The Malaysian government plans to expand a salary increase programme piloted last year – in an effort to rein in income inequality in the private sector.

Recent economic policies have sought to ease the impact of inflation on ordinary citizens while positioning Malaysia as a high-income economy.

The Progressive Wage Policy trialled between June and December 2024 is among the initiatives.

PWP is a voluntary wage incentive programme designed to boost not only the wages but also the productivity and skills of workers in Malaysia’s micro, small, and midsize enterprises.

This year, the government is preparing to expand the policy after earmarking 200 million ringgit to help raise the pay of 50,000 Malaysians.

Increasing Malaysians' median salary

PWP achieved its goal in the pilot phase after having raised the median monthly salary of entry-level employees from 1,950 to 2,200 ringgit, as well as the median monthly salary of more experienced employees from 2,200 to 2,400 ringgit.

The increases translate to an approximate US$50 and $44 increase for the two segments, respectively, based on figures presented by Economy Minister Rafizi Ramli.

The government is calling on businesses to consider the benefits of its wage growth initiative. The state provides incentives to firms on two grounds:

1) Setting entry-level salaries on par with occupation-based guidelines

2) Giving a minimum 6% increase yearly to other eligible employees

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How wage increases drive up inflation

Despite PWP’s early gains for the Malaysian government, wage increase is among the critical factors that drive up inflation.

Analysts from MIDF Research predict Malaysia’s full-year inflation could hit 2.8% as an effect of higher wages and taxes and the overall volatility of the global commodity and foreign exchange markets.

Other economic forecasts suggest PWP may also raise prices by 0.24 to 0.61 percentage points.

Inflationary effects may differ across sectors, but cost-sensitive goods-producing industries will potentially experience more significant impacts.

“Implementation of PWP could lead to a rise in labour costs, which, in turn, could have knock-on effects on the economy,” Calvin Cheng and Kevin Zhang wrote in their policy guide for Isis Malaysia.

Wage increases will work if they are compensated by corresponding productivity gains.

If not, businesses could “reduce their labour demand (and thus employment) – which will be more likely in cost-sensitive goods-producing industries,” Cheng and Zhang said.

Challenges in Malaysia’s employment landscape

Government officials believe raising wages is necessary to boost Malaysian employers’ competitive edge, especially in hiring homegrown talent.

If local businesses offered even just two-thirds of what Singaporean employers afforded Malaysians working in the city state, then many would return home to work in Malaysia instead, said Liew Chin Tong.

Liew, who is Malaysia’s Deputy Minister for Investment, Trade and Industry, raised the idea in light of the ongoing brain drain Malaysia experiences from losing its high-calibre talent to other countries.

Meanwhile, some employers in Malaysia are left with no other choice but to import talent from abroad to fill the skills gap.

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“As the cost of hiring foreign workers continues to rise, what can we offer to ensure local talent remains in the country? The problem in Malaysia isn’t a lack of talent but a wage issue,” Liew said.

Malaysia is thus considering a 13% hike that would set the minimum wage at 1,700 ringgit per month.

HR Minister Steven Sim views the issue of stagnant wages as one of Malaysia’s employment “paradoxes”.

Despite keeping unemployment low at 3.2%, Malaysia grapples with low wages and underemployment.

Ideally, a low unemployment rate should translate to higher compensation for productive members of the labour force. But the “wage-to-job paradox,” according to Sim, proves that the condition of the labour market isn’t yielding higher wages.

“If it is a workers’ market, wages would be improving because of the demand [for] workers and the low unemployment. But, unfortunately, the paradox in this situation is that wages are relatively low,” Sim said.

A better life for Malaysians

There is more to Malaysia’s push to raise wages than merely running the numbers.

While employers will likely bear the brunt of PWP-mandated salary increases, the move to boost wages will also raise the quality of life for citizens.

“Raising the minimum wage to a higher level will indirectly improve people’s quality of life by enabling them to purchase more nutritious food, rent more comfortable accommodation as well as save and invest,” economic analyst Dr. Ahmed Razman Abdul Latiff said, as reported in Bernama.

For many Malaysians abroad, in particular, the prospect of earning sufficiently is enough reason for them to return home.