Minimum wage rise may see short term price hike, long term growth

07 Jul 2023 07:00am
(from left) Kuperan, Zulkiply and Izlin
(from left) Kuperan, Zulkiply and Izlin

SHAH ALAM - Economists have pointed out that the recent rise in minimum wage is likely to result in price hike of goods and services, leading to inflation but in the long run the move will contribute to higher economic growth.

Professor Dr K Kuperan Viswanatham, an economist from Universiti Utara Malaysia said the wage increase will have an impact on the welfare of people.

While acknowledging the potential inflationary effects, Kuperan said the increase in wages could lead to higher economic growth.

"The increase in wages will have a much larger impact on the welfare of people and will lead to higher economic growth while the increase in inflation will be a slight and not a significant factor," he told Sinar Daily.

This is because salary hike will lead to higher consumption and expenditure, leading to a higher gross domestic product (GDP) and economic growth..

He was referring to Economy Minister Rafizi Ramli's statement where the the implementation of RM1,500 minimum wage for all sectors, including companies with fewer than five employees, could lead to a slight rise in the inflation rate.

Commenting further, Senior Research Fellow at the Social Wellbeing Research Centre (SWRC) of Universiti Malaya Dr Zulkiply Omar said the minimum wage rule will lead to the increase in labour cost for some employers who have been paying less than RM1,500.

Zulkiply cautioned that it could potentially lead to cost-push inflation, where producers or businesses will pass the rising cost to consumers.

"This will lead to inflation. On the other hand, if producers or businesses choose to absorb the rising in cost, the inflationary effect will be minimised," he said.

Nevertheless, Zulkiply said the minimum wage rule will be beneficial to the economy in the long run because it will have positive impact on productivity.

"Businesses will likely adopt better technology and improve efficiency to stay competitive.

"The demand for skill labour will also improve which will further lead to productivity improvement.

"However, the short run effect on inflationary pressure is strong given the current economic condition," he said.

Meanwhile, Universiti Malaya Deputy Dean Research Professor Dr Izlin Ismail said the affect on inflation would be less compared to last year.

This is because the increase in minimum wage to RM1,500 came into force in 2022, Izlin said.

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"As the minimum wage increase occurred more than a year ago, the effect on inflation would have occurred at that point.

"Will this lead to a rise in inflation again? I believe the effect on inflation would be rather muted as the main inflationary effect was already imputed last year when the minimum wage was implemented for larger businesses," she said.