Minimum Wage Policy Effects on Economic Efficiency and Poverty (S/O 12183)

• Main Authors: Abd Karim, Mohd Zaini, Hassan, Sallahuddin, Gee, Chan Sok
• Format: Monograph
• Language: English
• Published: UUM 2020
• Subjects: HB Economic Theory
• Online Access: https://repo.uum.edu.my/id/eprint/31506/1/12183.pdf; https://repo.uum.edu.my/id/eprint/31506/

The minimum wage policy was first introduced in Malaysia in 2013. However, some quarters, particularly Malaysian Employees Federation, argued against the idea of a nationwide minimum wage asserting that it will lead to an increase in the cost of doing business and thus will hurt Malaysian competitiveness. Although standard economic theory unambiguously implies that wage floors have a negative impact on employment, the existing empirical literature is not so clear. Some studies have found the expected negative impact on employment, yet others have found no impact or, in occasional cases, a positive effect of minimum wages on jobs. It is also argued that, a minimum wage law, if pegged above the market wage, could leads to a general misallocation of resources and loss of efficiency in the overall economy. However, there is no study linking minimum wage on efficiency. Hence, the objective of this study is to analyze the effect of minimum wage policy on a country's efficiency and also its effect on poverty. To achieve the objective, in the first stage, we estimated economic efficiency for all the countries and efficiency of economic sector in Malaysia by using the non-parametric method. In the second stage, after having estimated the efficiency scores, we analyzed the effect of minimum wage on efficiency and poverty by estimating a Tobit regression where the efficiency scores is included as the dependent variable. By analyzing the minimum wage effect on efficiency, we can address the question of whether the proposed minimum wage legislation in Malaysia has any effect on the efficiency of Malaysian economy. This is a very pertinent issue in the case of Malaysia as any policy that could erode its competitiveness would be detrimental to its quest of becoming a high income economy. Results of the study show that first, there is no difference in technical efficiency between countries with and without minimum wage policy. Furthermore, looking at the countries with minimum wage policy, the amount of minimum wage up to a certain level has a positive effect on economic efficiency. Second, there is not enough evidence to support the hypothesis that country with minimum wage rate policy enjoys significant reduction in poverty rates. However, the results suggest that higher minimum wage rate reduce the poverty rate of the countries involved. Third, the results show that there is not enough evidence to support the hypothesis that country with minimum wage rate policy enjoys significant reduction in income inequality. However, the results suggest that higher minimum wage rate reduce inequality gap of the countries involved. Several policy implications arise from the results. First, the mere presence of minimum wage policy does not have any bearing on efficiency, poverty and income inequality. Second, what more important is the level of minimum wage rate. The minimum wage rate must be high enough to have effect in reducing poverty and income inequality but low enough so as not to adversely affect employment