Minimum Wages: Helping or Hurting Producers?

The Government of Malaysia has announced a minimum wage of RM900 per month for the peninsula and RM800 per month for East Malaysia in 2010. However, the government again announced the minimum wages are going to increase effectively in July 2016 to RM1000 (11%) for peninsular and RM920 (15%) for East Malaysia. It is expected to boost productivity and a more equitable distribution of income between capital owners and workers. Arguments arise among those against the increment in the minimum wage that it interferes with market forces in wage setting, increases business costs and lead to lower profit earned by firms. Thus, this paper tries to investigate the relationship between the minimum wage and profitability of a firm. Does this wage policy hurt the producer so much or not? Using the time series data, the finding shows that the wages were significantly raised and firm profitability was significantly reduced by the minimum wage. However, there were no significant effects on labour demand. If the rise in productivity growth matches the rise in wages, this will result in a lower cost of production and companies may absorb the rise in unit labour cost.