Price Implications of Minimum Wage

Impact of implication of minimum wages: the perspective of construction industries.

Based on a simple figure by Thomas Werner 2013, show the impact of implication of minimum wages. In the figure 1 where the details of the following is represent, the (perfectly competitive) labour market with the respective (perfectly competitive) goods market and a very fundamental production function in a scheme of three quadrants. In the upper left diagram (1^st quadrant), we have depicted a traditional production function (with decreasing marginal returns) in a sector which is eligible for minimum wage legislation.

In the “base run” of Figure 1, we assume perfect competition in the concomitant goods market. The respective supply and demand curves are well behaved” (see upper right diagram, 2^nd quadrant). Their intersection explains the equilibrium output Y and price level P in the initial situation. Equilibrium output, which is shown in the upper left quadrant (1^st quadrant), goes along with equilibrium employment L,the latter is the result of the intersection of labour demand and labour supply in the lower quadrant (3^rd quadrant).

By introducing a binding minimum wage wmin rate into the labour market, employers will reduce employment accordingly, production will shrink and the sectorial supply SS curve will be shifted to the right. The resulting excess demand on the goods market will lead to a new and higher price Pmin. Notice that the higher price will now increase the marginal product of labour in terms of value (i.e. labour demand) and will shift the respective curve LD in the lower quadrant to the right LD’ with the result that we achieved the level of employment Lmin and the new output level Y min. (Thomas Werner 2013)

To summarize, the above figure 1, state that the implication on minimum wages maybe affect the decision of employer to employed less staff, this cause chain effect of reducing factor of production where later reduce the number of supply in the market and later effect the price of the supply due to excessive demand.

Based on the figure, by applying to our construction industry, we can determine that it will affect our employment rates in our industry, quality of production, material price, and price of final production such as the building itself or the tender by contractors.

Shortage of labours in construction industry

The issue regard to implementation of minimum wages on the construction industry it the employment issue. As we all know that our construction industry have always face issue such shortage of workers. (MBAM 2014) therefore we used foreign worker as a supply for this shortage but the implementation on the minimum wages may cause the issue of the shortage of worker to worsted as some employers chose to employ foreign workers in times of labour shortage, rather than raising wages and improving working conditions to attract local workers. (Hamzah 2012) But the implementation of minimum wages, it is possible of attracting both the foreign worker and local worker in hence increasing the supply. As the minimum wages between foreign worker and local worker are to be similar the chance this gives the local worker an area to compete with foreign worker for job opportunity. According to A. H. M. Zehadul Karim et al. (1999), the uncontrolled presences of foreign labours play a significant role in maintaining the lower wages level in construction industry. Malaysia will continue to face a labour shortage if it does not address its weak foreign labour laws and increase the minimum wages paid to Indonesian workers. (The New Straits Times Press (Malaysia) Berhad, 2010) However, the increased opportunity and wages for local to join the construction industry may not truly address the issue of shortage of labour as this does not change the fact that employer are still not willing to increase the wages but by act of government policy. Therefore employer may choose to cut down number of worker hired by making local or foreign worker work double input for their wages. The local worker will feel not willing to be taken advantage of by employer and will continue to have bad image of this industry will rather be unemployed that joining construction industry. As Many Malaysian are no longer willing to perform jobs that they consider it as 3D’s that contribute to the dependency on the foreign workforce. They are not interested working in a rough nature of work in site, which is needs more physical strength compared to working in air conditioned office.( Mohd Arif Marhani 2012) Therefore only source labour supply are still foreign workers.

Price escalation of material for construction

As stated that the implication on minimum wages affect the decision of employer to employed less staff, this cause chain effect of reducing factor of production where later reduce the number of supply in the market and later effect the price of the supply due to excessive demand. This will cause shortage of supply of material in construction industry where it later it will caused the price of material to escalated. As this can be seen in Malaysia, as Sarawak’s sole cement manufacturer CMS Cement Sdn Bhd will raise the prices of its product by 5% to 9%.(The Star 2014) and the escalating prices of building materials, higher manpower costs due to shortage of labour as well as hidden costs are among the main concerns of property developers in Johor. (The Star 2010) This is due to increased labour cost in the manufacturing industries as the manufacturing sector to be most affected by the minimum wage. Based on a Ministry of Human Resource (MOHR) survey in 2009, 33.8% of workers in the country earned less than MYR700 a month. (Maybank 2012)

Tender price and contract sum in construction

Due to increase material price and shortage of labours cause by implementation of minimum wages the possibility of the tender price of the construction industries will increase. The contractor will choose to increase the tender price or contract sum in order gain high profit and to cover for the increased of the wages and material prices. Therefore over time, the impact of higher wages in the construction sector will be reflected in higher contract values in the tenders for new jobs. (Maybank 2012)

Due to the effect of increasing of tender price and contract sum by contractor, resulting the increase the cost of development for developer. As the company Guocoland (M) Bhd sees the rising cost of development a growing challenge that is facing many developers within the local property sector. The external market factors and Bank Negara’s stringent lending guidelines aside, the biggest factor will be the current rising cost of development. (The Star Property 2013)

References

Abdul-Rahman, H., Wang, C., Wood, L. and Low, S. (2012). Negative impact induced by foreign workers: Evidence in Malaysian construction sector. Habitat International, 36(4), pp.433–443.

Free Malaysia Today, (2014). Material, labour shortage in construction sector. [online] Available at: http://www.freemalaysiatoday.com/category/business/2014/01/29/material-labour-shortage-in-construction-sector/ [Accessed 11 Jul. 2014].

Iskandarmalaysia.com.my, (2014). Rising building material, labour and hidden costs main concern for Johor developers – Iskandar Malaysia. [online] Available at: http://www.iskandarmalaysia.com.my/news/101116/rising-building-material-labour-and-hidden-costs-main-concern-for-johor-developers [Accessed 11 Jul. 2014].

Lemos, S. (2009). Minimum wage effects in a developing country. Labour Economics, 16(2), pp.224–237.

Malaysia Premier Property and Real Estate Portal, (2013). Rising cost a challenge to developers – Malaysia Premier Property and Real Estate Portal. [online] Available at: http://www.starproperty.my/index.php/articles/property-news/rising-cost-a-challenge-to-developers/ [Accessed 11 Jul. 2014].

Marhani, M., Adnan, H., Baharuddin, H., Esa, M. and Hassan, A. (2012). Dependency of foreign workers in Malaysian construction industry. Built Environment Journal, 9(1), pp.39–50.

Maybank IB Research, (2014). Economics & Market Update.

Memon, A. (2014). Identifying Construction Resource Factors Affecting Construction Cost: Case of johor. [online] Academia.edu. Available at: http://www.academia.edu/2487728/Identifying_Construction_Resource_Factors_Affecting_Construction_Cost_Case_of_johor [Accessed 11 Jul. 2014].

Thestar.com.my, (2014). Cement price goes up – Community | The Star Online. [online] Available at: http://www.thestar.com.my/News/Community/2014/01/18/Cement-price-goes-up-Move-by-sole-manufacturer-takes-effect-Feb-17-first-hike-since-2011/ [Accessed 11 Jul. 2014].

Werner, T., Sell, F. and Reinisch, D. (2013). Price effects of minimum wages: Evidence from the construction sector in East and West Germany.