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It has been discussed that Malaysia should implement the minimum wage which would help the local workers to the sectors that were being hit by the government's policy to significantly reduce the intake of foreign workers. 'A minimum wage council comprised of government and private sector representative needs to be set up work out the minimum wage structure' said Dr. Chua Soi Lek, former Minister of Health Malaysia. Indeed, what is minimum wage about? Minimum wage is the idea that the minimum amount of wage that must be paid to the labor market of a country, generally on hourly, daily or monthly.
Based on the diagram which mentioned earlier, the market achieves the equilibrium at point ¥ with price P¥ which is the amount of wages that have been agreed to be paid to the local or foreign workers and meet the equilibrium quantity demanded of workers which is at point Q¥. However, since the idea of minimum wage is being introduced, therefore, the market should have considered the price floor policy, which is Mw that prices should be set at any point as long as it is above the equilibrium price.
Nevertheless, after the minimum wage has imposed, there are some changes on the quantity demanded of both local and foreign workers. First of the, surpluses would occur once minimum wage imposed. An obvious transform which is the foreign workers quantity demanded has fall rapidly which is the range from point QT - QL2, this is also the surplus area for foreign workers. On the other hand, the local workers do have surplus as well, but it is not as wide as foreign ones where the surplus occur between point QL1 to Q¥. This shows that if minimum wage is implemented, the demands for workers remain unchanged, but increase of local workers supplied and reduction of foreign workers hired in the industries would have happened.
This drama can be explained through few importance issues. First point would be based on the hypothesis that has been made which is majority of the foreign workers, exclude those who contribute professional services like doctors, lawyers, lecturers, managers or accountants, are all from Indonesia or Bangladesh mainly contribute in construction jobs and they are unskilled. Since a minimum wage that has to be paid to workers, industries and firms in Malaysia will tend to hire local workers due to their capability and ability is much privileged compared to foreign ones. This will result an economic effect where increased in local workers supplied and decreased in foreign workers supplied. Additionally, seeing as reduction of foreign workers in the market, it will also cause another economic effect which is surplus where supply is more than demand. Clearly can be seen, the supply of foreign workers where point ST - SL has indicated surplus occur for foreign workers. When there are surpluses in one market, which means the supply of the market cannot meet the demand in the market. For example, this foreign and local workers case, both of the workers have surpluses, but it is just that foreign one is greater than local one. The surpluses of these two workers add together, it will create another economic effect called unemployment. The greater the surpluses are, the higher the unemployment rate in the market.
To implement minimum wage unnecessarily means only create surpluses or unemployment; it has its own benefits as well. Minimum wage reduces poverty. It is because since there is a minimum amount that has to be paid to every worker, therefore, those poor workers would have the opportunity to enjoy higher paid and this will reduce their poverty. Secondly, it also increases productivity. It is ideal to assume workers would be motivated by the higher paid since money is one of the motivations to encourage people to work. Since people are getting higher paid, they will work harder and increase their productivity level. Furthermore, it enhances the inventiveness for the unemployment to accept jobs. This will greater the participation rate of unemployment to seek for jobs due to higher paid. Lastly, it also increases investment. This is due to the confidence that have boosted to investor to invest and increase labor productivity because labor is now costly. If productivity increases, higher return would go to investors.
However, when there are pros, cons surely occur. Minimum wage could cause cost push inflation. This explains firms and industries now faced higher cost which they are likely to pass to consumers. Additionally, more workers would have contributed their forces in black markets as the wages are higher now. For those who are from the lower income earner, minimum wage does not help in a way that because they have to rely on the benefit of minimum wage and this will not increase their income. Therefore, this group of earner will not affected by the minimum wage.
In conclusion, Malaysia should implement minimum wage in a way that not because of the benefits of it which gives several reimbursements to workers whether local or foreign; it is because a reasonable and fair income distribution should be practiced. There are many people work 18hours a day and their paid is still low because some of the employers are not paying for contributions, but paying for experiences and name recognitions. Injustice occurs too when some workers who practically under 'security' somehow get fixed paid even they did not participate much in the labor force activities, not to mention higher paid. With the help of minimum wage, every worker get the same minimum amount of wage, no overstated nor understated in order to practice a fair income distribution in labor market.
The Gross Domestic Product (GPD) is a tool of measurement to measure one country's aggregate economic output. GDP can be calculated by 3 ways which all of them should produce the same result. Those ways are the product or the output approach, the income approach and the expenditure approach. Comparing with those 3 ways of determining GPD, the product approach is the most direct way which it sums all the outputs of every class or level of enterprise to arrive at the total. The expenditure approach, however works on the ideals that all of the product should be purchased by consumers, therefore the total products me be equal to the total spending in purchasing items. The income approach is means that the incomes of producers must be equal to the value of their product; GDP can be calculated by adding all the incomes.
GDP is the easiest way to measure economic growth by comparing the GDP from year to year since the GDP figure represents the outside of final goods and services produced in a year. Unfortunately, GDP may not be the perfect tool to measure economic growth as in inflation and population growth is being taken into account.
Another reason why GDP is not a good measurement in measuring economic growth and standard of living of a country is that real GDP per capita does not consider the distribution of wealth. When real GDP per capita increases, it is unlikely that everyone is made equally better off. The benefits of growth are unlikely to be distributed evenly throughout. This is because growth is not evenly distributed. Some sectors may growth faster than others. Sectors which have elastic demand will grow faster than sectors that have inelastic of demand. For instance, demand for output from the manufacturing sector will grow faster. As people's income increases, their demand for manufacturing goods will increase due to higher purchasing power. On the other hand, agriculture goods sectors will grow slower because now people will have higher purchasing power and people now is affordable for better quality goods.
Additional disadvantage is that GDP data only measure the value of goods and services which are exchanged in the market. This is meant that non-market transactions such as housework performed by housewives, which are unpriced yet contribute to economic welfare are not included. Housework is considered as productive activities as well, but those activities did not interact with any priced and traded on the market, they are not included in the GDP because they are not final goods or services. By this, GDP will underestimate the value of economic growth welfare in the market which would result imbalanced in the calculated value.
Furthermore, GDP does not recognize the existence of black market. Black market means that activities or transactions are being done illegally or does not fulfill the requirement of policies. Since GDP are not taking black market part into its account, it would possibly affect an underestimate GDP per capital in that particular country. The reason why black market exist it is simply because they neglected to cope with higher taxes, higher cost of production and complex rules and regulations. Therefore, the government is powerless to track what are the contributions of black market contributes to the country and therefore, underestimated GDP per capita would occur.
Additionally, environment issues and crime act is not suppose to be counted in into GDP. The standard of living cannot fully measure by GDP due to the crime acts and environment issues. A country with high per capital does not necessarily mean people are living better or satisfied. Standard of living is something that is wide broad and it is not easy to determine just using GDP itself; it also needs to consider several perspectives for example, environment issues, crime acts, discrimination and any other political conflicts that happen in one country. This can be seen high per capital income country like United State is also having pollution, crime rate, discrimination and also political conflicts within the country. This shows that GDP is not an ideal tool to measure standard living.
Lastly, GDP provides no information about changes in socio-economic conditions. Socio-economic conditions include nutrition levels, pollution levels, the availability of housing, the provision of education, medical services or freedom of speech. GDP is unable to give information on these conditions which could possibly affect the economic welfare. Since GDP is unable to classify about socio-economic, it would be vague to calculate the economy's output performance and standard of living. Additionally, because of the weaknesses of GDP as a measurement of economic welfare, a number of other measures could be applied as well for example, GPI (The Genuine Progress Indicator), HDI (The Human Development Index) and Index of Social health.
In conclusion, GDP is not a perfect measurement to measure one country's economy's output performance nor the standard living because it provides many negative sided for example, inflation and population growth are being taken into account, does not include non-market activities, unable to track black market, does not consider environment and crime rate and also fail to classify socio-economic condition. However, economists have no any other alternatives but to adapt GDP as the tool to measure standard of living because it is the only measurement that allows one country to calculate their economic performance and standard of living.