The minimum wage is set in Rm900 which announced by Prime Minister Datuk Seri Najib Tun Razak

(http://thestar.com.my/news/story.asp?file=/2012/4/30/nation/20120430211402&sec=nation)

In the beginning of the year, April 2012, Prime Minister Datuk Seri Najib Tun Razak had announced that the minimum wage rate in Malaysia for the private sector employees in Peninsular is set as RM 900 and RM 800 in Sabah, Sarawak and Labuan. However, this announcement was followed by some dissatisfaction from Malaysia labours as they claimed that RM 900 is not enough to cover their cost of living around Kuala Lumpur area. I personally think that having a minimum wage rate is a good commandment made by the government as it can avoid or to minimize the discrimination of labour especially unskilled labour. They might be fulfilling on the wages and work better.

From the economics point of view, setting a minimum wage is like setting a price floor. Price floor is a tool used by government to set minimum prices for goods and services that is believe sold in an unfair market at a very low price. In this case, we use the minimum wage in Peninsular, the price floor is RM 900 which means that employers are not allowed to pay their employees at any wages below the RM 900. A price floor must be set above the equilibrium price to be effective. Diagram 1 is drawn in order to have a clearer picture on the impact of the minimum wages on the number of labours.

As you can see in the Diagram 1, before the minimum wage is set, the equilibrium wage is RM800 and equilibrium number of labours is 10, 000 which is showed at point E. At this point E, the number of labours that are willing to supply is equal to the number of labours that are demanded by the firms; therefore, there is no surplus or shortage occurred. After the minimum wage rate is set at RM 900, the number of labour supply increases from 10,000 to 12,000 labours and due to the increase of wage rate, the supply curve moves along from point E to point B. On the other side, the labour demand decreases from 10,000 to 8,000 due to the increase of wages. A surplus of labour is occurred at the gap of point A and point B which is 4,000 labours and this will lead to unemployment rate to increase due to the lesser labours demanded by firms and more labours supplied by the people. However, this does not imply that the commandment is bad for the economy. In the Diagram 1, a deadweight loss is occurred due to the regulations of minimum wages that moves the market away from the equilibrium point as shown in the purple shaded region; this region is the amount of money that the labour market loss. Besides that, producer surplus (blue +orange) is more than consumer surplus (pink) which means that the labour get more benefits than the firm. Not only that, by setting a minimum wage above equilibrium might be able to increase the productivity of labours because of the motivation and satisfaction inside them. In brief, I believe that implementing minimum wage is good for the economy growth.

            Furthermore, we will now relate the minimum wages with the elasticity of demand and supply of labours. It is believed that low-skilled jobs are more elastic as compared to job that requires specific skills and trainings because there are more labours that are readily available for the job at a lower market wage rate. If the elasticity of demand for labour is elastic then any changes in wage rate will results a more changes in labour demanded and vice versa. As an illustration, if both the elasticity of demand and supply of labours are elastic in response to the changes in the wage rate then the excess supply will definitely be more than the surplus in Diagram 1. Hence, it is important to understand the elasticity of goods and services because it enables us to know the responsiveness of demand and supply towards the changes in price in a given time period. The government should be organizing a campaign that able to encourage them to learn and train their skills in technical schools.

          Next, we will discuss on the income and substitution effects that arise from the changes in the wage rate paid to the employees. As for income effect, an increase in the wage will results a higher income of a particular person that could earn from the job; in other perspective, it also mean that the time needed by the person to spent at work to earn sufficient pay for the job decreases. To sum it up, a higher wage rates means that the target wages can be achieved with fewer hours of labour supply; hence, income effects encourage people to work less hours and enjoy more leisure times as leisure is considered as a normal good. On the other hand, for substitution effect, an increase in the wage will definitely increase the cost of production. After that, the firm will consider whether to use more capital than labour as labour become more expensive and maybe they can also substitute their labours with unskilled labours or foreign labours that are employable at a lower wage rate.

          All in all, the policy of minimum wages set by the government is good as it ensure that unskilled labours are protected from discrimination and it also acknowledge the labours on the rate of wage they should get; thus, it helps to eliminate some of the microeconomics failures of labour market. There would be slightly increase of their purchasing power, so it will be slightly lead the economy become well. Besides, having a minimum wage rate of RM 900 in Malaysia is not enough to bear the high cost of living in the country; but if the minimum wage is set too high then it will mislead the labour market and eventually will affects the economy of the country which shows an increase of unemployment rate. The purchase power would be also decrease since there are lots of employees are unemployed. Hence, the policy is good as it ensures that the implementation does not burden the employers and also the employees will gain benefits from it.