Closing the produc1vity-wage gap

Closing the produc1vity-wage gap

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Compensa1on vs produc1vity o Wages, or more accurately total compensa.on per hour, increased at approximately the same annual rate during a certain period o if nominal compensa.on is adjusted for infla9on o in the same way as the nominal output measure that is used to calculate produc.vity. 3

Compensa.on vs produc.vity In essence, rising inequality has prevented potential pay growth from translating into actual pay growth for most workers. The result has been wage stagnation. For future productivity gains to lead to robust wage growth and widely shared prosperity, we need to institute policies that reconnect pay and productivity, such as those in EPI s Agenda to Raise America s Pay. Without such policies, efforts to spur economic growth or increase productivity (the largest factor driving growth) will fail to lift typical workers wages. 4

o Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce. o Otherwise, compe99ve firms would have an incen9ve to alter the number of workers they hire, and these adjustments would bring wages and produc9vity in line. 5

Produc.vity Level, Q1 2015 to Q2 2017 (RM) 84,000 82,000 80,000 78,000 76,000 74,000 72,000 70,000 68,000 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 6

o The produc9vity gap is a phrase to describe a sustained difference in measured output per worker (or GDP per person employed) between one country and another. o Produc9vity is a measure of the efficiency of factor inputs such as labour and capital. 7

Produc1vity-Pay gap Malaysia: Compensa9on and produc9vity 1973-2006 0.025 Labour produc9vity 0.02 0.015 Compensa9on 0.01 0.005 0 1973-2006 1973-1979 1979-1989 1989-1995 1995-2000 2000-2006 -0.005 Usable produc9vity Compensa9on Source: various Na9onal Produc9vity Report, MPC. 8

Compensa1on versus produc1vity Similari9es: Both are at the same magnitude of going up whether the advance or developing countries. Differences: The gap between compensa9on and produc9vity keep becoming bigger as 9me goes by showing the direc9on of both variables over 9me. 9

The lesser the CE represent the less income (GNI) and less CE over GDP. The right hand side are countries with higher COE compared to the less at the leq hand side. 10

Produc9vity versus Efficiency There are two concepts of efficiency: Technological efficiency occurs when it is not possible to increase output without increasing inputs. Economic efficiency occurs when the cost of producing a given output is as low as possible. Technological efficiency is an engineering maber. Given what is technologically feasible, something can or cannot be done. Economic efficiency depends on the prices of the factors of produc9on. Something that is technologically efficient may not be economically efficient. But something that is economically efficient is always technologically efficient. A key point to understand is the idea that economic efficiency occurs "when the cost of producing a given output is as low as possible". There's a hidden assump9on here, and that is the assump9on that all else being equal. A change that lowers the quality of the good while at the same 9me lowers the cost of produc9on does not increase economic efficiency. The concept of economic efficiency is only relevant when the quality of goods being produced is unchanged. Efficiency is divided into two categories: 1. Technical efficiency 2. Economic efficiency (includes growth and distribu9on) As an example, a one unit labour work for 12 long hours but the produc9vity resulted to 3 man-hours. However, another unit of labour works only 3 hours to sa9sfy short 3 manhours. Efficiency is about doing the same with less 11

Why produc1vity wage gap important? Always confused with other produc9vity measures like produc9vity for growth rate and level, as well as wage level, etc. Measurement could es9mate gap on labour resources, capital, etc. This could either connotes the gap of CE/GDP and OS/GDP, 35:65 ra9o, Produc9vity rate 37% by 2020, and/or level RM92K level, and inequality. Produc9vity is higher compared to wage is certaiy showing higher return to producer than workers. Why do we introduced produc9vity linked wages system (PLWS): a wage system which establishes a link between wages and produc9vity or performance that will ensure that any increase in wages commensurate with higher increase in produc9vity or performance. The system enables employees to obtain a fair share of gains that arise from produc9vity growth and performance improvements 12

VA per worker per hour is more important here. A unit of labour costs can work longer hours like average 10 to 12 hours in Asian, however the produc9ve man-hours could be just 3 hours of work for another labour working in Australia that only served 3 hour of their 9me. 13

Compensation Standard of living is high in advance countries because people work shorter hours but gets higher pay. Whereas, in Asia and also in Malaysia people works longer hours but gets lesser pay. 14

Compensation HH income from: employment, property, production of HH service and current transfers Employee income from: 80% Wage and 20% of Non Wage. See DOSM. 15

Median and average income of HH Wage and Non Wage Capital 16

Table 2: Source of GDP Growth and Contribution, 1996 to 2013 There's a need to increase labour growth and contribution. 17

Source: The conference board database Malaysia is compe9ng with Korea and Singapore 18

Msia has the highest labour p r o d u c t i v i t y a n d h a s potential to increase, but lowest in terms of TFP. So, do this supports the move to expand it's labour productivity. It do not pay to use cheap labour to increase TFP. It also does not not support the increase in wage if it does not contingent on productivity. Source: Malaysia Economic Monitor, World Bank. 19

Manufacturing sector/industry need to move from depending on volumes of cheap worker towards one which is intensively using automation and technology. 20

Productivity level, growth rates and TFP gaps 21

Although COE is 35% but it consists of labour and TFP component minus OS i.e. Capital. which is 65.5%. Much emphasis on quantity than quality! 22

Malaysia COE 2005 compared to selected countries Country Compensa9on of Employee Value added (VA) CE/VA Malaysia 145,723,027 509,272,188 28.6% Indonesia 882,217,985 2,876,891,638 30.7% Thailand 2,588,744 7,782,799 33.3% China 8,318,682 18,625,606 44.7% Korea 397,118,400 851,982,152 46.6% Australia 431,118 821,860 52.5% Taiwan 6,324,738 11,886,303 53.2% USA 6,998,736 12,421,885 56.3% Source: Input-output table 2005 and OECD tables 2005 23

Comparison of COE over VA of selected countries 1. Advanced countries like USA, Australia, UK and Korea have high percentage of wage levels compared to their value added that some exceeds 45%. This was contributed by the VA (denominator) which are higher than other countries. In terms of wages, the rate was quite high as well. 2. Developing countries like Thailand, Indonesia and Malaysia have relative value of percentage wage rates. This is because their VA is essentially lower than wages. This results in a lower percentage CE/VA. 3. Malaysia only scored the lowest percentage ratio CE/VA to 28.6% among these selected countries. The country must at least equal to or higher than the developing country if it wants to achieve its aspiration of economic transformation with the increase in wages followed by other variables such as poverty reduction, improvement of living standards, distribution and productivity. 24

Malaysian produc1vity 2016 NEGERI KDNK 2016 PADA HARGA PENDUDUK BEKERJA, 000 MALAR 2010, RM JUTA PRODUKTIVITI (RM) 1. Johor 104,480 1,580.6 66,101 2. Kedah 37,170 884.3 42,033 3. Kelantan 20,664 632.9 32,650 4. Melaka 33,155 397.3 83,451 5. Negeri Sembilan 38,839 466.9 83,185 6. Pahang 46,800 692.2 67,611 7. Pulau Pinang 73,718 827.4 89,096 8. Perak 60,408 988.2 61,129 9. Perlis 5,108 100.1 51,029 10. Selangor 251,599 3,217.6 78,195 11. Terengganu 28,601 428.5 66,747 12. Sabah 73,797 1,823.7 40,466 13. Sarawak 108,778 1,218.2 89,294 14. W.P. Kuala Lumpur 169,971 827.2 205,478 15. W.P. Labuan 5,488 40.2 136,517 JUMLAH 1,108,227 14,163.7 78,244 25

Comparison of value added for selected countries 26

Malaysia and selected countries comparison BL is higher than FL! 27

Number of workers( 000) by category of salary and wages RM700 and above in 2011 Coverage No. of workers ('000) Percent <RM700 Percent <RM800 Percent <RM900 Percent <RM1000 Peninsula Malaysia 5,100 25% 3% 9% 5% Sabah 674 8% 6% 1% 1% Sarawak 495 5% 4% 1% 0% Total 6,269 38% 13% 11% 6% Skewed to the left! 28

Comparison of workers' VA by state, 140 2005 120 116 100 80 60 62 58 56 54 53 52 40 20 42 40 38 36 33 27 26 20 VA per worker 0 W.P. Kuala Lumpur Pulau Pinang W.P. Labuan selangor Negeri Sembilan sarawak Melaka Pahang Terengganu Johor perlis perak Kedah sabah Kelantan 29

Analysis of VA by unit of labour, 2005 o Analysis VA per worker for the states in Malaysia shows that Kuala Lumpur led to the achievement of 16%. This was followed by Penang, Johor, Selangor, Negeri Sembilan, Johor and Melaka. The state VA is higher than other states in Malaysia. o The states that achieved modest VA less than 5.9% is states like Pahang, Terengganu, Johor, Perlis and Perak. While low VA for states of Kedah, Sabah and Kelantan. o Sabah and Sarawak have benefibed more from MW because they have a lack of VA in propor9on. While the peninsula, although there is more variety but overall is higher VA. Thus, in general, Peninsula benefit from the higher MW, but lower for domes9c sector with lower VA. 30

Variables Convergence of Minimum wage accross regions Even the MW will converge but the CE will not achieved the desired level. 2012 2013 2014 2015 2016 2017 2018 2019 2020 Annual rate of growth Median Wage 1400 1477 1558.24 1643.94 1734.35 1829.74 1930.38 2036.55 2148.56 5.5 Na9onal average 1513.02 1636.50 1770.05 1914.50 2070.74 2239.72 2422.50 2620.20 8.2 Sabah & Sarawak 800 878.03 963.67 1057.67 1160.83 1274.06 1398.33 1534.72 1684.41 9.8 Peninsular Malaysia 900 972.66 1052.03 1137.89 1230.75 1331.19 1439.82 1557.32 1684.41 8.1 31

Wages and produc1vity towards 2020 CE/GDP Produc.vity 0.332 0.339 0.343 0.348 y = 0.0062x + 0.3114 R² = 0.99433 0.353 0.361 0.367 0.373 0.379 78,24478,33479,78881,24182,695 75,588 69,03170,023 71,156 73,087 70,509 y = 1453.6x + 66705 R² = 0.96813 0.317 0.321 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 32

Target in 2020 Produc9vity level targeted at RM92,300. Our es9mates shows the country will only achieved 37.9%. It falls short of about 2%. Failing this means the wages and salaries are not rising as expected. Thus, take home pay and real wage will not increase the current standard of living. Our es9mates shows we will achieve around RM82,000 only. It falls short of about RM10,000. Failing this, wages could not increase to the expected level. To balance this efforts must be emphasizes to increase performance. 33

Conclusion ü Wages and produc9vity components influence by many factors. Either basic salary or fixed payment should consider relevant factors, such as cost of living, and reflect the value of the job. ü Wage increase is con9ngent on produc9vity components, must take into account the company's profitability and the performance of the individual employee or group of workers or organiza9on ü Wage increase naturally should be less than produc9vity growth, but not too low that lowers inequality and deteriorate standard of living. ü Targeted level, growth and TFP were es9mated fall short of their targets by 2020. Failing to reach these targets more efforts need to be intensified to achieve the desired results ü Conven9onal measure could not cover the precise measure of produc9vity and wage as well as efficiency ü All the above shows the superiority of PWG compared to the conven9onal broad unemployment method 34