Malaysia introduces minimum wage!!! So, how it’ll affect the short run aggregate supply?

In year 2012, Malaysia introduces the minimum wage. All employees in private sectors receive a minimum salary of RM900 per month in peninsular Malaysia and RM800 per month in the states of Sabah and Sarawak. Minimum wage is introduces to ensure employees have net income that could lift them out from poverty and they can meet the rising cost of living. So, it's a good news for employees. However, it seems to be a bad news for firms especially for those small businesses because minimum wage is too high for those small businesses to afford it.


When the minimum wage implement in businesses, there will be a changes in aggregate supply. If the wage of employees (domestic resource prices @ input price) increases, the cost of production will increase. Therefore, there's a shifting of aggregate supply curve to left.

   **Diagram 1

As shown on Diagram 1, employees' wage have increases thus the aggregate supply curve shifts leftward from AS1 to AS2 and the equilibrium price have moves from a to b. As a result, the price level has rise from P1 to P2. Thus, it causes cost-push inflation. The real output has decline from Qf to Q1. A recession (negative GDP gap) also occurs due to decline of real output.


As an effect of introduces minimum wage, it might also happen surging unemployment.

This is because firms may fired their employees to decrease the cost of production.

Thus,

“for those people who can’t find a job, they might look to the black market and agree to take salary which below the minimum wage”, said Wan Saiful Wan Jan, chief executive of libertarian think-tank Institute for Democracy and Economic Affairs. 

Reference Links:

1. http://www.bbc.co.uk/news/business-17903906

2. http://www.themalaysianinsider.com/malaysia/article/minimum-wage-will-cause-unemployment-inflation-say-employers-economists


Written by,
ONG JIE SHI
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