Volume 4 Issue 16: Intelligent Investing

Common Sense - Minimum Wage Edition

Not even sure if this is just a coincidence, but on the Monday after Bersih 3.0, the Najib administration quickly announced the minimum wage at RM900 (for West Malaysia) and RM800 for Sabah and Sarawak. For some, the announcement of a minimum wage is long overdue, while others, claim that it will destroy their businesses.

I think that all of the above issues totally miss the real point. The crux of the problems in Malaysia's labour force was correctly highlighted by Lim Guan Eng's response to Najib's announcement:

The DAP warned today that the government's minimum wage policy announced last night will not result in better quality of life without being more competitive, creating high productivity jobs and bringing women into the workforce.

I don't know the kind of advisers that Najib surrounds himself with, but based on the evidence provided in the same article above, it is no surprise that after a disastrous Bersih 3.0 outing, Najib's hand was forced to move:

Datuk Seri Najib Razak's announcement last night follows the increase of minimum wage by around 40 per cent in Thailand last month, part of Yingluck Shinawatra's campaign pledge that helped propel her to win Thai elections last July. 

Taiwan’s move to increase minimum pay by 5 per cent last year also helped President Ma Ying-jeou win a second term in January 

Vietnam will also raise the floor wage for the public sector by 27 per cent in May after enacting a minimum wage increase of as much as 69 per cent in October for both private and state-owned enterprises. 

Thousands of workers are also expected to take to the streets in Hong Kong today, demanding Chief Executive-elect Leung Chun-ying address a widening wealth gap when he takes office in July.

As Lim Guan Eng appropriately puts it, competitiveness is the main issue here. Right up til now, Najib has focused only on the easy reforms, implementing populist measures to shore up his support.

Blast From The Past

Since I have not got around to posting my thoughts on these issues, and some of them are getting a little out of date, I am just going to share the links here for archiving purposes. They are good reads and definitely worth thinking about. 

1. Rise of the Technocrats?

Is the European Union’s supposed “democratic deficit” now spreading to individual European countries in the wake of the sovereign-debt crisis? The rise of unelected technocrats to political power in Greece and Italy suggests, at least superficially, that the old taboo against technocratic governments pursuing an EU-dictated agenda has been shattered.

2. The Philippines - Malaysia's New Competitor?

The Philippines reopened for business under new management only a little more than a year ago. It is faring very well – and is set to become increasingly profitable.

3. Just a chart on the desirability and earnings potential of different college majors in the US

P/S: Anyone else find it shocking the Geology and Earth Sciences is listed under Arts?

4. Why Art majors are being subsidized (refer to No.3 for more)

ALEX TABARROK, a George Mason economist and blogger at Marginal Revolution, notes that though many more young Americans, about 50% more, now go to college than did 25 years ago, the number of students studying science, engineering, technology, or mathematics has not increased. So, Mr Tabarrok asks, "If students aren’t studying science, technology, engineering and math, what are they studying?" They are studying interesting and enjoyable fields, it turns out. Mr Tabarrok reports, with no little dread:

"In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985."

This is worrisome because diseases go uncured and potential gains in purchasing power are left unrealised as America's apple-cheeked human capital squanders itself staging the "Vagina Monologues". Mr Tabarrok admits there's nothing exactly wrong with young Americans learning how to play the euphonium, he just doubts this fluff is worth subsidizing. Growth-enhancing disruptive innovation doesn't come from villanelles!

"[G]raduates in the arts, psychology and journalism are less likely to create the kinds of innovations that drive economic growth. Economic growth is not a magic totem to which all else must bow, but it is one of the main reasons we subsidize higher education. 

The potential wage gains for college graduates go to the graduates — that’s reason enough for students to pursue a college education. We add subsidies to the mix, however, because we believe that education has positive spillover benefits that flow to society. 

One of the biggest of these benefits is the increase in innovation that highly educated workers theoretically bring to the economy... 

There is little justification for subsidizing sociology, dance and English majors." 

As a consequence, Mr Tabarrok thinks that "the taxpayers who foot the bill for these subsidies" are being ill used.

5. Here is Tabarrok's full post: College Has Been Oversold

6. Why Debt Is Not The Real Problem in Greece, But Competitiveness Is

7. One Year in Prison Costs More Than One Year at Princeton

Volume 4 Issue 7: Intelligent Investing

Civil Service Wages - One Step Forward, Two Steps Back

Another way to put this is that the government is not only shooting itself in the foot. It is also shooting Malaysia in the face. 

In the guise of "raising" public sector wages, the government had once again served the interests of the people in the top echelons of public service:

The Malaysian Insider understands that Putrajaya wants to completely overhaul the scheme which only seemed to benefit top civil servants but many of an estimated 2,000 senior civil servants have already signed and consented to the new scheme, which guarantees a pay rise of some RM5,000 a month.

Can you believe that some of the civil servants are guaranteed a pay rise of RM5,000 per month? The increase alone is more than most of our monthly incomes. Get this:

The proposal, which sees the highest pay at RM60,000 a month for the Chief Secretary to the Government while those in lower pay grades would receive an increment as low as RM1.70, has ignited anger and disapproval in the 1.4 million-strong civil service — a key vote bank for the ruling Barisan Nasional (BN) coalition — ahead of a general election that must be called by May 2013.

 I don't know how RM1.70 is going to make any difference in a person's life. Clearly the plan was well-thought out. So not only are the "rich" rewarded, but the poor are being marginalized yet again. As if the problem of inequality isn't bad enough.

Long ago, I had already recommended a "wage policy" that was simple and transparent:

It is now rampant that local graduates these days can barely qualify for a job at an MNC, even with the current wage level. I have been taught by graduates with engineering degrees in my secondary school. That was almost eight years ago. The situation is that bad. If you increase the minimum wages in sectors with positive externalities, you could possibly create a productivity multiplier. More people would want to be in these areas. For example, if a teacher's salary were to be increased significantly, more people would want to become teachers. Of course the buck must not stop there. The pay for the people who actually train these teachers have to increase as well. This will result in two things. First, too many people will want to become teachers. Now, this may seem like a bad thing at first. But this is the most fundamental concept of life. Just think about how you were born. Millions of sperm going after one ova. The fittest will survive. In this case, only the best people will get to be teachers. I mean, look at doctors. When you talk to parents, they stereotypically want their children to grow up to be doctors, lawyers and whatever. Why? Because it is a high paying job and not many people get to become doctors.

This competition for survival will push for the selectivity of the people who actually qualify for the profession. Even with the failed-notion of meritocracy in our country (by that, I mean, not all the best people will be selected because of our quota system) there will be an invisible force to select the better few to perform an important job function. The majority of the people who want to become teachers would be sufficiently qualified and so would their trainers.

Now, the second result is where the positive externality comes in. I pause to make an assumption here. I assert that good teachers will increase the number of good students. With more good students who eventually become useful graduates and consequently productive workers in all industries, the economy of our country will be thriving. Think first world thriving.

This proposal also signals to the general public about what jobs does the government think is important. In my opinion, doctors and teachers should come first in order to maintain long-term growth sustainability. We need to keep our population healthy, and we need to keep our population competitive intelectually.

But it goes without saying that any wage increase has to come with proportionate improvement in productivity. And to do this,  the government or the statistics department has to come up with a proper way to measure productivity and collect data on it, just like the US. As I have shared before, one of Bob Parson's 16 rules of success is:

Measure anything of significance

When you start measuring anything and everything that you deem as important, then only can you measure your improvements. If you merely wish to "improve productivity", it does not make sense if you have no way to measure productivity.

All these are just preliminary steps that need to be taken to even come close to reforming the Malaysian economy and society in its path towards high income. All we are hearing now is just lip-service and half-hearted attempts (I also wrote about them in recently, here, here and here) at appeasing the public before the impending elections.

Economics Majors and the 1%

Should I feel relieved that Economic majors are ranked second in terms of proportion of those who make it to the top 1% in income? Read here for more. Here is the chart:

Source: Economix

No Pay Rise?!

I think for a lot of Malaysians, it is hard to imagine what it is like to have no pay raise for many years on end. In fact, many Malaysians have come to the assumption that salary adjustments can only mean the upward kind. This attitude is so prevalent that it is ingrained into the minds of many fresh graduates today. Pay increments are now taken for granted. In fact, people expect bonuses even without working beyond what is expected of them. It is called BONUS for a reason. BONUS is paid to people who do what is BEYOND the requirements. One of the reasons I am bringing this up is the 2010 Auditor General Report that showed many of the GLCs paying out 1-2 month bonuses despite making losses year after year. One has got to ask, what are they being rewarded for? Exceptional consistency in loss-making?

Here is what I really wanted to share

This is what the average income per person in Italy looks like in the past three decades or so. More importantly, look at the last 10 years (starting from 2000). Not only has it rarely budged from the USD34-36,000 range (in real terms), it has fallen to about USD33,000 after the recent financial crisis. Can you imagine no salary increases for 10 consecutive years? Can you imagine taking a pay cut after 8 years of no pay increases?

Remember that there is no room for poor attitude and nothing comes for free. Take nothing for granted.

HT: Marginal Revolution

Why You Should Just Be A Banker...

'Nuff said.

Full article here.