Why is it important for Malaysia to address low salary issues for economic growth?

Malaysia’s economic story has long been framed around steady expansion, investment inflows, and the country’s ability to plug into global trade. Yet the question that increasingly shapes whether this growth can be sustained is not only how fast the economy expands, but also how that expansion translates into everyday earnings. When salaries stay low for a large share of workers, growth can continue on paper while the foundations for future growth quietly weaken. That is why addressing low salary issues is not simply a social concern or a matter of fairness. It is a central economic growth strategy, because wages shape domestic demand, productivity incentives, talent retention, fiscal resilience, and the kind of investment Malaysia can attract in the next phase of development.

At the most basic level, wages determine what households can buy and what businesses can sell. An economy that depends on consumers requires consumers who have room to spend beyond necessities. If wage growth is limited while costs rise, households become cautious, spending narrows toward essentials, and discretionary sectors are forced into a constant fight for volume rather than value. This matters because an economy that wants to move up the value chain needs customers who can sustain higher quality offerings. When purchasing power is constrained, firms learn to compete by cutting prices and compressing costs instead of differentiating through better products, better service, and better customer experience. Over time, that shapes the entire structure of business. Retail becomes promotion heavy, services become price sensitive, and innovation becomes harder to fund because the local market struggles to reward improvements. Growth may still occur, but it becomes shallow and concentrated, rather than broad and self reinforcing.

Low salaries also distort how firms think about productivity. When labour is relatively cheap, businesses have less urgency to redesign processes, invest in automation, adopt better management systems, or modernize operations. Cost competitiveness becomes the default strategy. This is understandable at the firm level, especially for businesses operating on thin margins, but it becomes damaging at the national level when it locks the economy into a low value equilibrium. Productivity is not only about technology. It is also about how work is organized, how employees are trained, how decisions are made, and how performance is measured. If wages remain low regardless of skill improvement, the incentive to build capability weakens. Employees may see limited payoff from upskilling, and employers may see limited need to restructure work. In that environment, the economy can expand without truly upgrading, which is exactly how countries find themselves stuck, growing but not transforming.

A related issue is the link between wages and the type of investment Malaysia attracts. There is a common assumption that low wages automatically make a country appealing to investors. That can be true for labour intensive activities, but it is far less reliable for high complexity sectors. Companies making long term investment decisions increasingly evaluate workforce stability, skill depth, retention rates, and the strength of local supplier ecosystems. If salary levels are too low to keep capable workers in place, firms may face high turnover, longer training cycles, and weaker operational consistency. For advanced manufacturing, shared services, and digital industries, that instability can be more costly than a slightly higher wage bill. In other words, low wages can sometimes send the wrong signal, suggesting not just affordability but also a ceiling on capability and a risk of churn. If Malaysia’s ambition is to attract higher value activities that bring better jobs and stronger spillovers into the domestic economy, wage structures need to support a stable, skilled, and motivated workforce.

Perhaps the most visible growth risk tied to low wages is talent leakage. Skilled workers, ambitious graduates, and experienced professionals compare opportunities across borders, especially in a region where mobility is increasingly normal. If compensation at home consistently lags behind what similarly qualified workers can earn elsewhere, the decision to leave becomes less emotional and more practical. This does not only affect the most elite segment of the workforce. It also affects nurses, engineers, technicians, analysts, and managers who sit at the heart of productivity improvement. When these workers leave, the economy loses not just labour hours but knowledge, networks, and leadership capacity. It also loses the multiplier effect that skilled workers create when they mentor others, start businesses, and build teams that raise standards. A country can invest heavily in education and training, but if wages do not reward the outcomes of that investment, the benefits can be captured by other economies. Addressing low salaries is therefore tied directly to whether Malaysia can retain and compound its human capital, which is one of the most important drivers of long run growth.

Low wages also affect entrepreneurship and risk taking. When earnings are tight, households have less buffer to absorb uncertainty. That encourages people to seek stable income rather than explore new ventures, move into higher risk roles, or invest time in building new skills. This is not because workers lack ambition, but because the cost of failure becomes too high when savings are limited. The result is an economy that may have many small businesses but fewer that are willing or able to scale, innovate, or pursue higher value niches. Over time, this reduces the dynamism that Malaysia needs to compete in industries where speed and experimentation matter. A healthier wage environment does not guarantee entrepreneurial success, but it creates the financial breathing room that makes ambition more feasible for a wider group of people. That matters for growth because new firms, new ideas, and competitive pressure are often what force industries to upgrade.

There is also a fiscal dimension that is frequently overlooked. A stronger wage base supports a stronger tax base. When many workers earn low salaries, government revenue from income taxes is naturally constrained, and the state becomes more dependent on other forms of revenue or on narrower pools of taxpayers. At the same time, low wages can increase pressure on public spending through higher demand for assistance, subsidies, or targeted relief when prices rise. This creates a difficult balancing act, especially when policymakers are trying to pursue reforms, manage fiscal sustainability, and invest in future oriented priorities such as infrastructure, healthcare, education, and industrial upgrading. Higher, more sustainable wages do not solve every fiscal problem, but they improve the state’s capacity to fund long term development without relying solely on higher rates or repeated short term measures.

Some may argue that Malaysia can address low pay simply by raising the minimum wage. Minimum wage policies do matter, because they protect the lowest paid workers and set a baseline expectation in the labour market. However, a minimum wage is ultimately a floor, not a ladder. For long term growth, the more important question is what happens above that floor. If most of the wage distribution remains compressed, workers can still feel stuck, and firms can still operate with limited pressure to upgrade. What Malaysia needs is a wage structure that rewards capability progression, encourages skill acquisition, and creates visible pathways for career growth. That requires a broader set of levers than wage floors alone. It requires stronger productivity systems, better job design, clearer performance management, and more deliberate investment in skills and technology.

This is where the role of small and medium enterprises becomes crucial. SMEs are a major employer, and many of them operate in sectors where productivity improvements have been slow. If SMEs are expected to raise wages without support to upgrade, the response may be resistance, informal workarounds, or cost cutting elsewhere. A serious wage agenda therefore has to be paired with an upgrading agenda. That can include incentives for digitization, practical management training, easier access to financing for productivity investments, and support for adoption of efficient tools and systems. When SMEs become more productive, paying higher wages becomes less threatening and more aligned with business survival. The goal is not to pressure firms into unsustainable commitments, but to help them transition from labour intensity to capability intensity.

Addressing low salaries is also about changing what Malaysia competes on. Competing primarily on low labour costs is a strategy with diminishing returns because other markets can often be cheaper, and because wage suppression eventually weakens the very capabilities that make an economy attractive. Malaysia’s long term advantage has to come from execution quality, reliability, and a workforce that can support more complex tasks. That kind of competitiveness requires higher wages because higher wages help attract stronger talent, reduce turnover, and signal that skill is valued. In a high capability economy, wages are not simply a cost. They are part of the system that sustains quality and innovation.

Importantly, raising wages should not be treated as a reward that comes after growth. For Malaysia, wages are one of the mechanisms that can create better growth. When workers earn more in line with productivity and skills, domestic demand becomes healthier and more diverse. Firms have more incentive to compete through quality because customers can pay for improvements. Talent becomes more likely to stay, strengthening the skills base and managerial depth that investors care about. The state gains more fiscal room to invest in development, and households gain more resilience, which reduces economic fragility during shocks. These effects reinforce each other, creating a pathway toward an economy that grows not just in size, but in sophistication and stability.

None of this means wage policy is simple. Wage growth that is disconnected from productivity can create inflationary pressure or strain weaker firms. That is why the most effective approach is one that links wages to capability, and capability to investment. The most sustainable wage increases come from improvements in how work is done, how people are trained, and how technology is used. This requires coordination across government, industry, and education. It also requires a shift in mindset from seeing low wages as a competitive advantage to seeing them as a warning sign of an economy that is not fully unlocking its potential.

Malaysia has the foundations to make this transition. It has industrial capacity, infrastructure, and a strategic position in regional supply chains. But the next stage of growth will depend on whether the economy can move from being cost effective to being capability led. Addressing low salary issues is at the heart of that shift. It expands the domestic market, strengthens incentives for productivity, retains the talent needed for upgrading, improves fiscal strength, and raises the quality of investment Malaysia can attract. If Malaysia treats low wages as a secondary issue, growth can continue while progress slows and frustrations deepen. If it treats wages as part of the competitiveness design, the country can build a stronger cycle of upgrading where better jobs support better demand, better demand supports better businesses, and better businesses support sustained economic growth.