The Malaysian Industrial, Commercial and Service Employers Association (MICSEA) has called on the Government to carefully assess and phase in any new national minimum wage rate under Budget 2027, warning that micro and small businesses could struggle to absorb a sharp increase.
MICSEA, which represents employers with a focus on small and medium-sized enterprises (SMEs), said it recognised the need for wages to respond to the rising cost of living and for workers’ purchasing power to improve.
However, the association said the pace and scale of any increase should reflect what businesses can realistically afford and the amount of time employers have had to adjust.
Malaysia’s current minimum wage of RM1,700 became applicable to all employers nationwide from 1 August 2025.
MICSEA President YK Lai said employers were not opposed to higher wages, but cautioned that a significant increase could affect smaller businesses operating on relatively thin margins.
“Employers are not against better wages. We want workers to earn more. What worries us is a rate that looks manageable for a large company but is very hard for a small business running on thin margins,” he said.
Productivity Growth and Proposed Wage Increases
MICSEA’s call comes as Malaysia records continued growth in labour productivity.
According to the Department of Statistics Malaysia (DOSM), labour productivity increased 5.5% per hour worked and 4.9% per employed person in the second quarter of 2026. Manufacturing recorded stronger growth, with productivity per hour worked increasing 7.1% and productivity per employed person rising 7.3%.
MICSEA said these figures showed that businesses were becoming more productive, but argued that the gap between productivity growth and potential minimum wage increases remained significant.
An increase in the minimum wage from RM1,700 to RM1,900 would represent a rise of approximately 11.8%, while an increase to RM2,000 would be about 17.6%.
Lai stressed that wages and productivity do not necessarily need to increase at the same rate, but said the relationship remained an important consideration for businesses.
“Nobody is saying pay should rise by exactly the same percentage as productivity,” he said. “But the gap matters. If wages rise much faster than output, the difference has to come from somewhere, and for a small firm that usually means fewer hires, less overtime or higher prices.”
The Government’s Pre-Budget Statement 2027 has also linked sustainable wage growth with productivity gains, while highlighting measures around skills development, apprenticeships, AI literacy, digital capability and lifelong learning.
SMEs Face Multiple Cost Pressures
MICSEA said the impact of any minimum wage revision should be assessed against the broader structure of Malaysia’s business landscape.
Micro, small and medium enterprises account for about 96.1% of business establishments in Malaysia, representing approximately 1.086 million firms in 2024. They also contributed about 39.5% of GDP, equivalent to RM652.4 billion.
For smaller businesses, labour is only one of several operating costs. Raw materials, electricity, rent, logistics, financing and compliance expenses also compete for limited cash flow, while businesses continue to operate in competitive markets.
MICSEA therefore argued that the affordability of a new minimum wage should not be assessed solely based on what larger corporations, multinational companies and government-linked companies can absorb.
Manufacturers Continue to Face Cost Pressures
The association also pointed to findings from the Federation of Malaysian Manufacturers (FMM) Business Conditions Survey for the first half of 2026.
The survey received 670 responses, with SMEs accounting for 72% of respondents. It found that 69% reported higher production costs, while 63% expected costs to rise further in the second half of the year.
Meanwhile, 53% identified higher raw material and intermediate input costs as a major challenge, while 45% cited the West Asia conflict, Red Sea disruptions and higher war-risk costs.
Another 29% said they were having difficulty passing higher costs on to customers, putting further pressure on margins.
Only 38% of respondents expected profits to increase, while another 38% expected profits to decline.
MICSEA said these figures did not mean Malaysia could not afford higher wages, but highlighted the importance of timing and implementation.
“Businesses need time to adjust pricing, staffing, technology and their business models,” Lai said.
Wage Compression Adds to Business Costs
MICSEA also highlighted wage compression, which can occur when increases in the minimum wage narrow the gap between entry-level and more experienced employees.
For example, if an entry-level worker earning RM1,700 is moved to RM2,000, an experienced operator earning RM2,100 would be only RM100 above the new minimum.
Employers could then face pressure to increase wages for technicians, skilled production workers, quality-control staff, team leaders and junior supervisors to maintain appropriate salary differentials and retain experienced employees.
MICSEA also noted that the direct increase in basic wages is only part of the additional cost.
For a company employing 10 workers at RM1,700 per month, increasing the minimum wage to RM1,900 would add RM24,000 a year to basic payroll costs. Increasing it to RM2,000 would add RM36,000.
Employer EPF contributions, overtime, shift allowances and other wage-linked costs would add to the overall increase.
“An extra RM300 in basic salary is not RM300 more in total cost,” Lai said.
MICSEA Calls for Productivity-Linked Pay
Rather than focusing solely on the minimum wage figure, MICSEA proposed that future wage policy be placed within a broader productivity-linked compensation framework.
The association suggested clearer salary progression based on skills, certification and responsibility rather than tenure alone.
It also proposed incentives tied to measurable outcomes, including output, quality, reduced waste and defects, and improved machine utilisation.
Gainsharing schemes, which allow employees to share in financial gains generated by productivity improvements, were also proposed.
“The aim is to move from a minimum-wage economy to one where pay reflects skills and productivity,” Lai said.
Support Measures for SMEs
If the Government proceeds with a significant minimum wage increase, MICSEA called for measures to help vulnerable businesses adapt.
Among its proposals are expanded SME productivity grants for automation, digitalisation and artificial intelligence, as well as co-funded training, reskilling and apprenticeship programmes.
The association also called for affordable financing for machinery, robotics and productivity-enhancing technology, alongside targeted tax deductions or allowances for productivity investments.
Other measures proposed include a reasonable implementation period for substantial adjustments, an assessment of whether a uniform national rate places disproportionate pressure on labour-intensive sectors and regions, and practical guidance for SMEs on managing wage compression and restructuring salary bands.
Tripartite Consultation Before Final Decision
MICSEA also called for tripartite consultation through the National Wages Consultative Council before any final decision is made.
It said discussions should involve employer organisations, trade unions, SMEs, industry associations, economists and regional business representatives.
The association said the consultation should consider inflation, cost of living, employment, business survival, investment and regional differences alongside the proposed wage figure.
“This should not be workers against employers,” Lai said. “The question is how we raise incomes while protecting jobs, small businesses and Malaysia’s competitiveness.”
MICSEA said it remained ready to work with the Government, unions and employer groups to develop a wage framework that balances higher worker incomes with business sustainability and productivity growth.
