How does minimum wage policy impact unemployment in Malaysia?

The Minimum Wage Order has been implemented in Malaysia since 2012 with the aim of improving living standards and reducing poverty. However, the impact of the implementation of the minimum wage on unemployment remains unclear and raises concerns that higher labour costs have the potential to reduce hiring and subsequently increase unemployment rates. Therefore, this study intends to re-examine the extent to which the implementation of the minimum wage has affected the unemployment rate in line with the increasingly technology-driven Malaysian labour market, utilising data from 2013 to 2023. Using a quantile regression analysis, the results of this study show that there is a consistent positive relationship between the minimum wage and unemployment, starting from the 10th quantile up to the 50th quantile of unemployment distributions. The unemployment rate increased from 11.7% at the 10th quantile to 13.7% at the 50th quantile. However, at higher quantiles, starting from the 75th to the 90th quantile, our results indicate a negative and statistically insignificant relationship between the minimum wage and the unemployment rate. Our results suggest that the Malaysian labour market is efficient in addressing the mismatch between job requirements and workers’ skills during the minimum wage implementation period. As a result, wage increases did not lead to a significant increase in unemployment, suggesting that the Malaysian labour market can accommodate higher wages through productivity gains or cost management strategies. Based on our findings, we suggest future policymakers implement balanced wage policies while simultaneously promoting skills training initiatives and educational reforms to reduce unemployment risks and address educational mismatches for vulnerable workers.