Low wages? Don't blame SMEs, fix the system

Free Malaysia Today

11-05-2025

From William Ng
Over the past few days, the oft-quoted claim that Malaysia is 'addicted to low wages' again resurfaced in public discourse and across the policymaking circles.
While such commentaries bring attention to the very real concern of wage stagnation, it also risks misdiagnosing the root problem and unfairly placing blame on businesses, particularly small and medium enterprises (SMEs), who are in fact just as much products of, as they are victims of the system.
Let's be clear: SMEs are not addicted to low wages. They are trapped in a low-productivity ecosystem that they did not create and are struggling to navigate.
Rather than condemning businesses for not paying more, we must examine the structural barriers that make wage growth difficult and ask what role the government and society must play in enabling long-term, sustainable improvement.
Why we can't compare Malaysia to Korea, Japan (yet)
Calls to emulate the wage share of advanced economies like Japan and South Korea ignore fundamental differences in our stage of development. These countries have spent decades building high-value industries, deepening local supply chains, and investing heavily in education and research. They didn't raise wages by legislation (like we do), but they raised productivity first.
In contrast, Malaysian SMEs largely operate in low-margin industries, face fragmented supply chains, and contend with inconsistent policy support. Expecting them to pay South Korean or Japanese wages, or wage ratio, without the same foundation is unrealistic.
Take our educational achievements, for example. According to the Programme for International Student Assessment (PISA), only 1% of our 15-year-olds achieved Level 5 or 6 in mathematics; compared to 41% in Singapore and 23% in Japan and Korea. The issue is structural, not merely behavioural.
SMEs want to pay more, but the system must change
The notion that employers 'choose' to keep wages low is both inaccurate and unfair. Many SMEs want to pay more, but their ability to do so is constrained by razor-thin profit margins, driven by rising input costs, regulatory burdens, and a race-to-the-bottom pricing environment.
To make matters worse, there is a long-standing mismatch between skills and market needs, which forces firms to spend on retraining or accept underqualified hires.
Access to automation and advanced technologies remains limited. Despite government incentives, SMEs struggle with the upfront costs, lack of scale, and underutilisation risks.
Technology adoption is not just about subsidies; it's about fit-for-scale solutions, which are rarely designed with SMEs in mind.
If we want wages to rise, we must increase productivity. And that requires coordinated investment, meaningful support, and a change in our national economic narrative.
We must shift the conversation from 'why aren't businesses paying more?' to 'what is stopping businesses from paying more?' The answers point squarely to systemic shortcomings.
The elephant in the room is our education system that produces 14,000 straight A students annually, yet struggles to hit that 1% Pisa. We urgently need a skills pipeline aligned with industry needs. Technical and vocational education training (TVET) must be elevated, not treated as a second-class option.
Most SMEs operate in the low-productivity services sector, yet our national policies continue to focus disproportionately on manufacturing and exports. We need targeted interventions to help service-based SMEs move up the value chain and shift away from low-growth sub-sectors.
Another frequent scapegoat in the low-wage debate is the foreign workforce. The popular argument is that their lower cost suppresses local wages. But this oversimplifies the issue. The total cost of hiring foreign workers, including levies, agency fees, accommodation, and insurance, is often higher than hiring a similarly skilled local worker. The real issue is structural, not labour substitution.
Reducing dependence on low-skilled foreign labour is important, but it must be done gradually, with viable alternatives in place for businesses to remain competitive.
Reform, not blame
Some argue that until we resolve the productivity-wage disconnect, we must at least legislate a living wage. I agree. But wage increments alone will not address inequality if the cost of living – encompassing housing, transport, and healthcare – continues to outpace income. A broader set of social and economic reforms is essential.
Vilifying SMEs is not the answer. We should see them as partners in national development and support them in becoming better employers. Wage growth must be tied to productivity—not forced in a way that undermines business viability, jobs and long-term investment.
We are not against higher wages. On the contrary, we want a Malaysia where businesses are thriving, workers are valued, and wages rise alongside economic progress. But this cannot be achieved by rhetoric or mandates alone. It requires systemic reform, a whole-of-nation approach, and a long-term national commitment to economic transformation.
If we are serious about breaking the so-called 'addiction' to low wages, we must first fix the foundations. Blaming SMEs is a distraction. Let us instead focus on building the institutions, capabilities, and incentives that will allow all Malaysians—workers and businesses alike—to prosper.
William Ng is the national president of the Small and Medium Enterprises Association of Malaysia (Samenta), Malaysia's oldest association for SMEs.
The views expressed are those of the writer and do not necessarily reflect that of FMT.