OCTOBER 27 — The Department of Statistics’ latest report on Household Income and Basic Amenities Survey saw Malaysian households’ income rising by more than six per cent per year between 2014 and 2016.

Median monthly household income grew from RM4,585 in 2014 to RM5,228 in 2016 and mean monthly household income improved to RM6,958 in 2016 from RM6,141 in 2014, the report revealed.

Compared to last year’s inflation rate at 2.1 per cent, it could be argued that income of Malaysians rose faster than prices.

If so, why does it seem like the opposite? Some would argue that the mismatch between the two is due to human frailty in observing the reality.

Firstly, there is a difference between perceived and official measures of inflation. While the Consumer Price Index (CPI) tracks the price changes of a basket of goods and services, people, however, are more likely to recall price changes of products that they buy frequently, and to recall a significant jump in prices. Besides, people’s perceived inflation could also be easily swayed by media reports.

Secondly, a higher income translates to higher need to live a more comfortable life, a phenomenon called lifestyle inflation. Economic theory of decreasing marginal utility of income stipulates that the more people earn, the harder it becomes for additional income to satisfy them. When people earn more, the tendency is to upgrade one’s standard of living than to save.  

For instance, the latest Household Expenditure Survey showed that Malaysians, both urban and rural dwellers, are spending more on eating out than on groceries compared to the last survey in 2014.

Ten years ago, an average household in KL would spend about ten months of their income to purchase a brand new 1.3 litre engine local brand car. Today, it would cost them only four months to purchase the same brand new car. Since people’s income has improved, sales of foreign brand cars registered higher annual growth than the local ones and sales of motorcycles are declining. In addition, the value of credit card transactions have increased steadily since 2009 from RM69.3 billion to RM128.4 billion in 2016.

As income rises, people would rarely maintain their standard of living. As standards of living improve, it would look as if the prices have gone up while in reality people on higher incomes have higher expenses, such as nicer cars and bigger houses, priced into their lives.

Alas, the story does not end here. Legitimate concerns why Malaysians continue to feel the pinch are worth scrutinising too, particularly those in the B40 category.

On the cost side, the authors have previously argued that the CPI, as mentioned earlier, is only an index. The ‘true’ inflation rate can be very subjective. 

On the income side, despite a noticeable improvement in the share of compensation of employees (CE) to GDP from 29.3 per cent in 2008 to 35.3 per cent in 2016, Malaysia’s ratio is still lower than that of advanced economies. Last year, Singapore’s CE to GDP stood at 44.5 per cent while for the US, the figure was 53.6 per cent. It essentially signifies that Malaysia’s impressive GDP growth is mostly enjoyed by the corporations, not so much by the workers.

Across the sectors, pay gap in the public sector is perhaps not as alarming as that of the private sector. A top-level civil service employee, for instance, would not be paid on average over 15 times more than a fresh-graduate civil servant.

While the private sector’s figures may vary across firms and industries, The Asian Banker last year reported that top executives at big banks in Malaysia are paid between 35 to 200 times as much as the average worker. 

In the last year’s Budget Recalibration Speech, the Prime Minister underlined the pay gap between higher management and employees in the Government-Linked Companies (GLCs). There is a clear acknowledgement from the highest leadership that this is an issue that must be addressed as we inch closer to a developed high-income nation status. 

The government could push for tighter regulations concerning salary structure in the GLCs. A case in point is an example from China, where the government capped the wage gap between the highest paid and the lowest paid in China’s State-Owned Enterprises. 

All in all, solely focusing on curtailing prices may lead to a low-cost, but not high-income nation. The challenge in achieving high-income nation status is to improve income in years to come.

This article first appeared in Malay Mail, 27 October 2017.

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