Malaysia and Singapore's alternative to unemployment: Some Projected Effects.

Due to falling consumption, firms are cutting production capacity... it's an unnecesary cost. In other words, reducing the amount spent on labour. For UK and US, this means layoffs.

But for Singapore and Malaysia, we don't have social welfare programs. So the consequences of losing your job here is VERY bad compared to the USA. Especially if you can't find a new job in this environment.

The current "solution" to this is to reduce salary per person, instead of reducing number of people employed. This is good because unemployed people would default on debts, possibly turn to crime, etc etc... whereas spreading out the pain, ie instead of 10 unemployed people, you have 100 people who take a 10% pay cut... you instead get a much larger group of people who are still solvent and make enough to eat, who merely cut back on spending a little.

OR, possibly cut back on spending A LOT. In fact, it is possible this "solution" will cause consumer spending to drop even more than layoffs would. Why is this? It's because the average consumer is burdened with debt. Far more debt than their grandparents or great-grandparents would ever dream of saddling themselves with. And also fixed payments, like insurance and EPF contribution.

Well, I'd better just draw out how this works with an example. Let's take a company with 1000 workers. Each has RM3000 salary. They have over RM100,000 in loans ie housing, car, credit cards, for which they pay around RM1000 monthly. Their insurance, EPF and other monthly fixed expenses around RM500. They spend around RM1000 on necessities like FOOD, water, electricity, phone bills, petrol... leaving them with RM500 disposable income to be spent on things like clothes, outings, and other non-day to day essentials.
So consumer spending is around RM1500 per person=RM1.5million total.

1st scenario. 100 people are fired. 900 people remain. The effect would be: 90 people more or less maintain similiar spending habits. 10 people declare bankruptcy, or just sell everything and move to some cheaper locale and get a lower paying job... let's say they will on average end up with RM1000 incomes... enough to survive, basically. So, overall consumer spending= RM(1500x900) + (1000x100) = RM1,450,000. A drop of 50k. In other words, the fall in employment salary was borne mainly by the loan, property, insurance and EPF.

2nd scenario. 1000 people take a 10% paycut. The likely effect would be: 1000 people take a RM300 cut in disposable income. Overall consumer spending drops 300x1000 = 300k. In other words, this fall will be 100% borne by those who sell non-essentials.

...

In other words, for Malaysia and Singapore, under this "solution"... this is going to be a really terrible time to be selling luxury goods, or basically any non-essential items.
These sort of figures mean we're looking at a possible fall in sales of over 50% for all those clothes boutiques, shoe shops, computer shops, entertainment outlets...

These groups of businesses are always the hardest hit during a recession, so poor sales from them would hardly be a surprise.

However, my point is that these businesses will be utterly smashed by this technique of "spreading out the pain". Instead of losing 10% of their customers outright, they will face 100% of their customers reducing business by 50%. Pain.

Oh, BTW. This is going to be a huge blow for the auto-industry. When people take a pay cut, they definitely postphone buying a new car. You just become unable to make the monthly installments.

I think that Supermarkets like Tesco and Giant will do well in this environment, as people will be shopping for the cheapest deals. Also, more people will be choosing to cook their own meals. It's cheaper, and hey, after all, they so much more free time, due to all the shorter working hours, right?