Why a 'rich' household in Kelantan is considered a low-income one in KL

Households in Malaysia are categorised as low-income or B40, middle-income or M40 and top-income or T20. ― Picture by Choo Choy May
Households in Malaysia are categorised as low-income or B40, middle-income or M40 and top-income or T20. ― Picture by Choo Choy May

KUALA LUMPUR, Oct 15 ― In Kelantan where almost every household (85.3 per cent) earns below RM7,000 a month, you would be considered to be in the top 20 per cent (T20) group traditionally regarded as high-income if you earn RM7,000.

But earning that salary in the capital city Kuala Lumpur will place your household only in the low-income group, a report by Khazanah Research Institute (KRI) has shown.

The point that KRI wants to make is that not all households in Malaysia earn the same amount of money even if you have a national average, as those in some states may have income levels that wildly vary from the national mean household income of RM6,958.

“For example, a household in Kelantan that earned just above RM5,870 is considered to be in the top 20 per cent of households of that state.

“However, they would be part of the middle 40 per cent households nationally, and in fact in the bottom 40 cent of households if they're in Kuala Lumpur,” it said in its latest report “The State of Households 2018: Different Realities” that was released today.

Percentage of households by state below RM7,000 in 2016. ― Screengrab from Khazanah Research Institute's The State of Households 2018: Different Realities report
Percentage of households by state below RM7,000 in 2016. ― Screengrab from Khazanah Research Institute's The State of Households 2018: Different Realities report

Households in Malaysia are categorised as low-income or B40, middle-income or M40 and top-income or T20. This is broken down to 40 per cent each for both low- and middle-income groups and 20 per cent for top income earners.

According to the report which used 2016 figures ― the latest available from the Department of Statistics Malaysia (DOSM) ― the national income level categorises B40 households as earning below RM4,360, M40 households (RM4,360-RM9,619) and T20 households (above RM9,619).

Just like Kelantan where its T20 group would be M40 according to the national standard, Kuala Lumpur also does not fit into the national threshold levels as a monthly income of below RM7,640 would place a household in the B40 group in the city but in the M40 group on a national level.

In fact, only Melaka, Johor, Penang (collectively forming around 20 per cent of Malaysia's population) has household income levels that fit the national thresholds for B40, M40 and T20.

Using the RM7,000 mark

Another way of looking at the diverse realities of different states is to look at the percentage of households earning below RM7,000 (which is close to the national mean household income) each month as of 2016.

The national standard in 2016 is that 65.7 per cent of the 6.9 million Malaysian households earn below RM7,000 each month, with Melaka, Johor, Penang households again fitting this profile closely.

Slightly deviating from this nationwide level are the four states of Terengganu, Negri Sembilan, Sabah and Sarawak where 26 per cent of the population live and where a slightly higher range of around 73.6 per cent to 76.8 per cent households earn below RM7,000, and also Labuan where a slightly smaller figure of 47.8 per cent of households earn less than RM7,000.

The five states accounting for 28 per cent of Malaysia's population (Kelantan, Perlis, Pahang, Kedah, Perak) all have much higher proportion of households earning below RM7,000 at 80 per cent or more, with Kelantan being the highest at 85.3 per cent. Kelantan also has the highest percentage nationwide of households earning less than RM3,000.

On the other extreme end in a chart in KRI's report, Selangor (47.8 per cent), Putrajaya (34.6 per cent) and Kuala Lumpur (34.1 per cent) have the least proportion of households earning below RM7,000. In other words, the majority of households living in these three locations earn more than RM7,000 each month.

Income thresholds for household income class in 2016. ― Screengrab from Khazanah Research Institute's The State of Households 2018: Different Realities report
Income thresholds for household income class in 2016. ― Screengrab from Khazanah Research Institute's The State of Households 2018: Different Realities report
Let's zoom in

The KRI report also noted that households in most of the districts in Malaysia earn less than the national median household income of RM5,228 in 2016, with those earning higher median income located mainly in highly urbanised and populated areas such as districts within Greater Kuala Lumpur (Petaling ― RM7,904), Penang (Timur Laut ― RM5,964) and Johor Baru (RM6,518).

“The differences between districts can be stark: Kuala Lumpur had the highest median household income at RM9,073, 4.3 times higher than the district with the lowest median household income in the country: Pitas, Sabah at RM2,105 median household income,” the report said, citing DOSM data.

Greater Kuala Lumpur households had a mean household income of RM10,427 in 2016, almost two times of those in districts outside of that area (RM5,719), the report noted.

Even when using a Greater Kuala Lumpur district with the lowest mean household income (Klang) at RM8,606, it was still higher than a district beyond the GKL zone with the highest mean household income (Johor Baru) at RM8,198, the report noted.

Despite only accounting for 26.3 per cent of the total number of households in Malaysia, the Greater Kuala Lumpur households' total income was almost 40 per cent of total income of all households nationally.

(Greater Kuala Lumpur includes districts such as Kuala Lumpur, Gombak, Petaling, Sepang, Putrajaya, Klang and Hulu Langat, based on the definition adopted by KRI from the Economic Planning Unit's standard.)

But why?

After examining the common idea that the demographics in Kuala Lumpur was more economically favourable with more working-age adults compared to retirees and children, KRI concluded that this factor was not significant enough to explain why household income levels vary so widely between states.

KRI's research instead showed that factors that play a greater role in determining income levels are: urbanisation and education levels.

“Urban households earn more than rural households, and households with heads with higher education and skill levels have much higher household incomes,” the report said.

Noting that an urban household in Malaysia was on average 70 per cent richer than a rural household, KRI said this was the case even within each state.

KRI said urban households throughout the country earned 1.7 times more than their rural counterparts in terms of median income in 2016, with Sarawak itself showing the largest difference at 1.8 times, followed by Sabah and Selangor both at 1.5 times. Other states ranged from 1.1 times to 1.4 times, with the state with the smallest urban-rural difference for income being Perlis (1.1).

But more pronounced was the effect of having higher education levels and working in a higher-skilled job.

Household heads with at least a degree qualification having median household income of more than 3.6 times than someone with no certificate at all; while households with heads in the high-skilled, managers category and professionals category earned 3.2 times more and 2.8 times more respectively than those with a household head working in a low-skilled elementary job.

Ratio of median household income to elementary occupations income in 2016. ― Screengrab from Khazanah Research Institute's The State of Households 2018: Different Realities report
Ratio of median household income to elementary occupations income in 2016. ― Screengrab from Khazanah Research Institute's The State of Households 2018: Different Realities report
What is the current trend?

The number of Malaysian households have been steadily growing from 6.1 million in 2009 to 6.7 million (2014) and 6.9 million (2016), although the average household size has been decreasing from 5.2 persons (1980) to 4.1 persons (2016).

Interesting to note is that Malaysian households are increasingly living in urban areas: 4.2 million or 69 per cent of households in 2009 going up to 5.5 million or 78 per cent of households in 2016. The number of households living in rural areas has shrunk from 1.9 million (2009) to 1.5 million (2014 and also 2016).