Bank Negara warns of ‘race to the bottom’ in labour costs

  • Business
  • Wednesday, 28 Mar 2018

Remittances by foreign workers declined in Q4 of 2017

KUALA LUMPUR: Bank Negara Malaysia warns Malaysia’s transition to a high-income and developed nation is at risk, as long as firms are still engaged on a “race to the bottom” in relation to labour costs and are unwilling to pay more. 

In its annual report for 2017 released on Wednesday, it cautions that hiring cheaper foreign workers vis-à-vis locals allows employers to keep wages low and in doing so, obviates the pressure to change the status quo.

This distorts the natural wage clearing mechanisms that would have otherwise driven wages upwards.

Critically, the readily available pool of cheaper low-skilled foreign workers distorts domestic factor prices, and thus discourages industrial upgrading.

It makes labour relatively cheap when compared to capital, and thus weakens incentives for firms to substitute labour for technology, or for greater value adding activities from employment of higher-skilled labour.

While grants and incentives for automation and technology adoption are helpful, they are by themselves insufficient to create the necessary push for firms to move up the value-chain. 

Since 2008, around RM8bil has already been allocated by the Government to assist with technology adoption and commercialisation efforts.

Median wages of foreign workers are generally lower than those of locals, especially in mid-skilled occupations where 60.8% of locals are employed. 

The very high presence of foreign workers in the private sector could widen wage differentials and deter job creation for locals. 

This is most evident in the Gulf Cooperation Council economies where 88% of private-sector jobs created from 2000-2010 were taken by foreign workers, of which 85% of them were low-skilled.

“Much has been said about the reluctance of local workers in undertaking ‘dirty, dangerous and dif?cult’ (3D) jobs. 

“While cultural factors and the inherent nature of the work do play a role in deterring local involvement, it may also be argued that it is partly due to local wage conditions,” it  said. 

The report highlighted that of the approximate 200,000 daily commuters from Malaysia to Singapore, it was found that 40% were working in mid- to low-skilled jobs, motivated mainly by higher wages. 

This includes occupations that are often avoided in Malaysia such as plant and machine operators and assemblers, cleaners and labourers. In other words, at a more attractive level of wages, Malaysian workers would not shun 3D jobs.

While this is a limited example, it does suggest that current wages in Malaysia may be too low to attract local workers. 

Employers may also be reluctant to increase them due to the presence and abundance of cheaper alternatives. In the same vein, so long as blue-collar wages continue to face downward pressures, employers will not be hard pressed to adopt productivity-enhancing measures. 

Consequently, Malaysia risks being trapped in a low-wage, low-skill conundrum.

This can be observed through the share of job creation by skills from 2011 to 2017. When taken with other factors, Malaysia’s share of low-skilled job creation has increased to 16% from 8% in 2002 to 2010.

In fact, 73% of jobs created in 2015 to 2016 went to foreigners, of which almost all of them had at most a secondary education.

Reforms on the existing levy system can help disincentivise low-cost operations and prod ?rms to reduce dependence on foreign workers over time. 

There are three ways in which reforms can do so: 

The ?rst would involve narrowing the wage per hour gap between local and foreign workers, arising from statutory exemptions.

Internal estimates suggest that the average cost of hiring foreign workers on a per hourly basis is 30% lower than that of a local. 

While the upfront costs (e.g. compulsory medical check-ups, travel) of hiring the former may appear sizeable, it is important to note that these workers are usually subjected to longer working hours and that they do not enjoy the usual statutory bene? ts (e.g. Employer’s EPF and SOCSO contributions) that locals do.

In effect, the lower cost structure increases the appeal of foreign workers to employers over locals. 

Embedding the statutory costs in the levy calculations will help reduce this gap towards parity.

This can then be followed by making the levy system more progressive, so that industries or ?rms that are more dependent on foreign workers will face a higher total levy cost. 

The calculations can be made more nuanced, factoring the automation possibilities, wage growth and productivity improvements of each industry. 

The upcoming implementation of the multi-tiered levy in 2019 is a welcomed development, as it allows for a more differentiated deterrent mechanism depending on the ?rms’ workforce pro?le. 

In line with best practices, the levy that is collected should be re-channelled back to the industry to support automation efforts. 

There is room to ensure better treatment of foreign workers, be it improvements in working conditions or ensuring that foreign workers are paid as agreed. 

The questionable living and working conditions of foreign workers in certain industries do not merely raise concerns on workers’ welfare but are symptomatic of the unhealthy business drive of certain unscrupulous employers to improve cost competitiveness.

Bank Negara said these proposed reforms must be complemented with effective monitoring and enforcement on the ground, particularly with respect to undocumented foreign workers. 

Without addressing this challenge, any additional tightening in foreign worker policies will only penalise law-abiding employers. 

It may also lead to greater risks of corruption and employers circumventing existing regulations by resorting to the available pool of undocumented foreign workers.

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