WHY are wages still low in Malaysia?
Well, there are six words to describe the main reason for this – “high dependence on low-skilled foreign workers”.
The issue of Malaysia’s huge reliance on low-skilled foreign labour has been raised time and again, but only moderate progress has been made in alleviating the situation.
Low-skilled foreign labour remains a prevalent feature of Malaysia’s economy, and according to Bank Negara, it is a major factor suppressing local wages and impeding the country’s progress towards a high-productivity nation.
As the central bank governor Tan Sri Muhammad Ibrahim puts it, Malaysia is currently weighed down by a low-wage, low-productivity trap, with the contributing factor being the prolonged reliance on low-skilled foreign workers.
While their existence may benefit individual firms in the short term, they could impose high macroeconomic costs to the economy over the longer term.
“Easy availability of cheap low-skilled foreign workers blunts the need for productivity improvement and automation. Employers keep wages low to maintain margins,” Muhammad says.
“Unfortunately, this depresses wages for local workers. The hiring of low-skilled foreign workers also promotes the creation of low-skilled jobs,” he adds.
From 2011 to 2017, the share of low-skilled jobs in Malaysia increased significantly to 16%, compared with only 8% in the period of 2002 to 2010. Apart from that, local economic sectors that rely on foreign workers such as agriculture, construction and manufacturing also suffer from low productivity.
Nevertheless, it is an undeniable fact that foreign workers do contribute somewhat to Malaysia’s economic growth.
The World Bank, in its study about three years ago noted that immigrant labour both high and low-skilled, continued to play a crucial role in Malaysia’s economic development, and would still be needed for the country to achieve high-income status by 2020.
The global institution’s econometric modeling suggested that a 10% net increase in low-skilled foreign workers could increase Malaysia’s gross domestic product (GDP) by as much as 1.1%. For every 10 new immigrant workers in a given state and sector, up to five new jobs may be created for Malaysians in that state and sector, it said.
Even so, the World Bank acknowledged that the influx of foreign labour did have a negative impact on the wages of some groups.
Its study found a 10% increase in immigration flow would reduce wages of the least-educated Malaysians, which represents 14% of the total labour force, by 0.74%. Overall, a 10% increase in immigration flow would slightly increase the wages of Malaysians by 0.14%.
According to Muhammad, while some argue that foreign employment creates economic activities, which consequently create jobs for local employment, it is neither the most efficient nor the desired route to create more mid-to-high-skilled jobs.
“Compared with local employment, foreign workers repatriate a large share of their incomes, which limits the spillover or multiplier effect on the domestic economy,” he explains.
Total outward remittances in 2017 stood at RM35.3bil, of which the bulk was accounted for by foreign workers.
In addition, Muhammad says high dependence on low-skilled foreign workers will also have an adverse effect of shaping Malaysia’s reputation as a low-skilled, labour-intensive destination.
Bank Negara says while Malaysia has clearly benefitted from the presence of foreign workers, the role that foreign workers play in the Malaysian economy must keep up with the times.
The central bank believes critical reforms to the country’s labour market are very much within its reach, and it should continue to gradually wean its dependence on foreign workers.
Malaysia should seize the opportunity now to set itself on a more productive, sophisticated and sustainable economic growth path, it says.
According to Muhammad, cutting back on foreign worker dependency can help to drive higher wages for Malaysians across-the-board.
The Government’s efforts in reducing the country’s dependency on low-skilled foreign workers have been ongoing since the implementation of the 8th Malaysia Plan (2001-2005), with greater clarity and a renewed focus to resolve the issue at hand upon the implementation of the 11th Malaysia Plan.
This has resulted in the steady decline in the share of documented foreign workers from 16.1% in 2013 to 12.0% of the labour force in 2017.
More can be done to build on the progress made, Bank Negara says, while proposing a five-pronged approach to managing foreign workers in Malaysia.
Firstly, it says, there must be a clear stance on the role of low-skilled foreign workers in Malaysia’s economic narrative. Secondly, policy implementation and changes must be gradual and clearly communicated to the industry.
Thirdly, existing demand-management tools (such as quotas, dependency ceilings and levies) can be reformed to be more market-driven, while incentivising the outcomes that are in line with Malaysia’s economic objectives.
Fourthly, 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. Lastly, it is also important to note that the proposed reforms must be complemented with effective monitoring and enforcement on the ground, particularly with respect to undocumented foreign workers.
An economist tells StarBizWeek that addressing the high reliance on foreign workers is pertinent for Malaysia’s transition into a high-income economy.
“Malaysia needs to shift its focus from importing cheap labour to managing labour flow that can maximise growth and facilitate its structural adjustment towards a higher income economy,” he says.
“It has been far too long for our economy to be swamped with foreign workers who are unskilled, or have low skill sets that could not contribute meaningfully to Malaysia’s aspiration of becoming a high-income economy,” he adds.