Low-skilled tech, foreign workers to slow down Malaysia’s march to advanced economy

  • Economy
  • Monday, 15 Oct 2018

KUALA LUMPUR: Malaysia’s adoption of low-skill based technologies linked to its dependence on foreign workers may possibly be slowing down the shift to becoming an advanced economy, says Khazanah Research Institute (KRI)

In its “State of the Household” report issued on Monday, it said the state of economic well-being for future generations of Malaysian households’ hinges crucially on how the country overcomes some of the structural challenges, including in relation to the labour market.

In its section on “The Malaysian workforce – A changing landscape”, it said there are no studies investigating the long-term impact of foreign workers on the choice of production technology of the country and the growth potential on the Malaysian economy more generally.

“Specifically, suppose an economy has a selection of feasible production technologies to choose from, and it will optimise based on what it has in relative abundance.

“Adoption of low-skill based technologies, given our dependence on foreign workers may possibly be slowing down our convergence to advanced economies,” it said.

KRI said based on official statistics, foreign workers represent around 15% of all employed persons in Malaysia.

In 2013, 15.7% of total employed persons were foreign workers and dipped to 15.5% in 2018.

In 2010 to 2013, the number of foreign workers increased from almost 1.7 million to 2.1 million and latest record was around 2.2 million.

Indonesians workers declined from almost three quarter in 2000 to 39.2% in 2015 followed by Nepalese (23.5%), and Bangladeshis (13.2%).  

The decline in Indonesian workers recently partly due to a ban on labour migration to Malaysia by the Indonesian government from 2009 to 2011 following human rights violations concerns, and more stringent regulations in place.

Almost 70% of all foreign workers work in urban areas but in rural areas, there are more foreign workers as they are in the agricultural sector.

In 2010, the agriculture and construction sectors employed 52% of all foreign workers.

In 2017, the agriculture and construction sectors employing 40.5% of all foreign workers, although, a sizable part of foreign workers (35.9%) were employed in services while the remaining 23.0% were in manufacturing.

“However, it is important to note that the official statistics exclude workers in communal housing, therefore, possibly undercounting the number of foreign workers in agriculture.

“Foreign workers constitute a large share of total employment in agriculture at 37.4%, construction at 23.6% and 20.5% in manufacturing. In contrast, the share of foreign workers in mining and services is relatively small, at 12.5% and 8.9% respectively,” it said.

The report stated low-skilled jobs are dominated by foreign workers but this percentage has since declined.

In 2013, 76.7% of low-skilled employed persons were foreign workers, although this has fallen to 51.0% in 2017.

“This is an important point—around one in two unskilled workers are foreign workers, potentially reflecting how foreign workers play a complementary role to local workers, who are mostly in skilled and semi-skilled jobs.

“However, of all the foreign workers, most tend to be in semi-skilled jobs, even though they make up less than 20% of all semi-skilled employed persons,” it said.

The KRI report showed that around 64.5% of foreign workers were in semi-skilled jobs in 2010, but this share has declined to 52.9% in 2016.

Similarly, the share of foreign workers in skilled jobs has also declined.

Only the share of foreign workers working in low-skilled occupations went up, from about 28.2% in 2010 to 42.3% in 2016

The reported pointed out the Malaysian labour force was about 10.6 million strong in 2010 and 12.7 million in 2017, while the foreign labour force stood at about 1.7 million in 2010 and 2.3 million in 2017.

Out of the 10.6 million Malaysians in the labour force in 2010, 10.2 million were employed, while 12.2 million were employed in 2017.

About 1.6 million foreign workers were employed out of the 1.7 million in 2010, while almost all foreigners in the labour force were employed in 2017.

From 2010 to 2017, the number of Malaysians in the labour force with tertiary education increased the most by about 1.3 million.

Malaysians with secondary education in the labour force increased by 1.2 million, while there was a decrease of about 438,000 Malaysians in the labour force with primary education.

However, in the same period, the number of employed Malaysians in semi-skilled occupations increased the most by 1.3 million, while those employed in skilled occupations increased by just 713,000, even though more than half of all Malaysians in the labour force have tertiary education.

“This points to a possible mismatch in labour demand and supply, in that not all tertiary educated individuals entered skilled occupations. It is likely that some tertiary educated individuals entered semi-skilled jobs instead,” it said.

On the other hand, the number of foreigners in the labour force with secondary education increased the most by 423,000 from 2010 to 2017, while those with education up to the primary level increased by 105,000.

There was an even larger increase of 473,000 in the number of foreign workers employed in low-skilled occupations.

“Additionally, there was an increase of 96,000 foreign workers in semi-skilled occupations. This change could be the result of foreign workers educated up to the secondary level entering low-skilled and semi-skilled occupations,” it said.

The KRI report pointed out foreign workers tend to go into low-skilled jobs, where half of all employed persons are of foreign-origin, while native workers go into skilled and semi-skilled occupations.

While it is true that there is a large increase of foreign workers in semi-skilled jobs, this represents less than 20% of semi-skilled employment.

“So even as the skills mismatch leaves tertiary educated Malaysians in semi-skilled jobs, on aggregate they do not face a high likelihood of being replaced by foreign workers. Malaysians in low-skilled jobs, on the other hand, could stand to lose,” it said.

The report also identified three research directions going forward that are particularly important for policies.

  • Firstly, it will be useful to see the effect of foreign workers on different segments of the Malaysian workforce.

Not all Malaysians are affected equally by the large presence of foreign workers in the country. Some Malaysian workers may be negatively affected depending on their education and skill levels.

The World Bank study showed the least educated, lowest-skilled Malaysians were significantly disadvantaged as they experience job displacement and wage suppression.

Based on the latest available statistics, close to one million Malaysians are in this category, many of them in the rural areas. This is not a small number. An in-depth understanding of how they are affected is key for informed policy interventions.

  • Secondly, future research should analyse how foreign workers affect Malaysia’s development beyond the labour market.

The Statistics Department’s official statistics show that “there are currently more foreign workers than Malaysian-Indians”.

Going by EPU’s estimates, which include undocumented foreign workers, shows a number which is even larger than the entire Malaysian-Chinese working population.

“It is important to emphasise again that even though the foreign population is significant, systematic understanding of the lives and welfare of the two million documented and many more undocumented foreign workers in Malaysia is next to non-existent.

“For instance, are foreign workers leading decent and dignified lives, and if not, should a policy be in place to support them? How is the large presence of migrants affecting the development of our society, and the utilisation of public spaces, goods and services?”

  • Finally, how foreign workers affect the structural transformation of the Malaysian economy is a highly consequential research question.

KRI said the state of economic well-being for future generations of Malaysian households’ hinges crucially on how the country overcome some of the structural challenges towards becoming an advanced economy.

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