MALAYSIA is set to become a high-income nation by 2023 but struggles to stay on track due to global headwinds, as well as certain structural constraints.
In this article, we will analyse these constraints from labour and productivity perspectives. For Malaysia to achieve high-income status by 2023, high productivity and workforce are key.
Malaysia should benefit from a clear shift away from an economy that is input-based cost and cost suppression, to one that competes on the quality of its labour force.
As of December 2018, some 514,200 people, 3.3% of Malaysian labour force, were unemployed in our economy with the number of unemployed people increasing at the rate of 2.3% year-on-year (y-o-y), from 502,600 people as at end of 2017.
The Malaysian Employers Federation (MEF) recently said some 30,000 people may likely lose their jobs this year, if the economy slows down further.
In addition, unemployment rate among youths, particularly with tertiary educational attainment, remains high mainly due to the mismatch between graduates’ skills and industry requirements.
As a matter of fact, some 175,900 (4.2%), out of 4,231,100 people who attained tertiary education, were unemployed in 2017.
eparately, the share of low-skilled jobs in Malaysia increased significantly to around 14% in 2017 from only 8% in 2010, while high-skilled employment shrank to 37% from 45% over the same time period.
According to Bank Negara, foreign labour, primarily low-skilled, made up 15.5% of total workforce as at end of 2017.
They are mostly in the manufacturing, construction and agricultural sectors, causing these sectors to suffer from low productivity.
Critical reforms to the country’s labour market should be very much within its reach to tackle the structural problems within our labour market.
In other words, labour force must be well remunerated in order to contribute to a sustainable economic growth.
In its efforts to boost Malaysia’s wage growth, the government has announced that minimum wage is to increase to RM1,100 in 2019 and gradually reach its targeted RM1,500. However, the current pace of wage growth is still insufficient to help Malaysia achieve high income nation status by 2023.
Bank Negara has also reported that slightly more than 50% of working Malaysians earned less than the national median income of RM1,703 in 2016. According to its 2017 annual report, expenditure of the bottom 40% (B40) of Malaysian households has expanded at a faster pace compared to their earned income. From 2014 to 2016, B40 household expenditure jumped 6%, higher than the average income growth of 5.8% in this category.
In addition, the gap in the income share between B40 and top 20% (T20) household group remains large, as T20 household earns almost 50% of total income earned in Malaysia. Thus, raising the income and purchasing power of B40 household is imperative to reduce overall income inequalities. This would definitely provide better opportunities for the B40s to contribute to economic growth. Also, initiatives to boost higher female labour participation are equally important to maintain a similar pace of wage growth between male and female workers in upcoming years.
It is worth noting that prior to 2016, female workers registered a lower absolute value compared to male workers. However, this anomaly is no more an issue after 2016, as median wages for female workers have matched the wages earned by males
Besides the slow wage growth, labour productivity is also a major concern that needs to be addressed. Labour productivity grew above the 2011-2017 average growth of 2.4% and downwards in recent quarters. In fact, decline in productivity growth is mainly attributed to the mining & quarrying and agricultural sectors registering a 2.9% increase in 3Q18 (2Q18: 6.2%) and 1.4% (2Q18: 3.4%) respectively. This may be due to the oil price crash in 2015 for mining & quarrying, and falling commodity prices reflected this trend in agriculture sector.
Malaysia also has a female labour force participation rate (LFPR) that is significantly lower than the males, despite the higher number of females graduates with higher educational attainment (female LFPR: 54.7% vs male LFPR: 80.1% in 2017 compared with the number of graduates in higher education, female: 163,820 vs male: 130,152 in 2016).
In the mid-term review of 11th Malaysian Plan, the government has promised to undertake concerted efforts to broaden the implementation of the Productivity-Linked Wage System (PLWS) to ensure that wages are compatible with higher productivity as well as to implement flexible working arrangement for female labour to increase productivity level.
However, the over-dependence on semi-skilled and low-skilled labour – which makes up 72.5% of total employment – would eventually perpetuate a labour-intensive economy, suppress wages and serve as a disincentive to automation, thus impeding efforts to increase labour productivity if these are not treated as serious concerns.
There are still common challenges across all sectors that impede further productivity improvements such as talent, technologies, business environment, industry structure and mindset.
Part of it is that industry players are faced with skill gaps among local graduates, which is due to the mismatch between industry demand and the supply from institutions of higher learning, as well as technical and vocational education and training (TVET) institutions.
Despite that, high skilled jobs makes up only around 25% in Malaysia compared to almost 50% in the United States. In order to increase productivity and wage growth, more high skilled jobs essentially need to be created in line with the employability of graduates. Structurally, most industries in our economy remain in the lower-end of the production value chain, in spite of various incentives, hence limiting the creation of skilled jobs.
According to Department of Statistics, a total of 76,000 skilled jobs were created in 2017 across all the major sectors, but the number of applicants filling up the positions was almost 26 times the jobs created. In order to generate skilled jobs with higher productivity and wages, the right initiatives need to be implemented to attract higher quality investments into Malaysia.
This must also take into consideration quality of innovation, automation, adoption of new technology, and commercialisation of intellectual property. Moreover, higher education and TVET must be continuously reviewed to equip graduates with specific skills and talents in keeping pace with demands of the industry and the dynamic requirements.
This will eventually play an important role especially in embracing the Fourth Industrial Revolution, where skills demanded by the labour market are rapidly evolving.
In a nutshell, increasing the number of high skilled jobs will likely reduce the brain drain effect of Malaysians choosing to work abroad. To put it simply, a higher number of skilled jobs and a better proportion of skilled workers are needed for our economy to move up the value chain and be competitive at a global scale.
Undeniably, Malaysia’s economy has long benefitted from a supportive immigration stance. According to the United Nations Conference Board, Malaysia is one of the countries with a high ratio of immigrants to total population (8.8%) in Asia Pacific in 2017. The percentage of foreign labour has been increasing steadily since the 1990s due to the large demand for cheap labour wages. In 2017, excluding illegal foreign workers, 2.3 million foreign labour accounts for 13.2% of total labour force.
Undoubtedly, Malaysians’ reluctance to take on jobs classified under the 3D (dirty, dangerous, demanding) has contributed to the dependency on foreign labours. While low-skilled foreign labour remains an extensive component of Malaysia’s economy, Bank Negara contends that it is a major factor suppressing the local wages and deterring the country’s progress towards a high-productivity nation.
As such, the government has become more stringent on foreign labour policies and has been intensifying efforts in clamping down illegal foreign workers. One such example is the mid-term review of the 11th Malaysia Plan when the government introduced the new tiered foreign worker levy system to strictly reduce and regulate the number of foreign workers.
To sum up, Malaysia should seize the opportunity now to set itself on a more productive, sophisticated and sustainable economic growth path in order to achieve its target of a high-income nation status by 2023.
Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd.