Long-term solutions needed for foreign labour

  • Corporate News
  • Saturday, 26 Sep 2020

According to the Human Resources Ministry, Malaysia currently hosts about 2.1 million documented foreign workers, which accounts for about 14% of the domestic labour force. (Foreign constr workers getting food during the early stages of Covid-19.)

IN Malaysia, there had been concerns with regard to the increasing number of foreigners, especially the unskilled foreign labourers in Malaysia.

The influx of foreign labourers to Malaysia creates multiple economic, socioeconomic and political dilemmas. Thus, it is of utmost importance to decrease the overdependence on foreign labour.

Implications of hiring foreign labour

In the early 1980s, the industrialisation era transformed the country’s economic structure from agriculture to manufacturing and services, creating an influx of foreign labourers into Malaysia. The inflow of large numbers of foreigners into the domestic labour market fulfilled job openings at various levels, the majority of them at the lower ranks.

Since then, the proportion of foreign labour in Malaysia has been on the rise. According to the Human Resources Ministry, Malaysia currently hosts about 2.1 million documented foreign workers, which accounts for about 14% of the domestic labour force. The growing presence of foreign workers in Malaysia is largely driven by the strong demand for labour associated with economic growth, as well as the relatively cheaper cost of foreign labour.

Foreign workers’ migration is a common trend especially when most countries in the world today are focusing on maximising their economic development. From the macroeconomic perspective, immigration of foreign workers is likely to bring good impact to the receiving countries. For example, the improvement in labour productivity or the total factor productivity.

Nonetheless, there will also be some negative effects in terms of the rise in wage differentials between high income and low income groups. While low-skilled foreign labour remains a large component of Malaysia’s economy, this factor is suppressing local wages and deterring the country’s progress towards becoming a high-income nation.

The influx of foreign workers could hamper the economic growth, local employment opportunities and wages of local workers. Foreign workers enjoy many benefits such that when they utilise the public facilities of a country, they do not pay taxes that are used to construct public facilities. This situation may lead to an elimination of the amount of capital available for local workers. Therefore, the influx of foreign workers can hamper long-term economic growth.

Monopolisation in construction and low-tech manufacturing

Manokaran MottainManokaran Mottain

The differences in growth and overall educational gaps between the labour forces of Malaysia and its more popular neighbours, Indonesia and the Philippines, are the key pull and push factors that fuel the current migration patterns.

Another major factor for the overdependence on foreign labour is Malaysians’ general reluctance to undertake the 3D (dirty, dangerous, difficult) jobs. This has resulted in the monopolisation of foreign labour in certain sectors especially in construction as well as low-tech manufacturing sub-industries for food, wood products, textiles, and transport equipment. Local labour is either unavailable in these sectors or perceived to be unattractive in terms of wages and work conditions to attract Malaysian workers in sufficient numbers to fill the rapidly expanding demand.

The manufacturing and construction sectors rely on foreigners that require lower levels of skills, usually offering low remuneration, and are unappealing to Malaysian workers. In manufacturing, both export-oriented and domestic-oriented establishments tend to keep high utilisation rates of their plants, thus requiring a regular flow of all types of workers (high, semi and low skilled, as well as foreign and domestic).

Despite the legal channels provided, the majority of foreign workers still use illegal channels mainly to save cost. This has eventually led to the trafficking of illegal foreign workers into the country. World Bank estimates that there are about 3.3 million undocumented foreign labourers in our country, mainly concentrated in the manufacturing sector (36%), followed by construction (19%) and plantation (15%) sectors.

The Malaysian construction sector employs approximately 10% of the total workforce. However, there is still heavy dependence on foreign labour which brings several challenges to the productivity of the Malaysian construction companies. The first of these is the lack of initiatives to adopt more productive and modern methods of construction. Next is the availability of foreign workers, who are paid lower wages compared to local workers. Nevertheless, many of these foreign workers do not have enough construction experience, thus resulting in low productivity and poor quality of work. Communication barriers between the employers and these foreign workers may also lead to misunderstandings, which will hamper the quality level of work done at such projects.

On the other hand, the low-tech manufacturing sub-sector is another key industry in Malaysia that has been monopolised by foreign labour for the fact that these industries involve low-skilled jobs which seldom attract local workers. According to the Department of Statistics (DOSM), there has been a substantial increase in low-skilled and semi-skilled jobs in manufacturing subsectors such as food processing, beverage & tobacco products (2019: 246,000; 2018: 243,000), textiles, wearing apparel & leather products (2019: 84,000; 2018: 79,000); and wood products, furniture, paper products & printing (2019: 274,000; 2018: 266,000). Though their total contribution to gross domestic product (GDP) is less than 5%, the increasing number of lower-skilled jobs, presumably dominated by foreign workers, could ultimately affect the resilience of the manufacturing sector in the long run through the deterioration of labour productivity.

Substitutability or complementarity?

The role of foreign workers in Malaysian economy has always been a contentious issue. The major concern would be whether foreign workers are taking away jobs from the locals and if they depress market wages. Another pertinent issue regarding foreign labour is their substitutability or complementarity with local labour.

There is a widening gap between the educational attainment of foreign and domestic workers, indicating that foreign workers could complement the Malaysian workers and close gap on the shortages at the low end of the human capital spectrum.

The fast-changing manufacturing and services sectors require more professional and skilled workers to cope with the rapid change in technological adoption. However, the demand for low-skilled and semi-skilled labour is still high due to the fact that the total number of employment for these skills has been steadily increasing since 2017. DOSM estimates show that the creation of low-skilled and semi-skilled jobs increased 0.4% y-o-y and 1.8% y-o-y respectively in 2019. The increasing demand for such jobs raises concerns on the availability of domestic workers who are willing to take up these jobs. At this point, Malaysia’s labour market is forced to still rely on foreign labour to complement the locals.

On the other hand, the presence of skilled foreign professionals or expertise remains significant in the domestic labour market. Nevertheless, job opportunities for the high-skilled local workers will be jeopardised when they can easily be substituted by foreigners. Consequently, the unemployment rate among the locals would increase. At this juncture, it is important to stress that the percentage of graduates being employed in skilled employment has been substantially declining since 2016 despite the increasing number of graduates entering the labour market over the years. According to DOSM, the percentage share of employed graduates in skilled jobs declined to 73.3% of total graduates in 2019 from 77.1% in 2016.

While the labour market is over-saturated with skilled graduates, new jobs are still concentrated in the semi-skilled jobs category. This has become the root cause of increasing unemployment among graduates (unemployed graduates – 2019: 170,300 versus 2016: 145,800) due to job mismatch when graduates end up occupying non-graduates jobs that are widely available in the labour market. Hence, we urge local companies to prioritise local graduates instead of foreigners for such skilled job categories.

Viable solutions to tackle the issue

To limit the impact of Covid-19 on the domestic labour market, the government pledged to reduce the hiring of foreign workers in construction, agriculture and plantation sectors.

One of the ways to reduce dependence on foreign workers, especially for low-skilled workers, is by adopting new technology in line with the abruption of fourth industrial revolution. It is essential for labour-intensive industries to replace workers with semi-automatic or automatic machineries. In the near future, the low-tech manufacturing industry cannot purely rely on low-cost labour, but to utilise technology and be capital intensive to retain competitiveness.

Going forward, traditional commodity-based economic activities will gradually lose out to the high technology production lines. Hence, it is of utmost importance for the nation to upgrade the labour force with more specialisation in areas of expertise. In order to upgrade the domestic labour market, the nation needs to further invest in high quality education and technical and vocational education and training programmes to enhance the domestic work force. As a result, the dependency of low-skilled foreign labour is likely to gradually decrease in the long run.

Nonetheless, a reasonable number of highly skilled foreign workers are still necessary for industrial development in Malaysia, especially during this era of industrial modernisation. The high dependence on foreign workers may be reduced through several efforts:

redesigning the human resource development to produce high-skill workers through the cooperation between universities and industries to retain the existing high-skill workers and university students;

utilising advanced technology and investing in more machineries and modern equipment;

providing incentives to research and development in technology and innovation that corresponds to local workers’ abilities.

In addition to these, the availability of empirical data of foreign workers is essential to illustrate the actual pattern of migrant workers in Malaysia. The lack of reliable data on both the documented and undocumented foreign workers is a setback for the policymakers to draw feasible policy measures to curtail the dependency on foreign workforce. The Immigration Department and hiring companies play a crucial role in gathering the necessary data of migrants entering the domestic labour market.

The larger outflow of foreign remittances by foreign labourers in Malaysia is also a cause for concern and has caused our nation’s secondary income to continue registering a higher deficit of RM21.4bil in 2019 compared to RM19.3bil in 2018. If Malaysian employers manage to reduce their dependency on foreign labour, the country could save a lot in foreign remittances. With domestic unemployment soaring in recent months (July: 4.7%; June: 4.9%; May: 5.3%), it is the right time for local companies to restructure their over-reliance on foreign labour and absorb more locals into the labour market.

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd. The views expressed here are the writer’s own.

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