Upskilling and workforce transition the way forward

Center for Market Education Sdn Bhd chief executive officer Carmelo Ferlito (pic) says the reliance on cheap labour is not the main problem.

WHILE the wage-to-gross domestic product (GDP) ratio of many advanced economies has been declining over the years, Malaysia is still playing catch-up despite seeing steady growth since 2005.

According to a 2019 paper by the International Labour Organisation (ILO), globally, the share of national income going to workers is falling, from 53.7% in 2004 to 51.4% in 2017.

Comparatively, the contribution of compensation of employees to Malaysia’s GDP increased to 35.9% in 2019 against 35.8% in 2018, according to the Statistics Department.

According to the Asian Development Bank Institute, the steady increase can be attributed to the growing importance of more traditional service sub-sectors and small and medium enterprises in the economy.

“This, in turn, is associated with greater reliance on low-skilled foreign workers during this period.

“These findings have important policy implications for Malaysia, including the potential trade-off between driving labour productivity and fostering inclusiveness,” it says.

But how does Malaysia’s wage-to-GDP ratio compare with other countries?

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According to Singapore government’s official communication platform and repository website, wages make up around 40% of the country’s GDP.

“This is lower than other developed economies whose wage shares are mostly above 50%. Some have interpreted Singapore’s lower wage share to be an indication that our workers are worse off,” the portal says.

According to Singapore’s Ministry of Manpower website, the country had a total foreign workforce of 1.23 million as at December 2020.

Commentators have observed that as Singapore has climbed steadily up Asia’s per capita income ladder, its residents have increasingly turned to foreign labour from other countries to do the work they don’t want to do.

A similar situation can be seen in many countries, especially Malaysia. Yet, Singapore’s wage-to-GDP ratio is still higher than Malaysia.

Malaysia is also heavily dependent on foreign labour.

Citing the Employment Insurance System, the Malaysian Employers Federation estimates that there were about 1.38 million legal foreign workers in Malaysia as at the end of last November.

The number of illegal foreign workers in the country, meanwhile, has been estimated to be more than triple the number of legal foreign employees.

So how then, to ramp up the wage-to-GDP ratio?

Center for Market Education Sdn Bhd chief executive officer Carmelo Ferlito says the reliance on cheap labour is not the main problem.

“If there are enough jobs for Malaysians but they do not want to perform certain jobs, cheap labour creates a competitive advantage for Malaysia.

“In this case, cheap labour is bringing an increase in income to the nation, an income which is not directly measured by the wages but more in general by the GDP.”

Ferlito, however, adds that cheap foreign labour cannot be the only strategy in the long run.

“Malaysia is losing its appeal as a hub for international investors. Rediscovering the international vocation to openness is one of the keys to allowing investors to come back and bring well-paid jobs into the country.

“This means engaging in institutional reforms and cutting red tape for businesses.”

According to Singapore’s communication platform and repository website, there are many factors influencing the wage share of the economy.

“For example, the structure of the economy can affect wage shares. A more capital-intensive economy may have lower wage share than one that is more labour-intensive.

“Also, an economy which is more open to investment and trade needs to offer higher returns and profits to keep firms anchored. This, in turn, tends to attract more profitable firms along with better quality jobs.”

The portal goes on to clarify that citizens in a country with higher wage share do not necessarily earn more than those in countries with lower wage shares.

“For example, while Germany and Japan have higher wage shares than Singapore (53% and 52% in 2018, respectively), they have lower average wages after accounting for differences in purchasing power.

“Within Singapore, sectors with higher wage shares do not necessarily pay their workers more. For example, the biomedical manufacturing sector has a low wage share of 10% of value-added compared to 55% for the accommodation and food services sector.”

However, the portal says the average wage in the biomedical manufacturing sector is more than three times that in the accommodation and food services sector.

“It is therefore more important to focus on other direct measures of worker welfare, such as real wage growth.

To support long-term wage growth, ongoing efforts to improve productivity, such as through skills upgrading and job restructuring, remain critical.”

Garage Analytics Sdn Bhd founder and chief executive officer Datuk Tharuma Rajah concurs, believing that upskilling and having a successful workforce transition plan is key towards reducing the dependence on foreign labour.

“With the advancement of and increased dependence on technology, especially following the pandemic, there’s going to be a lot of disruption that will create transitions towards information technology-related jobs.

“The highly educated individuals will be able to make that transition more easily. Here, it will be the low-income group that will be the hardest-hit, as they don’t have the necessary skills needed by these new tech-based firms.

Tharuma gives an example of how banks today are embracing financial technology (fintech) at breakneck speed.

“There was a time when the success of a bank was based on how many branches it had. But today, more banks are closing down their branches because fintech is the way to go.”

Tharuma says Malaysia could try incorporating a “personal training account” model such as France, which is a scheme that allows employees to develop and professionalise their skills throughout their entire working careers.

The scheme enables the accumulation of credits for the right to training for every individual since his or her entrance into the labour market.

The account is entirely transferable from one occupation to another and preserved when changing or losing one’s job.

Tharuma says such a scheme would help especially those in low-paying jobs if there is disruption in the sector or industry.

He also says Malaysia could re-designate the title of certain jobs to make them more appealing to locals.

“In Germany, a truck driver is very highly paid because they are more than just big lorry drivers.

“Over there, they are thought to maintain the trucks and manage the logistics. In Germany, they are called navigation specialists rather than lorry drivers.”

Tharuma says a simple re-designation in the job title, together with added responsibilities and incentives, is all that’s needed to attract local talents.

“Find ways to re-purpose the job, so that their productivity can go up and they can earn more wages,” he says.

According to ILO’s Global Labour Income Share and Distribution report, the global wage-to-GDP ratio saw a substantial downward trend from 2004 to 2017 (see chart).

“The decrease was temporarily reversed during the financial crisis in 2008 and 2009, due to a clear counter-cyclical behaviour. Both Europe and the Americas are key drivers of the global decline.

“The pattern of long-run decreases, with counter-cyclical behaviour, does not hold in general outside of developed countries. Asia does present an important decline, with a counter-cyclical blip in 2008 and 2009, mainly due to the behaviour of the labour share in India.”

The ILO goes on to state that the share of self-employment in India, as well as many other developing countries, is high.

The ILO adds that measuring the wage-to-GDP ratio of the self-employed can be a challenge.

“Whereas the share of income accruing to employees can be readily obtained via the national accounts item and compensation of employees, the labour income of the self-employed, cannot,” it says.

Additionally, Ferlito says one index alone (the wage-to-GDP ratio) is not enough to judge the health of the economy.

“The economy is a complex, evolving and living organism and we should look at it having in mind this complexity as well as its evolution over time.”

He adds that the same prudence applies when discussing any ratio.

“A ratio is indeed a relationship between two magnitudes. Paradoxically, the wage-to-GDP ratio could be lower during moments of economic growth and higher during moments of economic crisis.

“In fact, wages tend to be stabler than the GDP and therefore, ceteris paribus (all other things being equal), a higher GDP would bring down the ratio and vice versa.”

Ferlito says the economic crisis caused by the pandemic is “sort of an exception.”

“In fact, we just learned that in 2020, salaries in Malaysia went down by 9% as a result of stay-at-home orders. Wages declined more than the GDP (-5.6%) and therefore the ratio is worsening.

“I think that this trend may continue in 2021, depending on how much the GDP and wages will decline.”

In the short term, Ferlito believes that further stress may be placed on the ratio by stronger inflationary pressures, generated by lockdowns (supply-side shocks) and by expansive fiscal and monetary policies (that create excess liquidity).

“Inflation would push up the nominal GDP, while real wages will decline further.

“In the short-term, we need a radically new strategy to contain the Covid-19 virus without destroying the economy,” he says.

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