Grad squeeze hurts economy

A DEGREE holder works in a convenience store, another is into marketing and sales, while yet another is a Grab driver.

Close to two million Malaysians are being underemployed.

This means more than one out of three tertiary educated employees in the country are working in low- or semi-skilled jobs.

A degree holder working in a convenience store is not about value of the work itself, but whether the person’s education is being fully utilised.

It is understood that the official data captures both voluntary and involuntary overqualification, although the Statistics Department does not provide such breakdown.

The reality is, many employees do choose roles below their skill levels. For some, especially women, it is to pursue caregiving.

The official data does show that there were 1.04 million women in Malaysia affected by skill-related underemployment as of the first quarter of financial year 2026 (1Q26), compared to about 896,000 men.

Beyond caregiving, many Malaysians settle for jobs below their qualification to seek work-life balance, gain flexibility or better remuneration in sales-related jobs.

Singapore offers a useful comparison. Its Manpower Ministry recently reported that 19.4% of resident workers are overqualified for their jobs – up from 16.3% in 2015.

However, of these overqualified workers, about nine in 10 were underemployed by choice.

Malaysia’s problem is more difficult to read because the data does not tell how many are choosing such work and how many are trapped in it.

But the sheer scale of the number suggests a labour market that is still struggling to convert education into productive, higher skilled employment.

The blame game continues.

Some say industries do not evolve fast enough to accommodate the number of graduates churned out by the universities.

Others say the mismatch occurs because certain tertiary education programmes continue attracting large enrolment despite weak labour market demand.

After all, the business model of higher education rewards institutions for filling classrooms, not necessarily for ensuring that every graduate lands a job that matches their qualification.

A wage problem

Skill-related underemployment is not just a waste of education. It can also become a wage problem.

When graduates are absorbed into jobs below their qualification level, the supply of labour for semi-skilled roles rises.

This gives employers less incentive to raise salaries, particularly in sectors where productivity remains weak and labour supply is abundant.

The pressure is not limited to graduates. When tertiary educated workers move into lower skill roles, they compete with non graduates for the same jobs.

This can compress wages across the middle and lower segments of the labour market, making it harder for wage growth to reflect educational attainment.

World Bank data show that skill-related underemployment tends to be higher in economically lagging states of Malaysia.

In Kelantan, skill-related underemployment rates exceed 50%, while the rates exceed 40% in Terengganu, Pahang, and Perlis.

In its latest Malaysia Economic Monitor report, the World Bank notes that tertiary graduates who are underemployed face a wage penalty of 49.3%.

Over time, as more graduates move into low- or semi-skilled jobs, this weakens the wage premium from higher education.

If a degree no longer reliably leads to a higher skilled job, the economic return from tertiary education becomes less certain.

Speaking with StarBiz 7, Centre for Market Education chief executive officer Carmelo Ferlito says skill-related underemployment remains sticky in Malaysia because of the mismatch between social expectations and the actual structure of the labour market.

“For many years, there has been strong social and policy pressure for almost everyone to obtain a degree.

“The implicit promise was that a degree would automatically lead to a high-skilled, well-paid, white-collar job. But the labour market does not work according to aspirations.

“It works according to demand, productivity, business models, investment patterns and price signals.”

Ferlito adds that the firms should not be asked to “redesign” the job market around graduates.

“Instead, the solution is to make workers, graduates, and education institutions more responsive to market signals,” he says.

Not enough high-skilled jobs

Recently, the World Bank has raised concerns about job vacancies in Malaysia which remain concentrated in semi- and low-skilled roles, amid persistently high skill-related underemployment and ongoing challenges in attracting skilled workers in key industries such as electrical and electronics.

It also said firms in Malaysia are not creating enough high-skill, high-productivity jobs to absorb an increasingly educated workforce.

The data by asean+3 Macroeconomic Research Office or AMRO in its recently released 2026 annual consultation report also showed that the share of new skilled jobs has been falling to around 25%.

The dilemma is further compounded by the fact that most productive firms in Malaysia are not yet scaling as strongly as intended, according to the World Bank.

“This is a challenge as they offer better paying jobs.

“Market shares and employment absorption of national frontier firms – the top 10% most productive firms, have declined over the last decade, limiting aggregate productivity gains and wage growth,” the World Bank said.

To make it worse, Malaysia’s national frontier firms are falling behind the global productivity frontier, especially in digital- and knowledge-intensive sectors.

On the surface, Malaysia’s labour market presents a resilient image.

The unemployment rate has fallen to 2.9% in 1Q26, below pre-pandemic levels, while the labour force participation rate has reached a record-high of 70.9%.

Behind the impressive figures lies a less flattering reality.

AMRO said the country’s employment growth has been largely driven by own-account workers, suggesting that most new jobs are not the high-productivity, high-wage positions needed to sustain income growth.

Growth in real wages per worker in the manufacturing sector has remained negative despite government measures such as a minimum wage increase and progressive wage policy.

In fact, manufacturing wage growth has lagged behind productivity growth.

These issues are less acute in the services sector where labour conditions are tighter.

Bernard Aw, chief economist for the Asia-Pacific at Coface, warns that underemployment is likely constraining Malaysia’s potential growth because it reflects inefficient utilisation of human capital.

He tells StarBiz 7 that wage-related initiatives such as the Progressive Wage Model can help support incomes at the lower end, but they are unlikely to solve structural underemployment on their own.

“Sustainable improvement will require deeper reforms in education quality, vocational training, productivity, and incentives for firms to move into higher value-added activities.”

Aw points out that Malaysia’s skill-related underemployment remains a sticky structural issue because the economy is still heavily reliant on mid-skilled manufacturing, services, and low-cost labour models, while higher value-added sectors have not expanded fast enough.

The responsibility lies with both policymakers and the private sector – government reforms in education and industrial upgrading have been gradual, while many firms still prioritise cost competitiveness over automation, productivity, and innovation.

He says similar trends can be seen in Thailand and Indonesia, where economies generate jobs but face difficulties moving up the value chain.

“This explains why Malaysia can continue creating jobs amid strong investment inflows, yet still sees limited growth in skilled employment.

“Many of these roles remain concentrated in production, assembly, logistics, retail, and traditional manufacturing rather than high-skilled activities.

“Higher-value functions such as research and development, software, product design, and strategic management are still often located outside Malaysia.

“As a result, employment growth stays healthy, but the share of skilled jobs rises more slowly,” said Aw.

Amid persistently high underemployment, many young Malaysians increasingly question whether higher education guarantees economic mobility.

Rising living costs amplify frustration. Housing affordability challenges intensify financial pressure.

Student debt burdens remain significant for segments of graduates entering modest wage environments.

Against such a backdrop, social consequences gradually emerge.

Delayed family formation. Lower household savings. Reduced long-term wealth accumulation. Greater dissatisfaction toward career prospects.

Economic mobility weakens when education no longer consistently translates into stronger employment outcomes.

 

More public-private efforts needed

Both public and private sectors should accelerate efforts towards addressing underemployment and boosting technology-driven productivity growth in the country, says Prof Emeritus Datuk Noraini Idris, president and founder of National stem Association.

“Universities are already revamping their curriculum to meet the needs of the industries.

The Higher Education Ministry is also working on initiatives, such as the “2u2i” programme which is an innovative work-based learning initiative, says Noraini, who is also the adviser for Universiti Malaya’s Stem Centre.

The 2u2i programme allows university students to split their studies between academic learning on campus (“U”) and real-world work experience in industry (“I”), such as two years at university and two years in industry.”

However, she points out that efforts to instill adequate skills in students should not start in universities, and instead begin in schools.

“We need our students to be strong in science, technology, engineering, and mathematics (Stem) subjects from school.

“The problem is out of about 400,000 Form Three students, only about 16% enter pure science stream or Stem A during Form Four. The percentage has been declining, to make it worse.

“The teaching and learning process is an issue behind why students are not strong or interested in such subjects.

“We need more hands-on learning from a young age.”

Asked if the rise of artificial intelligence application in the workplace would further fuel underemployment in the future, Noraini agrees.

“Thus we need to prepare our young generation for such changes.”

Her organisation, National Stem Association, is also playing its part in preparing the nation for future challenges.

One of the initiatives is the Mini Teater Stem project, which started in 2019.

It is a competition aimed at identifying and cultivating talents in Stem among the bottom 40% high school students. It combines Stem education with performing arts, using theatre to showcase individual skills in areas like agriculture, cooking, and electronics.

The association is also behind a mentor-mentee programme where university undergraduates act as mentors for students in nearby schools.

Ferlito says Malaysia has an “education problem” behind its persistently high underemployment issue.

Tertiary education should mean higher-level formation for genuinely complex roles, instead of just more degrees, he says.

“At the same time, many standard occupations such as accounting support, technical operations, junior engineering functions, sales engineering, and administrative roles do not necessarily require a generalist university degree.

“They may be better served by strong professionalising of secondary education, technical institutes, apprenticeships, and employer-led training.”

Ferlito argues that it is a mistake to believe that policymakers can decide, by target or decree, what kind of jobs the economy should create.

“They cannot. The market decides which jobs are needed.

“Investment does not automatically create high-skilled jobs.

“The type of jobs created depends on the nature of the investment, the technologies used, the role Malaysia plays in regional value chains and the actual skills available in the labour force.”

In 2025, Malaysia recorded RM426.7bil in approved investments, the highest level ever achieved.

A huge chunk of these investments are in the form of data centres, which critics say are poor creators of jobs.

AMRO, in its latest report, said the lion’s share of jobs created by data centres takes place at the pre-operational stages.

Once operations begin, most data centres create only 30 to 50 permanent jobs.

During the operations stage, AMRO said a variety of indirect jobs are also created, generally through partnerships with external vendors that supply periodic services such as maintenance, repairs, and upgrades.

The bigger question, however, is not whether jobs are being created. It is whether enough of them are genuinely high skilled.

High underemployment also raises a harder question for wage reform.

Can policies such as the Progressive Wage Model deliver meaningful pay gains if the economy continues to absorb qualified workers into lower skilled roles?

“The risk with wage policies is that they confuse the symptom with the cause,” says Ferlito.

“Low wages are not mainly caused by a lack of wage-setting mechanisms. They are caused by low productivity, weak capital deepening, limited innovation, regulatory rigidities, and a mismatch between workers’ qualifications and market needs.

“If we try to push wages up without addressing productivity, the result may be higher costs for firms, fewer opportunities for young workers, or a shift toward informality and automation.”