PETALING JAYA: Skill-related underemployment is holding Malaysia back from achieving its full growth potential, but the problem runs deeper than workers being stuck in jobs below their qualifications.
Matthew Dornan, the World Bank’s senior economist for social policy, said skill-related underemployment is itself a symptom of other factors: a business environment in Malaysia that does not facilitate enough firm entry, exit, and expansion as a central bottleneck.
This includes regulatory barriers, limited competition, uneven access to finance, and slow insolvency processes.
These constraints prevent resources from flowing to more productive firms, limiting their entry and expansion, and through that, the creation of more high-quality jobs.
“It is a demand-side problem – businesses are not creating enough high-productivity jobs to absorb what is an increasingly educated workforce – though skills mismatches and capability gaps compound the challenge,” he told StarBiz.
The comments from Dornan came days after the World Bank released its latest Malaysia Economic Monitor report.
In the report, the World Bank noted that tertiary graduates in Malaysia who are underemployed faced a wage penalty of 49.3%.
This meant that tertiary-educated workers in skill-mismatched jobs earn 49.3% less than those in well-matched roles, controlling for experience, gender, sector, state, and year.
It was also mentioned that the share of tertiary-educated workers employed in jobs below their qualification level had risen from about 30% in 2015 to 36.1% in 2024.
This is despite it having moderated in recent years.
In some states, the skill-related underemployment rates were higher.
Dornan said there is a significant underutilisation of Malaysia’s human capital, and it weakens the link between rising education levels and wage growth.
Malaysia is also not creating enough quality jobs.
More than half of new job vacancies are in semi-skilled occupations and about 19% are in low-skilled roles.
Only 24.6% of new vacancies are classified as skilled.
“So even as investment flows in, particularly in sectors like electrical and electronics and data centres, the broader labour market is not generating enough high-skilled positions to absorb Malaysia’s increasingly educated workforce.
“A key reason for this is that the most productive firms in the economy – the top 10%, which pay roughly three times the wages of the median firm – are not scaling enough.
“In manufacturing, frontier firms’ employment share fell from 35% in 2010 to 33% in 2022, and their market share dropped from 80% to 71%.
“In services, frontier firms account for just 15% of employment despite generating 63% of sales.
“This matters because these are the firms that create better-paying, higher-skilled jobs,” added Dornan.
On wages, Dornan said Malaysia needs a virtuous cycle of productive firm growth and workforce capability development to achieve durable wage gains.
“This requires complementary reforms: improving the business environment so productive firms can enter, grow and create better jobs, while aligning skills development more closely with labour market demand,” according to him.
