Developing human capital

THE announcement by the Malaysian government on March 18 to suspend all applications and processing for foreign workers until further notice to ensure that employers sort out the arrival of the 995,396 approved workers so far has caused dismay in various industries.

Many argue that the policy is impractical and fails to consider the market situation as foreign labourers do not arrive simultaneously.

This policy, coupled with the 15% threshold on foreign workers to the overall labour force, raises the question as to why the government is trying to restrict the number of foreign labourers while many industries in Malaysia still rely on labour-intensive production.

One potential explanation lies in the human capital structure within the economy.

Recently, Malaysia signed a Memorandum of Cooperation with Japan regarding the establishment of a branch campus of the University of Tsukubae in Malaysia. The signing of the memorandum coincided with the Prime Minister’s recent official visit abroad, where he encouraged foreign universities to consider setting up campuses in Malaysia. It appears that the government has ambitious plans for developing human capital in Malaysia.

The introduction of new foreign universities is expected to increase the number of graduates in Malaysia, which stood at 31.58% of the labour force as at 2021.

Although the establishment of more tertiary education institutions, including those from foreign countries, is expected to diversify the education culture and enhance the economic performance in the long run by nurturing better human capital, there are concerns that the creation of high-skilled jobs has dropped between 2011 and 2017 compared to the previous decade.

Furthermore, the majority of the jobs created in 2015/16 went to foreign workers.

The issue of graduate labour disequilibrium in Malaysia is a growing concern due to its adverse effects on the economy. According to a report on real starting salaries between 2010 and 2018, there has been a drop in real wages.

The skill-related underemployment rate has also increased to 38.7%, which was significantly higher than the unemployment rate of 4.6% in 2021.

Unless addressed, this problem may further worsen the country’s brain drain phenomenon.

While shifting to knowledge and capital-intensive production is a well-known solution, many small and medium enterprises (SMEs) in Malaysia may struggle to adapt due to knowledge and/or capital constraints. As a result, hiring foreign workers who are more willing to accept lower salaries than local workers may seem like a feasible option.

The 15% foreign labour threshold policy is a step in the right direction, as it would reduce the number of foreign workers with lower salaries, and thus encourage industries to adopt capital and knowledge-intensive production methods.

The rapid advancement of AI technology and digitalisation has also provided businesses with alternative solutions, and the labour shortage has motivated them to make these changes.

Moreover, the minimum wage policy has increased labour costs, prompting businesses to reduce their reliance on labour-intensive production.

Nevertheless, these policies have been criticised for their negative side effects. For example, the higher minimum wage has caused a rise in production costs and inflation, especially when labour productivity does not grow at the same rate as wages.

Therefore, the government needs to consider implementing complementary policies to ensure the effectiveness of these policies and minimise their negative impact.

The economic restructuring process may face its greatest challenge in this aspect.

DR TEE CHEE LIP

Seri Kembangan, Selangor