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Malaysia: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2018
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An Overview of the Malaysian Labor Market1,2

Malaysia’s economy and its labor market have undergone significant shifts in the last three decades. The labor market is now more urban and has a higher share of female workers and workers with tertiary education. Employment has kept pace with labor supply, keeping the unemployment rate stable for more than a decade. Meanwhile, reliance on non–citizen workers has also increased against the backdrop of slower growth in citizen population. Continuing with its economic transformation, Malaysia aspires to achieve high–income status, with a labor market that is ready for the economy of the future: a market that can support more female workers, more skilled jobs, and a higher labor productivity growth.

1. The 11th Malaysia Plan (11MP, 2016–20) marks the final five years of Malaysia’s Vision 2020. One of the aspirations under the Vision, launched in 1991, is Malaysia reaching high–income status. The 11MP incorporates strategies and targets toward that aspiration. With respect to the labor market, these strategies and targets include boosting productivity, improving labor market efficiency and institutions, encouraging female labor force participation, creating higher-skilled jobs, and reducing reliance on low-skilled non-citizen workers. Against this backdrop, this analysis takes stock of the key developments in the Malaysian labor market, including a focus on female labor force participation and the role of the non-citizen workforce.

Table 1.Malaysia: Selected Targets Under the 11th Malaysia Plan (2016–20)
10MP actuals11MP goals2016 actuals
Real GDP growth (percent, average)5.25–64.2
Per capita GDP (U.S. dollars, end of period)10,44015,6909,850
Labor’s share in income (percent, end of period)~3540
Female labor force participation (percent, end of period)54.15954.3
Share of skilled employment (percent, end of period)25.53527.3
Labor productivity growth (percent, average)1.83.73.5
Total factor productivity growth (percent, average) 1/1.82.30.1
Sources: Economic Planning Unit, Prime Minister’s Department; Department of Statistics, Malaysia; World Bank; and IMF staff calculations.

IMF staff estimates for the 10th Malaysia Plan period (10MP, 2011–15) and 2016. See IMF Country Report No. 17/101 (Appendix III) for methodological discussion. Labor productivity growth was higher in 2017.

Sources: Economic Planning Unit, Prime Minister’s Department; Department of Statistics, Malaysia; World Bank; and IMF staff calculations.

IMF staff estimates for the 10th Malaysia Plan period (10MP, 2011–15) and 2016. See IMF Country Report No. 17/101 (Appendix III) for methodological discussion. Labor productivity growth was higher in 2017.

A. Labor Supply

2. The evolution of Malaysia’s labor supply reflects the underlying changes in the economic and socio–economic structures of the country. In the last three decades, Malaysia’s labor force has become predominantly urban and the share of tertiary–educated workers in the labor force has quadrupled, reflecting growth in urbanization and gains in educational attainment. Nearly three–fourths of Malaysia’s population now live in urban areas (mid–1980s: about 50 percent) and average years of schooling, an indicator of educational attainment, has also increased from below 7 years in the mid–1980s to about 10½ years by 2010.3 This shows that the younger cohorts of the labor force have become increasingly more educated. Thus, the share of 15–24–year old participants in the labor force has declined over time, leading to a higher share of workers in the 25–34 year age bracket. Female labor force participation rates have improved in recent history, but males seeking work continue to represent a larger share of the labor force. The share of non–citizens in the labor force has also increased.

Malaysia: Selected Characteristics of the Labor Market

(Shares in percent of the total labor force)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

3. More recently, despite gains in the overall labor force participation rate, the rate of Malaysia’s labor force expansion has trended downward. Labor force growth peaked in 2010 and has declined steadily since 2013. The deceleration in labor supply growth in the post–Global Financial Crisis (GFC) period has been partly driven by slower growth in working–age population (15–64 years of age). Over 2002–09, working–age population grew at compound annual growth of about 2.9 percent. By 2017, it had slowed down to 1.6 percent. The slowdown in population growth was partly offset by an increase in the labor force participation rate, which reached close to the all–time high of nearly 68 percent of the working–age population in 2016. In particular, female labor force participation rate has notably improved in the last few years to about 54¼ percent in 2016 from 49½ percent in 2012.

Malaysia: Selected Indicators of the Labor Market

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Contributions to Labor Force Growth

(In percentage points; year-on-year)

Sources: Department of Statistics, Malaysia; CEIC Data Co. Ltd.; and IMF staff calculations.

1/ Statistical discrepancies are due to differences in labor force participation rates between the population-based estimates and labor force survey-based estimates.

4. The share of non–citizen workers has also increased since 2010, reaching about 15½ percent of the total labor force in 2016. Non–citizens’ share in the labor force remained largely stable between 9½ percent and 10 percent over 2000–09. The non–citizen labor force, as compared to the citizens, has a higher share of male or rural job seekers; significantly higher participation rates for both gender; and is younger, but has less years of schooling.

Malaysia: Labor Force by Residency Status, 2016

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

B. Employment

5. The Malaysian economy witnessed net employment creation every year since the 1980s. The services sector now accounts for a higher share in the economy, both in overall value–added and in employment. Meanwhile, the share of employment accounted for by the agriculture, forestry, and fishing sector has declined. Gains in employment shares between 2010 and 2016 were concentrated in the following sectors: wholesale and retail trade; accommodation and beverage services activities; administrative and support services; and human health and social work activities.

Malaysia: Net Changes in Employment

(In millions of people)

Sources: Department of Statistics, Malaysia; and IMF staff caculations.

1/ Changes in 1992 and 1995 are over two-year periods due to non-availability of data for 1991 and 1994.

Malaysia: Employment by Sectors

(Share in percent of total employment)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

1/ Includes a small share of activities of households as employers since 2001. Simple avearges of shares for each sector across time for the pre-2016 periods

Malaysia: Change in Shares of Total Employment, 2010–16

(In percentage points)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

  • As of 2016, manufacturing and wholesale and retail trade sectors accounted for most of labor demand, totaling a little over one-third share in overall employment In the manufacturing sector, a key contributor to Malaysia’s exports, share in economy-wide employment declined between 2011 and 2015 as the economy adjusted to external shocks, most notable of which were global trade slowdown, concerns on China’s economy, and a significant drop in oil prices. However, it reversed partially in 2016 and 2017 as external trade improved. Decline in the public administration and defense reflects, in part, a hiring freeze.

  • By skills, the share of skilled-workers increased slightly in 2016, reaching 27¼ percent of total employment (2011–15 average: about 25 percent; 2001–10 average: about 26¼ percent).

  • Small and medium enterprises (SME), which are predominantly in the services sector and are micro-sized (i.e., annual turnover less than RM 300,000 and less than 5 full-time employees), accounted for about 40½ percent share in total employment in the economy in 2015, compared to about 33¼ percent in 2010.

  • Additionally, employment in the non-agricultural informal sectors accounted for about 11½ percent of total employment in 2015, and increase from 8.2 percent in 2012, but still significantly lower than other emerging market economies in the region.4 More than two-thirds of this type of employment comprised self-employed workers and employers.

Malaysia: Employment by Occupational Skills

(Share in percent of total employment)

Sources: CEIC Data Co. Ltd.; and IMF staff calculations.

1/ Skilled workers are defined as legislators, senior officers, and managers; professionals; and technicians and associate professionals.

2/ Semi-skilled workers are defined as clerical workers; service, shop, and market sales workers; and skilled agricultural and fishery workers.

Employment of the female workforce

6. In the post–GFC period, female employment has grown at a faster pace than male employment. Over 2010–16, female employment grew at a compound annual rate of about 4½ percent, compared to about 2 percent rate for male employment. Faster female employment growth took place mostly in the health and hospitality services and in the public sector. Higher female employment since 2012 explained most of the increases in three of the four sub–sectors of the economy that saw the largest increases in their shares in total employment.5

Malaysia: Female Employment by Industry

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

7. Female contribution to growth has increased at a faster pace in recent years. Based on a growth accounting exercise with human capital formation, staff finds that contribution from female employment to real GDP growth has more than trebled. 6 While in the 2001–08, female workers accounted for 4 percent, on average, of real GDP growth, their contribution increased to 14 percent over 2011– 16. Meanwhile, contributions by male workers increased from about 7 percent to about 13 percent. Not only women’s share in total employment has increased, but also the gender gap in average years of schooling has shrunk, leading to additional contributions to growth through human capital formation.7 Gross school enrollment ratios in secondary and tertiary education are also higher for females, particularly in tertiary education. This is likely reflected in the higher share of skilled occupations in female employment.

Malaysia: Contributions to Real GDP Growth

(In percentage points)

Sources: Department of Statistics, Malaysia; and IMF staff estimates.

Malaysia: Gross School Enrollment Ratios, 2015

(In percent; ratio of total enrollment to the population of the age group that corresponds to the level of schooling. A high ratio may include enrollment by overage and/or underage students)

Source: United Nations Educational, Scientific, and Cultural Organization (UNESCO) Institute for Statistics.

Malaysia: Employment by Occupation, 2016 1/

(Shares in percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

1/ Skilled-workers are defined by the following occupations: managers, professionals, technicians and associate professionals. Semi-skilled workers are those who are neither in skilled occupation nor in elementary occupations.

8. Malaysia has potential for further improving female labor force participation. Although the female labor force participation rate has improved in recent years, it remains low, both in absolute terms and relative to the male participation rate, when compared with some of the regional economies or the OECD average. Under the 11MP, Malaysia aspires to improve the female labor participation rate by 5 percentage points to 59 percent by 2020. If the female labor force participation rate had not changed since 2012, the direct impact would have led to a 3½ percent smaller labor force by 2016 and real GDP would have been about 1 percent lower (average growth lower by 0.2 percentage points). The World Bank (2012) also found that improvement in female labor force participation rates helped real GDP growth.8 Higher female labor force participation should help offset the impact of slowing population growth going forward.

Selected ASEAN Countries and OECD: Female Labor Force, 2016

(In percent)

Sources: Department of Statistics, Malaysia; OECD.Stat; World Economic Forum, the Global Gender Gap Report, 2016; CEIC Data Co. Ltd.; and IMF staff calculations.

9. While socio-cultural factor could potentially be at play, further policy actions may help improve female labor force participation. Studies have shown that beyond demographic factors, such as number of children, household size, etc., policy interventions can also help boost female labor force participation.9 In Malaysia, official statistics reveal that housework or family responsibility is the dominant factor for women not seeking employment, both in urban and rural areas. This is also correlated with a faster decline in the participation rates among married women aged 30 years and above (the 2010 Population and Housing Census report the average age for females at marriage was about 26 years). In contrast, in OECD countries, female labor force participation rates do not fall until later in the life cycle. Relative to males, female labor force participation rates are particularly low for less–educated women.

Malaysia: Reasons for Being Outside of Labor Force, 2016

(In percent of people outside of labor force by sex)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia and OECD: Female Labor Force Participation, 2016

(In percent)

Sources: Department of Statistics, Malaysia; OECD.Stat; and IMF staff calculations.

Malaysia: Labor Force Participation Rates by Sex and by Educational Attainment, 2016

(In percent)

Source: Department of Statistics, Malaysia.

  • IMF (2012) reports that female labor supply is more responsive to taxes than male labor supply. It finds that higher tax exemption for female workers than men and/or replacing family taxation, which usually leads to higher tax wedges for the secondary earners (e.g., women earners in many cases), by individual taxation have the potential to help improve female labor participation.

  • In Malaysia, given women’s dominant reason for not seeking employment mentioned above, particularly during the child–bearing or child–rearing ages, increased access to childcare facilities and family–friendly labor laws could help boost female labor participation. The Government Transformation Program 2.0 has set an ambitious target of 25 percent childcare enrollment by 2020 from 4 percent in 2012, but there has been limited success so far. Tax incentives to companies for setting up childcare facilities and/or encouraging them to allow flexible work arrangements could help retain married women workers.

  • IMF (2012) documents that a shift away from labor to consumption taxes could potentially boost labor demand by reducing non–wage labor costs. In the Malaysian context, this would imply further upgrading the Goods and Services (GST) tax framework, including reduction in the number of exempt items and raising the tax rate. Use of the additional revenues on growth–enhancing items, including physical and human capital, could potentially have a positive effect on long–term growth and labor demand.

  • Policies should also continue to strive toward achieving a gender–neutral employment law. In this context, while Malaysia has made improvements in recent years, including amendments to maternity benefits, announcing that termination of the services of a female employee during her maternity leave would be an offence in situations other than closure of the employer’s business, and a new sexual harassment regime. However, certain restrictions remain on employment of women, for example, for night work and/or for certain industries.

  • Some of the Budget 2018 measures have the potential of further incentivizing female labor force participation. These measures include, for example, (a) increasing the duration of maternity leave for the private sector to 90 days to match that of the public sector; (b) a minimum of 30 percent participation of women in Boards of government-linked companies and investment companies by end-2018; and (c) personal income tax exemptions on a maximum of 12 months consecutive salary for women with a career break of at least 2 years who intend to return to the workforce between 2018 and 2020.

Employment of non-citizen workers

10. Non-citizen workers are mostly employed in lower–skilled jobs. This reflects their relatively higher share in labor supply for such occupations compared to citizens. Citizens’ higher education level are likely related to their relatively higher labor supply for higher-skilled jobs.

Malaysia: Employment by Residency Status, 2016

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Share of Non-Citizen Employment by Market Segments, 2016

(In percent of each market segment)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

11. Demand for non–citizen workers varies by sectors and states. Data from the 2016 Economic Census reveal that non–citizen workers are primarily employed in three sectors: agriculture, forestry, and fishing; manufacturing; and construction, with the latter two sectors accounting for about two–thirds of the total non–citizen employment.

  • A large share of workers in the agricultural sector are non–citizens, primarily employed on a full–time basis and are involved in sector–specific skilled work or in elementary occupation.10 In the construction sector, non–citizen workers are mainly involved in construction of buildings, both residential and nonresidential.

  • In the manufacturing sector, about one–quarter of the workers are non–citizens. Within manufacturing, the shares of non–citizen workers are relatively higher in furniture and wood–work related occupations; textiles; and plastic and rubber products etc., reflecting social factors influencing citizen’s willingness to work in some of these occupations. In electrical and electronics (E&E) manufacturing (electronic components and board; computers and peripheral equipment; communication equipment; consumer electronics; electric motors etc.) — an important sector in Malaysia’s economy (in 2016 this sector accounted for about one–third of total goods exports and manufacturing employment, and about 6¼ percent of GDP) — non–citizen workers account for between 20 and 30 percent of the workforce, and about two–thirds of them are females.

  • Labor Force Survey data show that five states accounted for nearly 80 percent share in total non–citizen employment in 2016. In contrast, these states accounted for a combined 64 percent share in national GDP. The eastern state of Sabah (about 34 percent share in total non–citizen employment, with only 6.7 percent share in national GDP) and the peninsular state of Selangor (about 22 percent share in total non–citizen employment, similar to its share in national GDP), together accounted for more than half of overall non–citizen employment in 2016.

Malaysia: Non-Citizen Workers by States 1/

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

1/ Bubble sizes represent share in national GDP.

12. There are concerns in the public discourse that the influx of non–citizen workers has led to depressed wages and reduced job opportunities for lower–skilled workers. However, without establishing any causality, the data suggest that non-citizen workers have helped increase the labor force, contributing to GDP growth; while employment for lower-skilled workers kept pace with their labor supply and their wage gap with higher skilled workers has declined, and the process of capital deepening proceeded at a faster pace. Indeed, the following were observed in Malaysia since the GFC:

  • The rise in the non–citizen workforce has happened against the backdrop of slowing working–age population growth. Citizen population growth has nearly halved from 2 percent y/y in 2003 to 1.1 percent y/y 2017 (mid–year population estimates). Population growth by age groups shows that it has been largely negative for the youngest (0–14 years) age group, implying a risk of declining future labor force. As discussed earlier, working–age population growth has also slowed.

  • During 2011–16, if the non–citizen labor force had grown at the lower rate observed over 2001–09, the total labor force would have been smaller by about 7 percent by 2016 and the average real GDP growth would have been lower by 0.4 percentage points (assuming no additional changes in the capital/labor ratio and/or in total factor productivity, and the same unemployment rate for non–citizens as observed during this period).

  • The economy–wide capital/labor ratio has grown at a slightly faster rate in the post–GFC period. This is not surprising given a rise in the share of labor income in total income (i.e., a higher wage/rental ratio) over this period. At the industry level, in agriculture and construction, two sectors that rely relatively more on non–citizen workers, capital/labor ratios have grown at a faster pace over 2010–16. However, in the manufacturing sector there has been a slowdown in growth in the capital/labor ratio. In the E&E sub–sector, fixed investment has grown at slower pace than the manufacturing sector as a whole since 2010. As labor’s share in total income rises over the medium term, overall capital/labor ratio should go up, supporting higher productivity.

  • Despite a higher growth in the non–citizen workforce, workers with no formal education and primary education have seen a continued decline in their share in the total pool of unemployed workers, reflecting in part a decline in their share in total labor supply. Also, unemployment rates for these workers have remained lower than the national average, except between 2010 and 2015 when the unemployment rate for workers with no formal education was higher. However, the latter has declined at the fastest pace since 2013.

  • In recent years, average salaries and wages for lower–skilled or less– educated workers have grown at a relatively faster pace than the highest–earning workers (see more below). Given that employment growth for these workers kept pace with labor supply, rising average salaries and wages point to complementarity in skills between citizens and non–citizen workers in these jobs and the impact of implementation of a minimum wage policy from 2013. Between 2010 and 2016, for sectors that rely relatively more on non–citizen workers, nominal average salaries and wages for all workers, relative to the national average of 5.4 percent compound annual rate, went up at a faster pace in agriculture, forestry, and fishing (7.4 percent rate); at a similar pace in the manufacturing sector; and at a slightly lower pace in the construction sector (5.1 percent rate). A World Bank study also found a positive impact of immigration on overall employment and wages for Malaysian citizens. However, this study also finds that a 10 percent rise in immigration has a small negative impact on wages of the less–educated Malaysian workers, but about five and half times larger negative impact on immigrant workers’ wages.11

Malaysia: Population Growth by Selected Age Groups

(In percent; mid-year population)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Contributions to Labor Force Growth by Residency

(In percentage points)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Capital-Labor Ratio and Non-Citizen Employment

(Compound annual growth rate; in percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Laborers with No Formal Education or with Primary Education

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Unemployment Rate by Educational Attainment

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Supply of and Demand for Workers with No Formal Education or with Primary Education

(In percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

13. Reforming non–citizen worker policies and processes will involve structural shifts in certain key sectors and should be phased in. Malaysia remains an attractive destination for immigrant workers in the region and, as Malaysian citizens get more educated and seek employment in higher–skilled occupations, non–citizen workers can help fill in the vacancies in the lower–skilled occupations. However, the authorities aim to increasingly rely on higher–skilled non–citizen workers within an overall limit, and encourage increased employment in high–skilled jobs and adoption of technology as the economy moves up the value chain. While the aim is to improve productivity, changes in non–citizen worker policies should be phased in to allow important sectors of the economy time to adjust. The authorities should continue consultation with industries on the pace of adjustment and should rely on market–based mechanisms, as fixed numerical limits tend to lose relevance over time and lead to distortions and/or misreporting.

C. Unemployment

14. The economy-wide unemployment rate has been largely stable since the late 1990s. In the last one and half decade, employment growth has been largely in line with labor supply growth, helping keep the unemployment rate stable. Earlier, faster average employment growth over nearly a decade preceding the Asian Financial Crisis helped lower the unemployment rate from above 7 percent in the mid–1980s to 2.4 percent in 1997. Since then the unemployment rate has remained within a range of 2.9 percent and 3.7 percent, with 2016 witnessing an uptick to 3.4 percent. In the ten months of 2017, the unemployment rate was largely stable around 3.4 percent.

Malaysia: Unemployment Rate

(In percent)

Source: Department of Statistics, Malaysia.

Malaysia: Labor Force, Employment, and Unemployment

(In percent; growth rates are in compound annual rates for the pre-2016 periods)

Sources: Department of Statistics, Malaysia; CEIC Data Co. Ltd.; and IMF staff calculations.

15. However, certain segments of the labor market are exposed to higher unemployment rates than the national average. For example, in 2016, unemployment rates were higher for workers below the age of 30 years (youth unemployment); and more so for females than males in this age group. Also, females in rural areas and workers with tertiary education experienced higher rates of unemployment. Some of these patterns have remained for several years now pointing to structural factors that include skills mismatch. Unemployment of non–citizen workers was lower than that for citizens on average, reflecting that the demand–pull factors are playing a greater role than the supply–push factors in the employment of non–citizen workers.

Malaysia: Unemployment Rates, 2016

(In percent of total labor force in respective segments)

Source: Department of Statistics, Malaysia.

Malaysia: Share in Total Unemployment by Education Level

(In percent; simple annual averages)

Sources: CEIC Data Co. Ltd; and IMF staff calculations.

16. The rising share of tertiary–educated workers in the unemployment pool suggests skills mismatch that needs to be addressed. Public spending on education, as a share of GDP, is much higher in Malaysia than in peer countries. But the quality of education needs improvement and the authorities are paying attention (see, for example, Malaysia Education Blueprint, Pre–School to Post–Secondary Education, 2013–2025 and Malaysia Education Blueprint, Higher Education, 2015–2025). Further improving the quality of education and better alignment of learning opportunities with evolving business needs should help lower skills mismatch, although achieving a 35 percent share for skilled employment by 2020 appears optimistic given the pace of improvements so far. Additionally, while the gender gap in school enrollment has been bridged, the overall level of enrollment in higher education remains significantly below the average for high–income countries, an income group Malaysia aspires to join. The authorities should continue to implement policies toward improving access to education and vocational training; modernizing course contents, including in consultation with industries; training the teachers; implementing dual language program to strengthen soft skills like English language literacy; and improving the infrastructural facilities in educational institutions.

D. Labor Compensation and Productivity

Labor compensation

17. Labor’s share in national income has increased in the last decade. Labor’s share in national income has increased from 30 percent in 2005 to about 35 percent by 2015. Over 2011– 16, average real salaries and wages have increased at 3 percent compound annual rate. In nominal terms, average salaries and wages are highest in the mining and quarrying sector, which also has the highest labor productivity, followed by services sub–sectors of real estate; information and communication; education; and financial activities. Average salaries and wages in the manufacturing and wholesale and retail sales sectors were lower than the national average.

18. Malaysia has a much smaller gender earnings gap than most advanced and emerging market economies.12 In 2016, female workers’ average salaries and wages were about 4 percent below the average for male workers. Industry–wise, female workers earned about 30 percent less than males in agriculture, forestry, and fishing, whereas their average salaries and wages were higher in the construction sector, reflecting a higher share of female workers in skilled and semi–skilled occupations in that sector. Earning premia for higher–educated workers and skilled workers have declined slightly over 2011–16, partly because of the implementation of a minimum wage framework since 2013 that benefitted lower wage earners. State–wise, the gap between the states with the lowest and the highest average earnings has declined somewhat. However, slower increase in average salaries and wages in rural areas has contributed to a larger gap with urban areas.

Table 2.Malaysia: Minimum Wages(Monthly; in ringgit)
2013–152016
Peninsular Malaysia9001000
Sabah, Sarawak, and the Federal Territory of Labuan800920
Source: Attorney-General’s Chambers, Malaysia, Official
Source: Attorney-General’s Chambers, Malaysia, Official

Malaysia: Earnings Gaps by Type of Workers 1/

(Based on ratios of lowest and highest average salaries and wages within each category; higher ratio implies improvement toward equality)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

1/ Ratio of average salaries and wages of: female workers to male workers (gender gap); rural workers to urban workers (rural-urban gap); the state with lowest mean payments to the state with highest payments (state-wise gap); relative to payments to tertiary-educated workers, averaged across workers with no formal education or primary education (education-related gap); workers in elementary occupation to skilled workers (skill-related gap); and non-citizens to citizens (residency based gap).

2/ Data on skills cover 2012–16 period. Skilled-workers are defined by the following occupations: managers, professionals, technicians and associate professionals. Semi-skilled workers are those who are neither in skilled nor in elementary occupations.

Malaysia: Salaries and Wages by Type of Workers

(Percent changes in average monthly salaries and wages by categories)

Sources: Department of Statistcis, Malaysia; and IMF staff calculations.

1/ Data by skills cover 2013–16 period. Skilled-workers are defined by following occupations: managers, professionals, technicians and associate professionals. Semi-skilled workers are those who are neither in skilled nor in elementary occupations.

Labor productivity

19. Since 2014, labor productivity growth has recovered. Labor productivity growth weakened over 2009–13, but improved to about 3½ percent per annum average rate over 2014–16.13 Following Klyuev (2015), a decomposition of Malaysia’s labor productivity growth shows that within–sector productivity improvements have played a leading role in explaining overall productivity growth.14 Sectoral reallocation of labor played a smaller role, except over 2006–10 when a productivity decline in the mining and quarrying sector during 2008–09 lowered the total contribution of within–sector productivity. The manufacturing sector (particularly during 2001–05) and the services sector have been the main contributors to within–sector productivity gains, with the agricultural sector maintaining a small, but positive, contribution. The negative contribution from the interaction term reflects primarily the decline in productivity, on average, in the mining and quarrying sectors, while in 2016 it shows the impact of the lower combined shares in employment by the mining and manufacturing sectors, which offset the turnaround in productivity in the former.

Malaysia: Labor Productivity

(Year-on-year change, in percent)

Sources: Department of Statistics, Malaysia; and IMF staff calculations.

Malaysia: Contributions to Overall Within-Sector Labor Productivty Growth by Sector

(In percentage points; simple averages for the pre-2016 periods)

Sources: Department of Statistics, Malaysia; and IMF staff estimates.

Malaysia: Contributions to Labor Productivity Growth

(In percentage points; simple averages across time for the pre-2016 periods)

Sources: Department of Statistics, Malaysia; and IMF staff estimates.

20. However, during 2010–16, labor productivity growth, on average, lagged the rise in real labor earnings. During this period, average labor productivity has improved at a much slower pace of about 1½ percent per annum, which was about 1–1½ percentage points slower than the average rise in real earnings for workers or in unit labor costs. Sectors that experienced highest negative gaps between labor productivity and labor real earnings accounted for close to one–third of total employment. For the two largest employing sectors (viz., manufacturing and wholesale and retail trade), productivity and real wage growth were broadly similar, on average. On the other hand, in the construction and information and communication sectors labor productivity gains were faster than real labor earnings growth. In the first nine months of 2017, labor productivity growth outpaced real wage growth.

Malaysia: Real Labor Cost and Labor Productivity

(Percent change)

Sources: Department of Statistics, CEIC Data Co. Ltd.; Malaysia; and IMF staff calculations.

1/ Computed as growth in the ratio of total payments for salaries and wages to gross domestic product.

Malaysia: Changes in Labor Productivity and Real Salaries and Wages by Industry

(In percent; compound annual average rate over 2010–16)

21. Given its importance in the economy, the services sector should play a leading role in sustaining future increases in productivity. While the overall labor productivity growth in 2016 and the first nine months of 2017 met the 11MP aspirations, a sustained rise in the services sector productivity to 4.1 percent under the Plan’s objectives seems optimistic given earlier performance (2001–15 average: 2.3 percent; 2016: 2.8 percent). In this context, productivity improvements in the following sub–sectors could have a greater impact on sectoral and economy–wide productivity: wholesale and retail trade; accommodation and food and beverages; education; transportation and storage; and healthcare. The Malaysia Productivity Blueprint has identified nine subsectors that are considered critical for improvements in productivity. Overall, staff’s medium–term baseline projects a modest improvement in economy-wide labor productivity, between 2 and 3 percent per annum on average (faster than the historical average of about 2 percent, but slower than that assumed under the 11MP) accompanied by capital deepening.

E. Conclusion

22. The labor market in Malaysia has evolved and performed strongly in the last three decades, but there is room for further policy action to strengthen its performance. The labor market has evolved in line with economic and social transformations over the past three decades. Employment has kept pace with labor supply, helping maintain a stable unemployment rate since the late 1990s. Labor’s share in income has also gone up in recent years. However, some structural frictions remain and addressing them would help in realizing medium–term economic aspirations. As outlined in the 11MP and in several blueprints, policies should continue to be holistic with special focus on improving delivery of conventional and vocational education and their quality; creating skills that meet industry’s needs; encouraging R&D; and incentivizing further female labor force participation. Any reform to foreign labor policies, aimed at inducing firms to switch to more capital-intensive technology, should be market-based, clearly communicated, and gradually phased-in to allow sectors that rely on foreign workers to adjust. Improved labor market outcomes, along with updated public infrastructure and regulatory framework will help further improve the business environment, support higher private investment, and contribute to lower external imbalances.

Prepared by Souvik Gupta with the assistance of Justin Flinner.

Malaysia-specific data used in this analysis come from various data publications by the Department of Statistics, Malaysia. Examples of such data publications include Labor Force Surveys, Salaries and Wages Surveys, the 2016 Economic Census for various sectors of the economy, Informal Sector Surveys, etc.

Barro, Robert and Jong-Wha Lee, 2013, “A New Data Set of Educational Attainment in the World, 1950–2010.” Journal of Development Economics, Vol. 104, pp.184–198. Latest available data are as of 2010.

Based on information for Indonesia, the Philippines, Thailand, and Vietnam in the Key Indicators of the Labor Market (KILM) database, published by the International Labor Organization. The definitions of the non–agricultural informal sector in the Malaysian data and in the KILM database are similar.

Rise in female employment explained between 53 percent and 85 percent of the increases in employment in accommodation and food and beverage service activities; wholesale and retail trade, and repair of motor vehicles; and human health and social work activities. Female workers accounted for most of the rise in employment in the health sector.

For details on the growth accounting framework using human capital please see IMF Country Report 17/101 (Appendix III). The analysis here extends that framework to break down the total contribution of labor by gender. Data from the official Salaries and Wages Survey Reports and employment by gender are used to split the overall labor–share of income by gender. Educational attainment, a proxy for human capital, by gender is obtained from the Barro–Lee database. Staff assumes that the historical trend in years of schooling over 1985–2010 continued into 2016 for both the genders. Returns to education are assumed to be same for males and females.

By 2010, average years of schooling for females had almost caught up (lower by 0.2 years) with their male counterparts, declining from 1.4 fewer years of schooling in the mid–1980s.

World Bank, 2012, “Unlocking Women’s Potential”, Malaysia Economic Monitor, November 2012.

For example, Gonzales, C; S. Jain-Chandra; K. Kochhar; and M. Newiak, 2015, “Fair Play: More Equal Laws Boost Female Labor Force Participation”, IMF Staff Discussion Notes, SDN/15/02, International Monetary Fund; and IMF, 2012, “Fiscal Policy and Employment in Advanced and Emerging Economies”, Policy Paper, International Monetary Fund, June 2012.

According to Malaysia Standard Classification of Occupations 2008 (MASCO 2008), elementary occupations are those that require skill levels equivalent to primary education. These includes cleaners and helpers; laborers in agricultural, forestry, farming, fishery, mining, manufacturing, construction, and transportation sectors; food preparation assistants; street and related sales and services workers; and refuse and other elementary workers.

World Bank, 2015, “Immigrant Labour”, Malaysia Economic Monitor, December 2015.

See Table C2 in Appendix C of the World Economic Forum’s Global Gender Gap Report, 2016 for female-to-male earnings ratios in other countries.

Labor productivity is defined as the ratio of value–added across all industries (i.e., the real GDP) to total employment. It is not adjusted for hours worked and/or quality of labor inputs. Labor productivity growth was about 4 percent on a year-on-year basis in the first nine months of 2017.

Klyuev, Vladimir, 2015, “Structural Transformation—How Does Thailand Compare?”, IMF Working Paper, WP 15/51, International Monetary Fund.

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