Labour market in need of reform

THE labour market in Malaysia is in need of reform. The figures suggest that something needs to be done. Let us take labour income as a share of gross domestic product by income (GDPI). This figure tells us how much income from labour (as opposed to capital income) contributes to Malaysia's gross domestic product (GDP).

The labour income has been increasing from 29.5% of GDP in 2005 to 33.6% in 2013. We can see that the income earned through labour's contribution has been increasing.

But is the increase sufficient?

Not quite. In 2013, when Malaysia's adjusted labour income share was 42%, it was 58% for South Korea and 44% for Singapore.

Relatively, we are not doing well on this statistic.

That is not all, wages are not growing fast enough. This can be measured through the compensation to employee ratio (CE). Presently, the CE to GDP ratio is about 33%. The government aims to increase this to 40% by 2020.

The current figure is not satisfactory, neither is the 46% figure that is targeted for 2020 high enough.

A quick comparison shows that Malaysia does not stand well enough on this count. For the same reference period, South Korea's CE-to-GDP ratio is higher at 43%, that for South Africa 46%.

Developed countries have CE ratios that are in the region of 50%. The CE percentage for Australia is 48%, and it is higher for countries like Norway (52%) and Sweden (54%).

Malaysia should aim to move up its CE percentage to something like 50%. But that is an unlikely target policymakers would want to pursue, simply because it would imply a loss of labour-cost competitiveness.

A third statistic that describes the labour market is youth employment. The youth in Malaysia make up about 30% of the labour force, but the youth count for more than half of the total unemployed workers. Not an encouraging number at all.

In 2015, the youth unemployment rate rose to 3.1%. Youth unemployment by tertiary education is 15% for Malaysia. Is 15% high or low? It depends on who your employer is. It depends on whether you want to offer a bright and rosy picture or not.

One could change the basis of comparison depending on how one wants to present the Malaysian story: one could compare against countries that are worse off or against those that are successful.

Youth unemployment by tertiary education is 18% for Vietnam, 20% for the Philippines and 24.5% for Indonesia.

On the other hand, graduate employability is not a problem in advanced economies. In Australia, 5.9% of graduates are unemployed. This figure is 4.7% for Japan and 4.4% for Germany.

What, then, is the path ahead in terms of labour market reform?

The government is caught between the temptation to stay as a low labour-cost country and the imperative to move up as a high-skill, knowledge-intensive production centre.

The government has instituted the minimum wage at a rather low level, accompanied with the lax implementation of rules on migrant labour. The inflow of low-skilled migrant labour is still tolerated.

Graduate unemployment may not, yet, be a burning problem in Malaysia as compared with other countries in Asean. But, as compared with advanced countries, we are very far from the standards they set.

Graduate unemployment could rise for a number of reasons, among them the low rate at which associated jobs are created by industry, but also because of the poor absorbability of local graduates. The answer lies with the companies and with the profile of jobless graduates.

The question of labour productivity keeps coming up. It is often suggested that wages do not rise in Malaysia because productivity levels are not rising adequately. This may not be entirely correct.

A World Bank Study in 2012 revealed that real wages in Malaysia have recorded a slower growth compared to real labour productivity growth, particularly in the manufacturing sector. In the manufacturing sector, wages increased by 2.4% yearly over the decade while labour productivity expanded by 5% over the same period.

If labour is not paid its due, or corresponding to productivity increases, then there must be factors that cause this dampening effect. Offhand, the reason may reside in the presence of migrant workers or rigid institutional structures. More work must be done to examine why this phenomenon exists.

The labour market is riddled with problems relating to migrant workers, productivity, wage stagnation, and the quality of labour.

Although these problems have yet to be fully understood and a comprehensive policy outlined, there is more attention being paid to the challenges that will come out of future developments – Industry 4.0 being the present obsession.

Dr Shankaran Nambiar is author of Malaysia in Troubled Times. Comments: