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This article first appeared in Forum, The Edge Malaysia Weekly on January 8, 2018 - January 14, 2018

The transformation of the labour market holds the key to Malaysia’s economic development, which makes the design of policies in this area a somewhat tricky business.

The labour market plays a crucial role, in part due to the varied inputs that affect labour, and in part because of its impact on the broader macro-economy. While the labour market has a determining role, it is simultaneously being determined by forces outside its control.

Some of these processes have already been set in motion. One is the minimum wage policy — a recent initiative that has the potential to transform the labour market. At best, introducing it can reduce the dependence on low-skilled labour, particularly low-cost migrant workers.

There are ethical reasons why the minimum wage is a good thing, but apart from that, it ensures workers have the means to take care of their health.

The minimum wage has the potential to nudge employers away from low-cost labour and towards technology improvement and automation, which could lead to higher productivity.

Such moves are in line with the policy of attracting technologically intensive production to the country. The Malaysian Industrial Development Authority aims to attract high-quality foreign direct investment and rejects applications from companies that rely on labour-intensive production.

However, what could be gained from the minimum wage is lost because of the low level at which it is possibly pitched.

The Malaysian Trades Union Congress recently argued for a minimum wage of RM1,800. If a claim were to be made for a living wage, the sum demanded would be higher.

The current minimum wage may not be sufficient to achieve the tipping effect the government hopes for in terms of the structural transformation of the economy.

The government seems to be caught between the urge to precipitate a shift from labour-intensive to knowledge-intensive production, and to avoid disrupting small and medium enterprises that have no intention of changing their mode of production.

There is also the question of the quality of labour. We are seeing a high rate of graduate unemployment. There are two sides to the argument — one is that there are inadequate jobs for graduates, and the other is that the problem lies with the level of their skills.

Now, if job creation is weak, the future is going to be bleaker still. Although the economy is said to be growing at an acceptable pace, job growth is lagging behind. No less worrying is the view that graduates are not adequately trained and do not fit the market’s requirements.

More research is needed to find out if graduates are unemployed because of the courses they take or whether it is due to their training, command of language, diligence, attitude or other factors.

No less critical is the moderate rate of productivity growth. One measure of productivity is total factor productivity (TFP), which can be defined in different ways, including the efficient utilisation of labour and capital and long-term technological dynamism of a country.

Malaysia’s TFP has been declining over the years. From 2011 to 2015, TFP growth was 0.1% — a shocking figure compared with that of Vietnam (1.4%), Indonesia (1.2%) and Thailand (0.9%). China and India recorded TFP growth of 1% during that period. However, the US, at -0.5%, lags the faster developing countries.

Against this assortment of issues, there is mounting interest in Industry 4.0, which at its core involves artificial intelligence, robotics and cognitive technologies. As mentioned earlier, we seem to be still struggling to introduce capital-intensive production methods and moving towards a more knowledge-intensive environment.

Malaysia hardly seems to be at a stage where it has the expertise or human capital to fully take advantage of Industry 4.0, and cannot count too much on it to generate more jobs.

With the falling quality of education, lack of creativity and innovation and graduate unemployment, it would do well to consider how Industry 4.0 fits into the labour market in a broader sense.

Malaysia is at a point where it needs an objective re-assessment of labour. We need to have a macro sense of productivity, look at the relationship between labour and FDI, and address the problem of graduate unemployment. The low compensation of employees vis-à-vis the gross domestic product, problem of migrant workers and a whole host of related problems also have to be addressed.

Rather than talking about a wide range of labour-related issues, it is time they were considered within a broader framework. Then we would understand the problems involved and how the variables interact with each other.


Dr Shankaran Nambiar is a Senior Research Fellow at the Malaysian Institute of Economic Research. He is author of Malaysia in Troubled Times.

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