Report No. 131 h3 -MiY

MalaysiaMeeting Labor Ne'eds:More Workers and lKeUr ;I\diiFebruars 2B, 19995

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CURRENCY EQUIVALENTS

Currency unit = Ringgit

Average 1994 - US$1.0 = M$2.6242

M$1.0 = US$0.3811

Average 1993 - US$1.0 = M$2.5741

M$1.0 = US$0.3885

Average 1992 - US$1.0 = M$2.5474

M$1.0 = US$2.7501

Average 1991 - US$1.0 = M$2.750

M$1.0 = US$0.364

Average 1990 - US$1.0 = M$2.705

M$1.0 = US$0.370

Average 1989 - US$1.0 = M$2.709

M$1.0 = US$0.369

Average 1988 - US$1.0 = M$2.619

M$1.0 = US$0.382

Average 1987 - US$1.0 = M$2.520

M$1.0 = US$0.397

Average 1986 - US$1.0 = M$2.581

M$1.0 = US$0.387

Average 1985 - US$1.0 = M$2.483

M$1.0 = US$0.403

GLOSSARY OF ABBREVIATIONS

AFP Chile's funds

AFTA ASEAN Free Trade Area

ASEAN Association of South-East Asian Nations

ATP Approved Training Program

CIAST Centre for Instructors and Advanced Skill Training

CO Contacts Overseas

DDI Double Deduction Incentive for Training

DDIT Double Deduction Incentive for Training

EPF Employees Provident Fund

EPU Economic Planning Unit

EU European Union

FDI Foreign Direct Investment

FELDA Federal Land Development Authority

FLPR Female Labor Force Participation Rate

FMI French-Malaysia Institute

GDP Gross Domestic Product

GMI German-Malaysia Institute

GOM Government of Malaysia

HIV Human Immunodeficiency Virus

HRDC Human Resource Development Council

HRDF Human Resources Development Fund

ID Immigration DepartmentIKK Institut Ketukangan Kementah

IKM Institut Kemahiran Mara

ITI Industrial Training Institutes

LA Local Agent

LC Labor Contractors

MHR Ministry of Human Resources

MIDA Malaysian Industrial Development Authority

MTUC Malaysian Trade Union CongressNEP New Economic Plan

NGOs Non-Governmental OrganizationsNPC National Productivity CorporationNUPW National Union of Plantation WorkersNVTC National Vocational Training CouncilNWC National Wages CouncilOECD Organization for Economic Cooperation and Development

RM Malaysian Ringgits

RRIM Rubber Research Institute of Malaysia

SBL Skim Bantuan Latihan

SMV Secondary Vocational Schools of the Ministry of Education

TFP Total Factor Productivity

TNA Training Needs AnalysisUPAM United Planting Centers

VITB Vocational and Industrial Training Board

YTC Youth Training Centers

MEZTING LABOR NEEDS: MORE WORKERS AMD BETTBR SKILLS

Country Economic Report

Table of Contents

Page No.

Executive Summary . . . . . . . . . . . . . . . . . . . . . . i

I. Malaysia's Tight Labor Market . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . 1A. Emerging Trends in the Labor Market . . . . . . . . . . . . 3B. The Wage Pattern and Investment . . . . . . . . . . . . . 16

Appendix la: Estimates of Labor Supply and Demand . . . . 25Appendix lb: Investment Rates and Skilled Wages . . . . . 28

II. Nonwaae Costs of Labor . . . . . . . . . . . . . . . . . . . 32

Introduction . . . . . . . . . . . . . . . . . . . . . . 32A. Social Security and Other Payroll Levies . . . . . . . . 34B. Fringe Benefits .... . . . . ..... . . . . . . . . 41C. Work Incentives, Unions and Employment Flexibility . . . 47

III. Augmenting the Labor Force, The Role of Migration . . . . . . 58

Introduction . . . . . . . . . . . . . . . . . . . . . . 58A. Immigration: Stocks and Flows . . . . . . . . . . . . . . 58B. Benefits and Costs of Immigration Workers . . . . . . . . 63C. Immigration Policies . . . . . . . . . . . . . . . . . . 74D. Emigration: Stocks and Flows . . . . . . . . . . . . . . 82E. Regional Approaches to Trade and Migration . . . . . . . 85F. Recommendations . . . . . . . . . . . . . . . . . . . . . 85

IV. Industrial Skills Training . . . . . . . . . . . . . . . . . 88

A. Introduction .... . . . . . . . . . . . . . . . . . . 88B. Supply-side Issues in Industrial Skills Training . . . . 89c. Demand-side Incentives for Training . . . . . . . . . . . 103

Appendix a: Estimating the Labor Market outcomes ofPublic training ................... . 125

Appendix b: The DDIT Scheme . . . . . . . . . . . . . . . 128Appendix c: A Preliminary Analysis of the HRDF . . . . . 129

References

Chapter II . . . . . . . . . . . . . . . . . . . . . . . . . 134Chapter III . . . . . . . . . . . . . . . . . . . . . . . . . 135

This report has been prepared by Ijaz Nabi (EAlCO, Mission Leader),Indermit Gill (ESP), Jeffrey Hammer (EAPVP), Hong Tan (PSD), Judy Lu, SintameiTameno (EAlCO) and consultant Philip Martin. The Government of Malaysia'ssupport during the mission in March-April 1994 is gratefully acknowledged. Thereport was discussed with the Government in September 1994.

Text Tables Pace No

1.1 Employment by Sector, 1987-1993 . . . . . . . . . . . . . . . . 21.2 Simple Growth Accounting in Malaysia . . . . . . . . . . . . . 31.3 Ratio of Skilled to Total Workers . . . . . . . . . . . . . . . 81.4 Percentage Change in Wages of Different Categories of Workers

1987-91 .... . . . . . . .... . . . . . . . . . . . 101.5 Total Labor Force Participation Rates . . . . . . . . . . . . 121.6 Trends in Sectoral Employment, Malaysia . . . . . . . . . . . 151.7 Comparative Trends in Sectoral Employment . . . . . . . . . . 151.8 Determinants of Future Japanese Investment in East Asia's

Manufacturing Sector ....... ........... . 191.9 Operational Impediments by Japanese Affiliates in East Asia . 191.10 Labor Costs and Increases, 1992 . . . . . . . . . . . . . . . 201.11 Ease of Recruiting Skilled Labor . . . . . . . . . . . . . . 201.12 Japan's FDI in East Asia . . . . . . . . . . . . . . . . . . 211.13 Taiwan (China)'s FDI in East Asia, 1989-93 . . . . . . . . . 221.14 Gross Enrollment Ratios (t) by Level of Education,

Asia 1970-1985 .. 231.15 Proportion of Federal Subsidy on Education Received per

Quintile of Household per Capita Income . . . . . . . . . . 24

lA.l Labor Supply and Demand Estimates . . . . . . . . . . . . . . 291A.2 Supply Estimates: Disaggregated Labor Categories . . . . . . 301A.3 Investment Equations .31

2.1 Nonwage Costs Proportional to Wages, Various Sectors . . . . 362.2 Differences in Tax Base for Various Payroll Levies . . . . . 372.3 Sectoral Differences in EPF Coverage . . . . . . . . . . . . 392.4 Nonproportional Nonwage Benefits Under Employment Act, 1995 . 432.6 Total Bonuses Paid, By Occupational Category . . . . . . . . 512.7 Bonuses, Union Membership, and Labor-Management Relations in

Three High-Performing Asian Economies . . . . . . . . . . . 53

Al Determinants of EPF Contributions, 1961-1993 . . . . . . . . 55A2 Determinants of Bonuses .56A3 Propensity to Adopt Flexi-Wage Systems . . . . . . . . . . . 57

3.1 Estimated Immigrant Workers in Malaysia by Sector in 1991 593.2 Estimated Immigrant Workers in Malaysia by Sector in 1993 603.3 Some Wage Differentials Between Indonesia and Malaysia . . . 623.4 Estimated Immigrant Contribution to GDP: 1993 . . . . . . . . 653.5 Malaysian and Non-Malaysian Workers in Manufacturing:

1981-1991 . . . . . . . . . . . . . . . . . . . . . . . . . 643.6 The Process for Recruiting Legal Foreign Plantation

Workers (Pre-1992) .. 763.7 Illegal Aliens Apprehended in Malaysia between July 1, 1992

and October 31, 1993 .. 793.8 Work Permits Issues by Sector: December 1991-93 . . . . . . . 79

Page No.

3.9 Immigrant Workers Requested and Certified: March 1992-December 1993 . . . . . . . . . . . . . . . . . . . . . . . 81

4.1 Output of Skilled Manpower by Education and TrainingInstitutions . . . . . . . . . . . . . . . . . . . . . . . 90

4.2 Output of Skilled Manpower-Public Training Institutions . . . .904.3 Numbers Taking Trade Tests and Pass Rates . . . . . . . . . . 954.4 Summary Data on Labor Market Outcomes by Training

Institutions. .......... 974.5 Predicted Labor Market Outcomes From Regression Analysis . . 994.6 Employment Size Distribution of DDIT Applicants . . . . . . . 1134.7 Summary Data on Operation of the HRDF Schemes . . . . . . . . 1164.8 Distribution of ATP and SBL Trainees by Type of Training . . 121

4A.1 Probability of Working & Monthly Starting Pay . . . . . . . . 1264A.2 Time to Find Job and Training Relevance to Job . . . . . . . 1274B.1 Summary Statistics on DDIT Approved Programs 1988-1993 . . . 1284C.2 Number and Distribution of Companies and Workers

Registered with HRDF by Company Size and Industry . . . . . 1304C.3 Percent of Companies Training under SBL and ATP Scheme

by Company Size and Industry . . . . . . . . . . . . . . . 1304C.4 Number and distribution of Trainees - SBL and ATP Schemes

by Company Size and Industry . . . . . . . . . . . . . . . 1314C.5 Number of Workers Trained in SBL Scheme by Type of Training . 1324C.6 Distribution of types of SBL Training by Industry . . . . . . 133

Text Fiaures

1.1 Private Sector Real Wage . . . . . . . . . . . . . . . . . . . 41.2 Wages as Share of Costs and Value Added . . . . . . . . . . . . 51.3 Unit Cost of Labor of Top Five . . . . . . . . . . . . . . . . 61.4 Skill Intensity ......... ... 71.5 Trends in Gender Inequality in Earnings . . . . . . . . . . . 121.6 Female Labor Force . . . . . . . . . . . . . . . . . . . . . 13

1A.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . 27

2.1 Nonwage Costs as a Fraction of Wages . . . . . . . . . . . . 332.2 Firms Offering Fringe Benefits, 1993 . . . . . . . . . . . . 462.3 Share of Women in Incremental Employment, All occupations 462.4 Share of Women in Incremental Employment, Various Countries 472.5 Firms Using Incentive Schemes, 1993 . . . . . . . . . . . . . 52

Al Nonwage Costs as a Fraction of Wages . . . . . . . . . . . . 54A2 Turnover in Firms, June '92 to May '93 . . . . . . . . . . . 54

Page No.

3.1 Average Annual Earnings for All Mfg and Wood and CorkWorkers: 1981-1990 . . . . . . . . . . . . . . . . . . . . 67

3.2 Unit Labor Costs and Capitol-Labor Ratios for All Mfgand Wood and Cork, 1981-100 . . . . . . . . . . . . . . . . 67

3.3 Unit Labor Costs and Capitol-Labor Ratios for All Mfgand Wood and Cork, 1987=100 . . . . . . . . . . . . . . . . 69

3.4 Average Annual Earnings in Selected Services: 1987-1991 . . . 693.5 Unit labor Costs and Capitol-Labor ratios for Road haulage

and all Services, 1987=100 .. 703.6 Employer-Reported Plantation Labor Shortages in Malaysia

1980-1991 .. 713.7 Paid Workers Employed in Construction at the End of the

Year: 1981-1991 .. 733.8 Illegal Aliens who Registered in Malaysia between December

1, 1991 and June 30, 1992 . . . . . . . . . . . . . . . . . 783.9 Foreign Workers Issued Work permits, Requested by Employers,

and Certified: December 1991-93 . . . . . . . . . . . . . . 813.10 Immigration to the United States from Malaysia and Asia

1982-100 .. 84

4.1 Numbers Taking and Passing . . . . . . . . . . . . . . . . . 924.lb Pass Rates on the MLVK Trade Tests by Training Institution . 964.2 Actual and predicted Percent . . . . . . . . . . . . . . . . 1004.2b Other Observed and Predicted . . . . . . . . . . . . . . . . 1004.3a Proportion of Firms Training . . . . . . . . . . . . . . . . 1054.3b Percent Training by Sub-sector . . . . . . . . . . . . . . . 1054.4a Product Range, New Technology . . . . . . . . . . . . . . . . 1064.4b By Sub-sector . . . . . . . . . . . . . . . . . . . . . . . . 1064.5a DDIT Program Applications ................. . 1104.5b DDIT Trainees by Training Type . . . . . . . . . . . . . . . ill4.6a Percent Takeup of SBL and ATP . . . . . . . . . . . . . . . . 1184.6b Takeup of SBL and ATP ................... . 119

Text Boxe

2.1 Chile's Provident Fund: The Superiority of PrivateManagement . . . . . . . . . . . . . . . . . . . . . . . . 40

MALAYSIA

MEETING LABOR NEEDS: MORE WORKERS AND BITTER SKILLS

Executive Summary

1. Malaysia is unique among developing countries in that in a relativelyshort period from 1987 to 1993, the labor market has changed dramatically and theperennial preoccupation with unemployment has given way to problems of seriouslabor shortages. The Government's policy stance towards the labor market needsto adjust to this successful transition of the economy. To remain attractive inan intensely competitive region, the Government must shift its traditional focusfrom job creation to the more complex initiatives aimed at relieving labor markettightness through immigration, greater female participation in the labor forceand upgrading the quality of labor. The objective of this report is to assistthe Government in strengthening these initiatives by identifying bottlenecks inthe labor market and suggesting remedies in light of international experience.

2. The dilemma faced by Malaysia is that, given the small populationbase, rapid GDP growth quickly translates into high labor costs. Rising wages,when productivity is also rising, are a welcome reward to workers. However, ifproductivity lags behind wage increase, the economy's internationalcompetitiveness is lowered. The policy choices to maintain internationallycompetitive labor costs are: (i) devalue the exchange rate, (ii) import foreignworkers to alleviate labor market tightness and (iii) increase laborproductivity. The first can have damaging unintended consequences in an openeconomy. Too large an influx of foreign workers can lead to resentment by thehost population and may impose other costs. Thus the viable labor marketstrategy is one that combines judicious measures to augment the labor force withthose that upgrade skills to increase productivity.

3. The beneficial efficiency and equity effects of upgrading labor skillscan be seen in a simple growth accounting exercise. In 1988-93, labor income inMalaysia constituted 60 percent of GDP and labor contributed nearly a quarter ofaverage real GDP growth of 8.7 percent. With capital contributing 63 percent ofGDP growth, the residual is total factor productivity growth of 10.4 percent or0.9 percentage points of real GDP growth, which is lower than Thailand's 2.5percent and Korea's 3.5 percent. An important determinant of TFP growth isworkers' skills. Investment in skill upgrading thus increases total factorproductivity growth as. well as labor's income share, and will help sustainMalaysia's long term growth.

4. A comprehensive strategy to upgrade the labor force would have fourprongs: (i) improving secondary and higher education to raise the generaltechnical competency of the work force and increasing the "trainability" ofworkers, (ii) controlling the escalation of non-wage costs of labor andincorporating wage flexibility to reward workers and firms for productivityimprovements, (iii) augmenting the labor force by tapping more female labor,facilitating workers' move from agriculture to manufacturing and developing atransparent and consistent immigration policy and (iv) strengthening institutionsand policies to encourage firms to invest in worker training programs. Thisreport elaborates the last three prongs of the labor market strategy.

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5. The first prong, which involves laying a solid education foundation,is critical in raising entry-level quality of the labor and subsequent skillupgrading. This requires strengthening mathematics and technical content of thecurricula at the secondary level to improve the quality of those who enter thelabor force after secondary education and also to improve the tertiary levelintake. At the university level, Malaysia will need to build on its excellentrecord at lower levels of education to increase both enrollments as well as thequality of those who graduate. As discussed in a previous report (Malaysia:Fiscal Reform for Stable Growth - 10120 MA, April 1992), this will requiregreater private sector involvement in tertiary education to lighten the burdenon public exchequer. Reform of public universities is also needed to improveteacher recruitment. Student fees that reflect the cost of higher education willnot only facilitate public provision of higher education but will also make fora more responsible student body. These and related issues are taken up in detailin a forthcoming Government-Bank sector report.

A. Labor Market Trends and Emerging Skills Shortages

6. The turnaround in Malaysia's labor market is evidenced by the factthat between 1987-93, the economy generated 1.4 million jobs. The average annualemployment growth of 3.9 percent in this period was much higher than the domesticlabor force growth of 3.1 percent. The employment gap of 0.8 percent has madeimmigration unavoidable, particularly since the unemployment rate is below 2.8percent. Indeed without immigrant workers, labor market tightness in Malaysia andthe consequent pressure on wages would be even greater.

7. Most of the new jobs were created in the manufacturing sector. Theshare of manufacturing labor force increased 8.5 percentage points to a quarterof the labor force as this sector became the largest employer of workers. Therapid increase in demand for manufacturing labor resulted in a 55 percent hikein the average real wage. And since wages constitute as much as 38 percent oftotal costs (in textiles for example), this has fueled concern for the firms'costs and profitability. Moreover, the emerging skills shortage has resulted inwidespread labor pinching and complaints of reduced productivity associated withincreased labor turnover. The evidence of increasing unit labor costs in sectorssuch as food processing, electric machinery manufacture and manufacture of rubberproducts supports this.

8. A disturbing trend in Malaysia's labor market is that the skillcomposition of the manufacturing labor force is deteriorating. One measure ofskill intensity of the work force, the ratio of skilled to total workers, hasfallen from 0.43 in 1985 to 0.347 in 1991 with a sharp decline registered inelectric machinery manufactures, fabricated metal products and rubber products.In part, this might reflect problems of defining relative skills when all jobshave become more skill intensive, but to the extent that it captures loss ofskill intensity over time, this trend needs to be reversed.

9. As labor demand has increased, skilled workers have started to enjoya wage premium. In most manufacturing sub-sectors in 1987-91, wages of skilledworkers grew much more rapidly than those of unskilled workers. Moreover, when

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wages have fallen, they have done so more rapidly for the relatively unskilledworkers. If this inequality in wage growth is a signal for the economy to supplymore skilled workers and the economy responds in due course, then the signal willhave served a useful purpose and the inequality in income growth is transitional.However, if there are serious supply bottlenecks that prevent an adequate supplyresponse, this pattern of wage growth has unsatisfactory consequences for incomedistribution as well as for investment.

10. The formal analysis presented in this report shows that the labormarket is indeed supply constrained; the current pattern of wage growth isworsening interpersonal income inequality and is tarnishing Malaysia's excellentrecord on reducing income inequality. This conclusion is based on the findingsthat, (i) there has been less investment in skill intensive industries and theinvestment that has taken place has had a greater effect on unskilled thanskilled labor demand; therefore, skilled wages have not been pushed up by thepattern of investment; (ii) the demand for skilled workers is less elastic thanthat for unskilled workers but this explains only a small gap in skilled andunskilled worker wage and (iii) the most important determinant of the wage gapis the much smaller supply elasticity of skilled workers.

11. The other undesirable consequence of supply constrained wage growthis that it discourages foreign direct investment as well as domestically financedinvestment in the very industries that Malaysia needs to encourage in order totransform itself into an industrial economy. The evidence on changingperceptions comes from surveys of foreign investors in South East Asia that showthat potential investors increasingly voice concern about Malaysia's tighteninglabor market. The surveys reveal that wages for engineers and managers inMalaysia are the highest in the region as is the wage gap between skilled andunskilled workers. Those questioned also report considerable recruiting andtraining difficulties of skilled workers in Malaysia. These perceptions quicklyaffect investment; between 1992-93 foreign investment approvals given to Japaneseand Taiwanese investors fell sharply over previous years.

B. Containing Non-waae Costs And Institutina Waae Flexibility

12. Labor costs faced by firms consist not only of the wage component asdiscussed above but also non-wage labor expenses such as payroll taxes and fringebenefits. In a tight labor market, nonwage costs tend to increase and putadditional pressure on unit labor costs. Nonwage payments, when they are non-mandated incentive payments, also impart flexibility to wages and constitute animportant incentive for workers to increase productivity. Thus firms closelymonitor trends in nonwage costs to evaluate unit labor costs and competitiveness.

13. In Malaysia, although the estimated ratio of non-wage costs to thetotal wage bill is half that of OECD countries, the trend is on the rise. Theratio of nonwage costs to wages in Malaysian manufacturing was below 15 percentup to 1990, but with the 1 percent increase in Employees Provident Fund (EPF)contributions and the 1 percent levy for the Human Resource Development Fund(HRDF), measured nonwage costs in manufacturing are likely to be more than 20percent today. The intersectoral variations in the ratio of nonwage to wagecosts are also disconcerting. While the ratio varied between 15 and 20 percent

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in manufacturing between 1985 and 1991, the plantation sector had a ratioexceeding 45 percent. The experience of OECD countries is that countries withrelatively higher non-wage costs have created fewer jobs. The intersectoralvariation in job creation in Malaysia is remarkably similar.

14. Three sets of issues arise in containing non-wage expense:

Emplover EPF Contributions and Other Payroll Levies.

15. First, it seems that the multiple definitions of payroll, dependingupon the levy, cause much confusion and needs to be simplified. For example, thedefinition of payroll for the EPF includes bonuses, while that for the HRDF doesnot. The treatment of wages for foreign workers is also different across thesecontributory schemes. There are four definitions of wages in the Employment Actalone. This report recommends that a single definition of "wages" be used tocompute employer dues for EPF, SOCSO, HRDF and any other levies.

16. Second, it appears that the burden of these levies has increasedsubstantially over time, while the levy base has increased simultaneously,squeezing employers from two sides. Employers seem to have accepted these rates,but there are gaps in coverage (some sectors and some firms are still notcovered). Moreover, the rates of compliance differ across sectors, causingdistortions. Also, preliminary estimates based on EPF data between 1951 and 1993indicate that the best schemes for raising EPF contributions entail raisingemployee and employer coverage or employee contribution rates, rather thanemployer contribution rates. Means to increase coverage of EPF and other leviesneed to be explored, with the auxiliary aim of reducing intersectoraldifferences. This may involve spinning off some of the EPF investment functionsto other agencies, and having the EPF concentrate on coverage.

17. Third, payroll levies, by excluding foreign workers, raise theincentives for employing foreign labor. While foreigners can opt to contributeto the EPF, most do not. And the foreign labor tax may not level the playingfield. The report suggests that employer contributions to EPF, HRDF, and SOCSObe made mandatory for foreign workers. The money collected can be used to trainMalaysians and to strengthen immigration department capacity. Implementing thiswould require making labor agents or contractors liable for payroll taxes.

FrinQe benefits

18. This report finds that fringe benefits vary across sectors, and thatthere are probably very good reasons for this. For example, nonwage costs areabout 20 percent of wages in manufacturing, but more than 40 percent in theplantation sector due to mandated housing and medical benefits. Recent changesin the workforce however, appears to have made this a problem. The plantationsector seems to be moving from reliance on family labor to single -- oftenforeign -- workers, who may value money wages relatively more. But mandatednonwage costs imply that the plantation sector cannot pay high cash wages, andso may be disadvantaged relative to other sectors. These changes warrant therepeal of laws mandating housing and other fringe benefits for the plantationsector.

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19. Second, the maternity benefits required by law are quite generous.While the desirability of these benefits cannot be determined by economicconsiderations alone, their existence makes it difficult to determine whetherhigher labor force participation by women is constrained by the higher costs ofemploying women relative to men, or whether the constraints lie elsewhere, Therapid decreases in fertility rates during the last decade are likely to havediminished the desirability of generous mandated maternity leave and benefits.These nonwage mandates may, however, lead employers to view women as relativelymore costly to employ, leading to a downward "adjustment" in the wage componentof compensation.

Banuses. Overtime, and Other Rewards

20. A 1993 survey of 900 enterprises in Malaysia documents that 50 percentof the firms pay contractual bonuses to their workers while about 60 percent payincentive-based bonuses. Paid at the end of the year, bonuses are an importantvehicle for profit sharing: on average, they constitute between 1.5 to 2 monthsof the annual wage across different categories of workers. The analysis showsthat incentive-bonuses reduce labor turn-over and thus contribute to increasingproductivity. Moreover, incentive-based bonuses are less frequently observedamong firms that have strong industry-wide labor unions, which supports thegenerally held view that such bonuses work best in the presence of in-house laborunions.

21. The report's first recommendation regarding incentive-based paymentsis that an in-depth review be held of the role of collective bargaining indetermining the non-wage component of the wage packet. In particular, the roleof unions in negotiating bonuses and "merit increments" needs to be examined.Japan's experience indicates that a truly flexible wage system in the presenceof collective agreements can be instituted with in-house workers' unions.

22. The second recommendation is to-design and implement appropriatelegislation and economic incentives to strengthen in-house worker unions, thatare likely to be more supportive of tying wages to performance and in promotingworker training. In the meantime, additional legislation that will rob thesystem of wage-flexibility due to bonuses, overtime work provisions, and othernon-wage incentives should be avoided.

C. Auamentinf the Domestic Labor Force

23. To relieve labor shortages and the pressure on wages, three potentialsources for augmenting the labor force in Malaysia are, (i) increasing theparticipation of women in the labor force, (ii) facilitating the shift of laborout of agriculture to manufacturing and (iii) importing foreign workers.

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Increasina Female Labor Particioation

24. The labor force participation rate for women in Malaysia has increasedunremarkably from 46.6 percent in 1970 to 49.9 percent in 1990. However, womenhave moved from low skilled, lower paid self-employment to more skilled, betterpaid wage employment. Moreover, women's wages are slowly catching up with themen's in most skill categories of wage employment. Thus, gender incomeinequality in Malaysia fell on two counts: first, women moved to wageemployment; and second, the gender wage gap declined. The decline in genderinequality had a salutary effect on ethnic inequality as well. This is becausethe principal beneficiaries of increased female employment opportunities wereBumiputra women. This, in turn, increased Bumiputra family income and thushelped narrow the income gap across ethnic groups.

25. Despite progress, however, the gender wage gap remains quite large;on average, men's wages are nearly twice as high as women's. Moreover, in theprofessional worker category, wage inequality has actually worsened in recentyears. This evidence suggests that there is still some catching up to be donein Malaysia to further reduce the gender wage gap. Women can be expected toincrease their share of relatively more skilled employment, as their wages riseto match those of their male counterparts.

26. The potential for greater female labor in Malaysia is substantial andcan be seen in the fact the Malaysia's overall (urban and rural) FLPR at 49.9%is considerably lower than Thailand's 76.3%. That female labor in Malaysia canincrease under the right policy setting is clearly evidenced by female laborforce participation rates in urban areas in the period 1970-87. Policies thatimproved mother and child health care, increased female years of schooling andincreased employment opportunities in the dynamic, high wage, sectors of theeconomy had a salutary effect on fertility and female labor force participation.The total fertility rate declined sharply from 6.3 in 1965 to 3.7 by the end ofthe 1980's. The decline in fertility, because of postponement of marriage andchild bearing as well as longer intervals between children, reduced the timefemales were out of the labor force. As a result, for the median child bearingage of 20, the urban FLPR jumped from 44 percent in 1970 to 65 percent in 1987.In fact, smaller family size and improvements in maternal and child health meantthat labor force participation increased throughout the working life of femaleworkers.

27. Female labor force participation will increase as (i) better healthcare induced demographic changes spread to rural areas, (ii) greateropportunities are provided for women to improve skills and a further narrowingof the gender wage differential comes about, and (iii) fringe benefits such asmaternity leave are rationalized to keep female workers competitive.

Sectoral Restructuring of Labor

28. Manufacturing growth has accompanied a restructuring of Malaysia'slabor force, as workers have moved from low productivity, low wage agriculturaljobs to high wage, high productivity manufacturing employment. Consequently,

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over the 1980's, agriculture reduced its share from more than one-third to aboutone quarter of total employment. This "release" of labor from agriculture toaugment the manufacturing labor force will continue throughout the 1990's. Thus,aided by government's education policies during the NEP period, the labor marketis adjusting well to the economy's needs. This source of labor will eventuallydry up as rural labor scarcity and productivity improving technologicalinnovations in agriculture bid up rural wages. However, policies that retardthis process must be avoided. Thus, rural employment and crop support programs,as well as land clearing schemes must be undertaken only if aggregateproductivity gains are greater than those obtained from the ongoing shift oflabor to manufacturing.

Towards a Rational Immigration Policy

29. The need for immigrant workers arises from the gap between the rateat which the Malaysian economy is creating jobs and the rate of labor forcegrowth. Rough estimates show that there are about 1.2 million immigrant workersin Malaysia, or almost 1 in 6 workers. The largest concentration is inconstruction (70 percent of the total workforce), agriculture (30 percent) andnon-government services (10 percent) . Only 3 percent of the manufacturingworkforce consists of immigrants but demand in this sector is rising the fastest.A preliminary exercise reveals that migrant worker output may be as high as 12pe'rcent of Malaysia's GDP, and almost two-thirds of migrant earnings are spentin Malaysia.

30. The extreme views on immigration in Malaysia, calling for a total banor a completely open door policy, are unrealistic. There is little doubt thata total ban on immigration would, in the short run, further tighten the labormarket and would increase the cost of labor. The largest impact will be on theplantations sector and in selected services where migrant workers are currentlyconcentrated. The manufacturing sector will also be affected because rural wageswill be pushed up which will delay the release of Malaysian workers fromagriculture. Clearly, a total ban on immigration is not desirable. But neitheris the other extreme of an open door policy. Malaysians are considerably richerand Malaysia's GDP growth rate is considerably higher than that of many of itsneighbors. An open door policy would lead to a very large number of immigrantworkers and may be socially unacceptable to the host population. A rationalimmigration policy would fall somewhere between these two extremes and would needto consider the following:

31. The "stop-go" policy on foreign workers in recent years has resultedin much confusion among employers and may have contributed to the growth inillegal immigration, thus having consequences opposite of those intended by theauthorities. For transparency, the horizon for continued immigration should bespelled out. The horizon will depend on how quickly Malaysia makes thetransition to a high value added, high technology economy which, in turn, dependson the pace at which the labor force upgrades its skills. The pace of skillsupgrading will also determine the skill mix of foreign workers needed by theeconomy. These linkages must be explicitly recognized in announcing the policyhorizon.

- viii -

32. Even as the rest of the economy upgrades its skills, some sectors suchas plantation aariculture and construction in particular, will continue to relyon immigrant workers to survive. As employment opportunities open up elsewherein the ecQnomy, it is becoming difficult to retain Malaysian workers onplantations where wages are low and living conditions harsh. In the constructionsector, costs would rise exponentially if Indonesian workers were to bewithdrawn. In these sectors, demand for foreign workers should be met throughlegal contracts that are renewed periodically. The advantage of contract laboris that it allows employers to adjust employment of foreign workers to thebusiness cycle.

33. Economic incentives need to be designed to send a signal to employersthat foreign workers are additional and not cheaper labor. To that end, a feeon foreign workers should be levied equivalent to the EPF contributions ofdomestic labor. Such a levy would have several advantages. It would level theplaying field between foreign and domestic workers and would generate savings forforeign workers which they could take with them at the expiry of their contracts.Revenues from employers' share of the levy should be used to strengthen theimmigration department to reduce the time it takes to process foreign workerapplications. This would help curb illegal immigration. To reduce collectioncosts, the administrative structures of the EPF could be used to collect thelevy. The levy system would also yield a solid data base on the number ofmigrant workers and their occupation status. The lack of reliable data is acause of much confusion in the current debate on immigration in Malaysia.

34. Experience in Western Europe suggests that a reaional anoroach totrade and investment can lower intrao.reaional movement of migrant workers.Malaysia has been a leader in promoting East Asian economic integration via AFTA.AFTA has no migration provisions, yet it will undoubtedly have effects on themigration flows underway in the region. Malaysia might wish to take the lead inconsidering how freer trade might affect migration into the country, since it isa major destination for migrant workers from AFTA countries. Illegal immigrationto Sabah and Sarawak (not addressed in this report) would require effectivepolicing but also dialogue at such regional forums.

D. Strenothenina the Skills Training Proaram

35. While immigrant workers and increased participation of women in thelabor force will help overcome labor shortages in the short run, the long termsustainability of growth requires upgrading the labor force. A national skillupgrading program should be anchored in a sound education system particularly,at the tertiary level. Top quality higher education, where students pay feesthat reflect costs, would also make the individual the focus of skill upgradingrather than the firm. Individuals will invest in their skills and then move tojobs that yield the highest pay-off to investment in human capital.

Public provision of trainino

36. At present in Malaysia, the government is the principal supplier ofentry level training. In 1991-93, local public educational and traininginstitutions provided entry-level industrial skills to 920 trainees. The cost-

- ix -

effectiveness of public training is difficult to gauge because unit cost data arenot maintained systematically. However, trade tests suggest improvements in thepass rate from 53.2 percent in 1987 to 61.4 percent in 1993 with littledifference between public and private institutions.

37. The analysis of public training providers suggests a considerablevariation in performance of different training institutions as measured by theentry level labor market experiences of their trainees. In such evaluations, itis important to properly account for equity objectives to arrive at a correctranking of training providers. For example, job placement success of a traininginstitute located away from main industrial centers is likely to be low but thenits performance should be judged in view of the equity objective it is expectedto address. Allowing for such objectives, this report finds that the threeprincipal public training institutions (ILP, IKM, and IKBN) do quite well ascompared to SMVs (Secondary Vocational Schools of the Ministry of Education),though private training institutes appear to come out ahead in terms of findingemployment and higher starting pay. In terms of the relevance of training towork, the public and private training institutions appear to be on par, with theSMV and IKK training being most likely to have low job relevance. The relativelylow performance of SMV graduates on all outcome measures is of concern, andrequires further careful study especially since vocational schools provide thesingle largest source of skilled technicians.

38. Given that market signals to evaluate the performance of trainingproviders are likely to be weak, it is important to construct a reliable database to regularly evaluate the internal and external efficiency in the Drovisionof public traininQ. Data on unit training costs should be collected and analyzedon a systematic and system-wide basis. Broad based tracer surveys, such as thoseused in the analyses, are an important source of data on how graduates from bothpublic and private institutions fare in the labor market, and should be conductedon a regular basis by the NVTC. These analyses should help policy makersidentify potential problem areas to be resolved, develop training strategies, andimprove resource allocation both among training institutions under one ministry,and across institutions under different ministries.

39. A bolder approach towards an efficient public training program, onethat is consistent with the focus on the individual in accumulation of humancapital, is to let public training institutions compete with private trainers toattract potential trainees. The government would issue training vouchers toworkers not receiving firm based training armed with which potential traineeswould shop for the best provider in the public or the private sector. The valueof training vouchers should be equivalent to the total subsidy for entry leveltraining. Such a scheme would be particularly useful during a business downturnwhen firms are unwilling to train workers.

Tax incentives for skills development

40. The Malaysia Labor market Flexibility Survev (1988) confirmed the viewthat there is little skill upgrading of the workforce at the enterprise level inMalaysia; the number of workers trained is small and the quality of training

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imparted is poor. To overcome this under-investment in training, the governmentembarked on a program to strengthen the demand for training through the incentivescheme DDIT in the late 1980's and the HRDF in the early 1990's. A review ofthese schemes suggests the following:

41. The DDIT is not very successful in upgrading worker skills: thecumulative (1988-93) number of workers trained through MIDA approved DDITprograms was only 3,253; sectoral coverage of the scheme is uneven with theelectric and electronics sector accounting for 52 percent of the workers trainedin MIDA approved programs; the scheme has been used principally by multinationalfirms; and finally, between 1988 -1993, only 9 small firms (less than 50employees) took advantage of the DDIT. In part, this poor showing is due tocostly paperwork needed to get approval but there are problems also with thedesign of the scheme.

42. A number of suggestions have been made in the past to streamline thedesign of DDIT, such as reduced paperwork and a less cumbersome procedure forapprovals. Another idea is that DDIT should focus only on small firms while HRDF(discussed below) picks up the rest. However, given past trends, it is unlikelythat MIDA will get more than a handful of DDIT applications each year from smallfirms. Unless small firms make extensive use of approved training providers, andit is unclear that they do, it must be concluded that the DDIT incentive schemeis an ineffective policy instrument for this group of companies.

43. This report supports the view that DDIT has outlived its usefulnessand should now be completely replaced by the HRDF. Small firms should be broughtunder the HRDF and registered; however, the issue of payroll contributions forthese firms needs to be resolved. The government might consider a waiver of thepayroll levy for small firms, and a block grant to the HRDF from general revenuesto cover the costs of their use of training services. Bringing all firms underthe HRDF would eliminate duplication by two agencies, and simplify administrationsince the inevitable growth and shrinkage of firms above or below the 50 employeecutoff would be accommodated by universal coverage of all manufacturing firms.

The HRDF Scheme

44. The Human Resource Development Fund (HRDF) was set up in 1993 toencourage greater part4.cipation by the private sector in improving the country'straining needs. It is too early to judge the efficacy of HRDF in promotingtraining and skill upgrading. Additional years of accumulated information andexperience with the different schemes will be needed to do that. In the short-term, several measures may be undertaken to improve the effectiveness of the HRDCSecretariat and the administration of the HRDF.

45. The reimbursement rate should be simplified. Its range has recentlybeen revised from 50 to 80 percent and has been designed to give employersgreater incentives to train in critical skills and in smaller companies.However, the differential in rates is still large and is unlikely to have muchinfluence on training mix; employers will train wherever their skill needsdictate. One single reimbursement rate, at 80 percent of the expenses, wouldallow companies to make training choices and skills mix appropriate to their

- xi -

specific circumstances; to the extent that the reimbursement is partial, theyhave an incentive not to spend on frivolous' training. A single rate would alsosimplify the application process for both employers and the HRDC, and eliminateuncertainty on the part of firms about reimbursement rates.

46. It is recommended that the HRDF be corDoratized, and given greaterautonomy over personnel and policy matters. The Secretariat should move quicklyto fill higher level professional positions, and establish a training developmentunit to develop and promote new and innovative training programs in closecooperation with the private sector.

47. The apolication and aooroval procedure should be streamlined whereverfeasible. Recognizing that government has legitimate administrative data needs,the approval procedures could be streamlined in two areas. First, the HumanResource Development Council (HRDC) could focus on certifying providers under thePROLUS scheme, rather than the current procedure of approving specific ATPcourses. The operation of the market (employers and providers) would determinewhat training courses are demanded and who should supply them. However, amechanism should be instituted for eliciting complaints and for periodic reviewof training providers. A second area is to grant exemptions from the payroll levyfor companies with a demonstrated track record of extensive employee training,which would reduce administrative costs for these companies and for the HRDC.However, there should still be reporting requirements and periodic review ofcompanies records to monitor compliance.

48. An arrangement in which the HRDF uses certified trainina Droviders asaacents' should be given serious consideration. This proposal has tangiblebenefits for all parties. In essence, training providers would charge traineesthe portion of costs that is reimbursable (say 30 percent), and submit a requestto the HRDF for the balance of costs (70 percent). This arrangement shouldappeal to both employers (no paperwork and low upfront costs) and trainingproviders (scale economies in billing the HRDF and a marketing tool forattracting trainees) . It also has several administrative benefits for the HRDC,reducing paperwork and simplifying oversight of the ATP scheme.

49. To conclude, Malaysia's successful transition to an industrializedsociety crucially depends on how well the labor needs are met. More workers aswell as more skills will be needed to maintain the growth momentum. In thepublic sector, better trained civil servants will be needed to regulate theactivities of the much enlarged private sector. The government is gearing up tomeet this challenge by reforming the formal education system, particularly at thehigher level. Those reforms and the recommendations made in this report oncontaining non-wage costs, managing the flow of foreign workers and skillupgrading, will go a long way towards producing a labor force that quickly adaptsto new technologies to meet the challenges of Malaysia's next growth phase.

I. MALAYSIA'8 GIGHT LABOR NARKIT

Introduction

1.1 Malaysia's labor market has experienced a sharp turnaround followingthe recession of 1985-86. Between 1987 and 1993, the economy generated 1.4million additional jobs, mostly in the better paying industrial sector.Consequently, the structure of the labor market changed: the share of agriculturein total jobs declined 9.4 percentage points to 21.4 percent and that ofmanufacturing increased 8.5 percentage points to 24 percent (see Table 1.1).Furthermore, the importance of government employment also decreased. As a resultof this rapid growth in private sector jobs, government's policy stance hasshifted from the perennial concern for creating employment opportunities toabsorb the unemployed to one where skills upgrading for productivity growth hascome to occupy center stage.

1.2 Upgrading the labor force will be essential to sustain the growthmomentum in the long term. This is because labor income constitutes nearly 60percent of GDP and labor contributes nearly a quarter of GDP growth. This canbe seen from a simple growth accounting exercise in Table 1.2. Between 1989 and1993, public and private fixed assets in Malaysia increased by an average 13.7percent per annum in real terms. Assuming capital's share in GDP at 0.4.capital's contribution to GDP growth is calculated at 63.2 percent. Meanwhile,the average rate of labor force growth in this period was 3.9 percent, whichgives its contribution to GDP growth at 26.4 percent (Table 1.2). The residualGDP growth of 10.4 percent is the total factor productivity growth (TFP), whichcaptures the quality or the skills component of the labor force. In the yearsto come TFP growth will need to be increased to sustain the growth momentum thatMalaysia currently enjoys. This, in turn, will require investment in skills andin the education system to improve the quality of labor.

1.3 This report analyzes the main trends in Malaysia's labor market andrecommends policy changes for upgrading the labor force. The remainingdiscussion in this chapter reviews the wage trends and the skills composition ofthe labor force and argues that skills shortages arise principally due to supplybottlenecks. The potential for increasing the supply of female labor is alsoexplored. Chapter II examines the non-wage components of the wage package tocomment on whether these constitute additional burden on firms and workers. Amore rational structure is recommended and the role of bonus payments in wage-flexibility is explored. Chapter III examines Malaysia's immigration policiesto comment on whether these are consistent with the country's objective ofenhancing labor skills. Finally, Chapter IV reviews Malaysia's policies forskills development in the light of international experience.

Talble 1.1: Employntwn( ly Seetljr, IY87-19Y3

Total Agriculture, Mining and Manufaiuring Conouruction Finance, Tran.sport, Storage and Go(vernment Other ServicesForestry and Quarrying Insurance, Cotmmunication Services

Fishing Business Servicesand Real Ebtale

(uinits '(X)t))

1987 5,984 1,846 33 929 336 242 252 836 1,510

1988 6,176 1,889 29 987 340 230 266 845 1,590

1989 6,390 1,833 33 1,171 377 253 278 847 1,598

1990 6,686 1,738 37 1,333 424 258 302 850 1,744

1991 6,926 1,680 36 I,500 465 279 314 854 1,798

1992 7,148 1,630 36 1,640 507 300 326 858 1,851

1993 7,371 1,580 35 1,766 550 315 342 862 1,920

'% slhare

1987 100 30.8 0.6 15.5 5.6 4 4.2 14 25.2

1993 100 21.4 0.5 24 7.5 4.3 4.6 11.7 26

Additional joh created bctwen 1987 and 1993:

1,387 -266 2 837 214 73 90 26 410

Source: Economic Report 1993/94, Ministry of Finance Malaysia.

-3-

1.4 The recent developments in Malaysia's labor market are a testimony tothe successful transition of the economy from being mainly a primary goodsproducer twenty years ago to a new East Asian industrial tiger. The policies toeducate the labor force and facilitate access to modern sector jobs worked intandem with measures to stabilize and liberalize the economy. The result wassustained growth over a thirty year period leading to a large urban/industriallabor force and rapid wage and income growth. The labor market issues now beingfaced are a product of this successful transition.

Table 1.2: Simple Growth Accounting in Malaysia

(1988-93) Average

GDP Growth 8.7

Growth in real fLxed assets 13.7

Employment 3.9

Contribution to Growth* Percentage Contributionto GDP Grow-th

Capital 5.5 63.2

Labor 2.3 26.4

Total Factor Productivity 0.9 10.4

- Assuming Cobb-Douglas production function and capital and labor shares in GDP of 0.4 and 0.6 respectively.

A. Emerrina Trends in the Labor Market

1.5 The changing employment pattern and rapid job growth have bothcontributed to the tightening of the labor market. There are several indicatorsof this. The unemployment rate reported at 7.3 percent in 1987 fell to anestimated 2.8 percent in fiscal 1993i'. In 1987, 71 percent of the reportedmanufacturing job vacancies were filled within the year, whereas in 1993 as manyas 76 percent of the vacancies went unfilled. Surveys of voluntary turnover,that reflect relative skills scarcity, continue to show high turnover for severalcategories of skilled and professional workers.Y This is also underscored inthe frequently reported stories of "job pinching" in the press.

1.6 Labor market tightness is best captured in wage movements. accordingto the survey on private sector wage agreements, in the period 1987-92, theaverage real wage in Malaysia increased 46 percent. The increase inmanufacturing real wage was even steeper; on average, it increased 55 percent in

1' Economic Report, 1993/94. Government of Malaysia.

v Employment Turnover Survey, 1992. Jabatan Tenaga Rakyat.

this period (Figure 1.1) . Such rapid wage increase can have serious consequencesfor the firm's cost structure and profitability since wages constitute between10 percent (petroleum) and 38 percent (textiles) of total manufacturing costs.They range from 2 percent (petroleum) to 22 percent of value added (paper andpaper products).

Figure 1.1: Private Sector Real WageInd I co

160

150 _

140-

130

x

120

110

100 1G97 1998 1969 1990 1991 1992

o manufacturln t 5.rvrcos 0 Aariculttro A Total

Source: EPU.

- 5 -

Figure 1.2

WAGES AS SHARE OF COSTS AND VALUE ADDED

0.45

0.4-

0.35

D.M _

0 2.2_

0.13

a. I1

0.02

a~~~~~~~aT

i 5.TGt I out a wb'v 11 MetE

1 Food beverage tobacco2 Textile apparel footwear3 Wood products & furniture4 Paper & publishing5 Chemicals petrol & rubber6 Ceramics glass & minerals7 Ferrous & metal products8 Fabricated metals9 Machinery10 Electrical machinery11 Transport equipment12 Prof/scientific equipment13 Other manufacturing

1.7 Rising wages in themselves are not worrisome if productivity growthkeeps pace, since this ensures that firms' profitability is unaffected. Whatreally matters to firms is the unit labor cost that measures the change in laborcosts relative to productivity growth. Figure 1.3 shows how unit labor costshave evolved in Malaysia in recent years. In three of the five largestmanufacturing sub-sectors (in terms of share of value added) i.e. foodprocessing, electrical machinery, and manufacture of rubber products, unit laborcosts have now started to rise.

1.8 Increase in unit labor cost affects firm profitability, which has abearing on investors' perceptions regarding Malaysia's competitiveness. It isimportant, therefore, to check this trend early. This will require a differentpolicy response than that of the 1980's, when exchange rate depreciation and wage

restraints helped to bring down unit costs. With the economy at full employmentwage restraint is harder to negotiate and with large portfolio investments,exchange rate movements can have complex outcomes. Maintaining competitivenessnow requires a greater effort to upgrade the labor force to increase skills andthus increase productivity.

Figure 1.3

Unit Cost of Labor of Top Five

i~~~~0 ,.1- low L. .

10 ~ ~ ~~~IvmtcL X1~ I r Sar ir

I Fo CWICI ,q, oUX A ..rMt X 11O,rQ,& V TM,

source: Industrial Survey.

The Skill Composition of the Labgr Force

1.9 The direct evidence on skill composition of Malaysia's labor force isnot encouraging. Using the standard classification of the work force reportedin data reported by the National Productivity Corporation, Malaysia'Is labor forceis divided into managerial and professional cadre, skilled workers,F semi-skilled workers and unskilled workers. The ratio of the first two and the totalwork force gives a measure of skill intensity of labor. According to thismeasure, the aggregate manufacturing labor force became less skill intensive

between 19B5 and 1991. The ratio fell from 0.43 in 1985 to 0.35 in 1991 (Figure1.4).

1.10 The trend of declining skill intensity appears to hold across mostmanufacturing subsectors (Table 1.3). The fall in the ratio ranges from 17percent in paper & paper products and 18 percent in textiles to 42 percent in the

I'Malaysia's Department of Statistics defines skilled workers as those workerswho have received formal training (either in-service training or other types,e.g., formal training in an institution) for their specific job.

manufacture of electrical machinery, appliances and supplies. The index of skillintensity also fell in rubber products, fabricated metal products and themanufacture of transport equipment.

Figure 1.4, Ski I I Intensityof AnuVateLr 1ng Wokrs

0.44

0.43-

0.42

. D \0.941 ,. ,.

a 0.47

0 .3S

" 0.35-

0.38

iis liii 1337 Ing 1ims 13o 1191

Source: Industrial Survey.

1.11 The evidence of falling skill intensity of the employed is in directcontrast to the government's declared objective of upgrading the skillcomposition of the labor force to move to higher value added products. Thisperverse outcome could be because of: (i) a demand constraint i.e. thetechnologies embodied in the investment in this period of rapid growth requireless skilled workers or (ii) a supply constraint i.e. the formal education systemand training schemes are not producing enough skilled workers or (iii) acombination of the two. The analysis presented in part B attempts to formallyidentify the reasons.

Table 1.3: Ratio of Skillad to Total Workers*

1985 1992 PercentageChange

Total 0.432 0.347 -19.8

Food Manufacturing 0.271 0.308 13.8

Manufacture of Textiles 0.616 0.504 -18.1

Paper & Paper products, printing etc 0.405 0.335 -17.3

Industrial chemicals & other chem. 0.284 0.350 23.3

Petroleum refineries & misc. prod. 0.478 0.492 2.9

Rubber & products 0.300 0.231 -23.1

Non-metallic mineral products 0.268 0.313 16.5

Iron and steel basic industries, andnonferrous metal basic industries 0.369 0.375 1.6

Fabricated metal products except 0.393 0.299 -24.0electrical

Manufacture of electrical machineryapparatus, appliances & supplies 0.635 0.367 -42.2

Manufacture of transport equipment 0.523 0.386 -26.2

* Ratio of skilled workers to total workers including skilled, semi-skilled andunskilled workers.

Source: Industrial Survey, Malaysia

The Pattern of Waae Growth

1.12 An analysis of the wage trends would be a useful first look toidentify informally whether decline in skill intensity is demand constrained.But there is another important reason to look at the evolution of wages.Malaysia has an impressive record in reducing poverty and ethnic incomeinequalities.v Indeed, the sustained prosperity that the country has enjoyedhas been ascribed to the political stability associated with successful povertyalleviation and reduction in income disparities. Since wage income is thelargest component of personal income, there is some concern that the recentpattern of wage growth may have contributed to the problem of interpersonalincome inequality. These issues are examined next.

F' Analyzed in "Growth, Poverty Alleviation and Income Distribution in Malaysia:Changing Focus of Government Policy Intervention," Report No. 8667-MA. WorldBank. January 1991.

- 9 -

1.13 Across skill categories: Increase in skilled worker wages at a timeof declining skill intensity of the labor force is a reflection of the scarcitypremium that skilled workers enjoy. The evidence to determine whether this istrue in Malaysia can be seen in the differences in wages across different skillcategories of workers within manufacturing.

1.14 Within manufacturing, earnings differential across workers hasincreased. Salaries of skilled workers have grown much more rapidly than thesalaries of unskilled workers (Table 1.4). This is true in most manufacturingsub-sectors. Moreover, when salaries have fallen, they have fallen more sharplyfor the less skilled workers.

1.15 The evidence presented in Table 1.4 suggests that the demand forskilled workers continues to be strong so that the problem of declining skillintensity of the labor force is primarily due to inadequate supply of skilledworkers (more on this below). This evidence also suggests that interpersonalincome inequality may have increased in the period of rapid income growth, whichmay have tarnished Malaysia's impressive past :ecord in reducing poverty andethnic income inequalities. Policies that increase the supply of skilled workerswould thus not only shift the economy to a higher value added production base tosustain the growth momentum but would also reduce interpersonal incomeinequalities arising from the premium that skilled workers currently enjoy.

- 10 -

Table 1.4: Percentage Cbange In Wages of Different Categories of Worker1987-91 (at 1985 prices)

Major Group Managerial- Skilled Workers Semi-Skilled UnsklUedProfessional and Direct and Workers Direct Workers DirectNon Professional Contract and Contract and Contract

Total 7.7 10.7 9.7 4.9

Food Manufacturing 7.3 1.4 5.4 1.6

Manufacmre of Texiles 5.3 16.4 3.1 18.9

Paper & paper products, printing etc 25.1 16.9 4.5 5.0

Industrial Chemicals & other chem. 2.8 6.6 -0.7 -2.2

Petroleum refineries & misc. prod. 3.4 0.5 1.1 16.2

Rubber & products -4.4 7.1 58.1 -14.7

Non-metallic mineral products 19.4 5.1 5.2 -8.6

Iron and steel basic industries, and 0.8 1.0 26.4 -2.1nonferrous metal basic industries

Fabricated metal products exceptelectrical 20.6 11.0 -1.0 10.3

Manufacturer of electrical machineryapparatus, appliances & supplies -6.0 12.0 19.9 7.6

manufacture of transport equipment 34.1 8.0 10.6 23.9

Source: Industrial Survey, Malaysia

1.16 Across gender: Women have played an important role in Malaysia'srecent developmenty' and female labor will continue to be an important source ofgrowth in the future. Rapid and sustained economic growth results when adeveloping country catches up with industrialized countries. This involves twosorts of catching up: (i) catching up with the industrialized countries'technological frontier and (ii) the under-employed domestic factor catching upwith the modern sector workers. The latter is facilitated by openness andforeign investment, that create job opportunities, and education, that makes theunderemployed factor employable in the modern sector. In Malaysia, women were theunder-employed factor. Armed with education through the 1970s and the 1980s,women moved from traditional self-employment to modern sector jobs created byforeign investment and government. This vent for the under-employed factorfacilitated the double catch-up and sustained Malaysia's long-term growth.

1.17 The labor force participation rate for women in Malaysia has increasedunremarkably from 46.6 percent in 1970 to 49.9 percent in 1990. However, women

l' "Female-led Growth in Malaysia" by Surjit Bhalla, Homi Kharas and Ijaz Nabi(forthcoming).

- 11 -

have moved from low skilled, less well-paid self-employment to more skilled,better paid wage employment. Thus, gender income inequality in Malaysia fell aswomen moved to wage employment. The decline in gender inequality in access toskilled jobs had a salutary effect on ethnic inequality as well. This is becausethe principal beneficiaries of increased female employment opportunities wereBumiputra women. This, in turn, increased Bumiputra family income and thushelped narrow the income gap across ethnic groups.

1.18 Despite the gains, however, the gender wage gap remains quite large(Fig 1.5); men's wages are on average nearly twice as high as women's. And inthe professional worker category, wage inequality has actually worsened in recentyears. This evidence suggests that there is still some catching up to be donein Malaysia to further reduce the gender wage gap. Women can be expected toincrease their share of relatively more skilled employment, as their wages riseto match those of the male counterparts.

1.19 That female labor in Malaysia can increase under the right policysetting can be seen clearly in the evidence on female labor force participationrates in urban areas in the period 1970-87. Policies that improved mother andchild health care, increased female years of schooling and increased employmentopportunities in the dynamic, high wage sectors of the economy had a salutaryeffect on fertility and female labor force participation. The total fertilityrate declined sharply from 6.3 in 1965 to 3.7 by the end of the 1980's. Thedecline in fertility, because of postponement of marriage and child bearing aswell as longer intervals between children, reduced the time females were out ofthe labor force. As a result, for the median child bearing age of 20, the urbanFLPR jumped from 44 percent in 1970 to 65 percent in 1987. In fact, smallerfamily size and improvements in maternal and child health meant that labor forceparticipation increased throughout the working life of female workers (Fig 1.6).

1.20 The salutary policy setting needs to encompass the entire female laborforce (in both rural and urban areas). This, combined with opportunities forwomen to improve skills and a further narrowing of the gender wage differential,will help improve the aggregate FLPR. The potential for greater female labor inMalaysia is substantial and can be seen in Table 1.5 that compares Malaysia'soverall (urban and rural) FLPR (47.3k) with Thailand's (76.3%).

- 12 -

Figure 1.5

Trends in Gender Inequality in EarningsCF4msl. to Wfie oa Patlos

0.I

0.76 _

0.78

0. 74

0.72

0.7

a . Be0.80

0.62

0.0

0 .s _

0 . so

0.54-

0.32-

0. 5

0.40

0.48 1996 19g9 1990 1991

0 AI wrlre + Pre or_ tlon lc Non-rcofeelnsleo a TCch l co l X Cle_tcal

V General

Note: All workers consists of the categories given here plusother part-time and full time workers.

Table 1.5: Total Labor Force Partkipation Rate a/

1970 1980 1990

Female Male Female Male Female Male

Thailand 76.8% 90.0% 59.7% 76.1% 76.3% 87.7% b/

Malaysia 46.6% 81.3% 47.3% 85.5% 47.3% 79.7% b/

o/ Total mnber of people economically active as a percentage of total number in the working agepopulation of 15 to 64 years.

Sowce: Yearbook of Statistics 1974, 1984, 1988, 1993, Table I

- 13 -

Figure 1.6: Female Labor ForcePsrtrcipstion (iebmn)

70

50-

30

20

15-19 25-29 35~-39 45-49 55-59

Age GroLip

0 1970 +4 1980 o 1987

1.21 Release of labor from acriculture and services sectors can alsoaugment the labor force available to manufacturing, and thereby help moderatewage increases in periods of rapid expansion.

1.22 Since the late 1980's the growth of manufacturing employment has beena very rapid 9 percent per year, despite the under 3 percent growth of laborforce (Table 1.6). This could coexist with moderate employment growth in non-manufacturing sectors at 3.5 percent per year because of two favorable factors.One was the availability of a very large pool of unemployed workers -- theunemployment rate of,nearly 7 percent in 1985 was still at 5 percent in 1990.The other, more significant, factor has been the sustained release of labor fromagricultural employment at over 3 percent per year since the late 1980s. Seenin another way, over the period 1987-94, over 15 percent of the additional jobscreated in non-agriculture were filled by the labor released from agriculture.This contribution increased to nearly 20 percent during 1990-94 because reductionin unemployment has slowed down with unemployment approaching its "natural"floor.

1.23 The services sector is a prime candidate for reducing non-manufacturing demand for labor. In accounting for 40 percent of employment itappears to have substantial room for being transformed into a leaner sector. Thegovernment services sector has been virtually stagnant in recent years. It isthe rampant growth in the other services (commerce, financial services,restaurants, etc) -- at nearly 3.5 percent per year -- which needs to bechanneled into more productive manufacturing employment.

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1.24 An accelerated decline in agricultural employment combined withreduced growth in the services sector has two distinct advantages. First, itwill avoid the potential problems of a major increase in immigration; second, itwill require a modest increase in female labor force supply. Rough estimates arethat a 6 percent annual reduction in agricultural employment plus a moderatelyrapid labor force growth rate (3.4%) could sustain a very high manufacturingemployment growth rate (9k) and moderate expansion in non-manufacturingemployment (3k), and also allow for a plausible unemployment level (4%) . Therequired labor force growth could be achieved by a modest increase in the femaleparticipation rate (about 53% versus 47k in 1994).

1.25 An annual decline of 6 percent in the agricultural labor force wouldbe an ambitious but feasible target. Useful comparisons can be made (table 1.7)with two relevant countries in the region -- Korea and Japan -- when thesecountries were in a similar stage of development as Malaysia is today. In 1980Korea and Malaysia were similar in the share of agriculture in employment, ofaround 35 percent. By 1985 Korea had reduced the share to 25 percent, whereasMalaysia did not reach the same level until the end of the decade. Furthermore,between 1985 and 1990 Korea was able to reduce the share by 7 points, whereas inthe same length of time Malaysia could reduce the share of agriculturalemployment by about half as many points.

1.26 Japan may be used as an illustration of the scope of reduction inagricultural employment. In 1970 Japan had the same level of GNP per capita asMalaysia in 1985. But Japan had by then succeeded in rapidly reducing its useof labor in agriculture to only 19 percent of the labor force, whereasagriculture in Malaysia still accounted for 30 percent of employment. Finally,consider the year 1975 when GNP per capita in Japan was at a level that Malaysiaexpects to attain in the near future -- around US$45000. At this income levelthe share of agriculture in employment in Japan had declined to 14 percent. Witha current employment share of 20 percent, this target level can in fact be easilyachieved by Malaysia in the year 2000 -- with total employment growth of around3 percent per year, agriculture would need to release labor at about the samerate.

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Table 1.6: Trends In Sectoral Employment, Malaysia

1970 1975 1980 1985 1990 1994

Employment Shares (%)

100 100 100 100 100 100

Agriculture 51 45 37 30 26 20

Manufacturing 11 13 IS 15 20 25

Non-Manufacturing 38 42 48 55 54 55

Services 28 31 36 42 43 42

1970-80 1980-90 1980-85 1985-90 1990-94

Annual Growth (%)

Labor Force 3.4 3.2 3.4 3.0 2.8

Employment 3.6 3.3 3.2 3.4 3.3

Agriculture 0.5 -0.4 -1.0 0.2 -3.0

Manufacturing 6.9 5.9 2.6 9.4 9.1

Non-Manufacturing 5.8 4.7 6.2 3.2 3.7

Services 6.3 4.9 6.1 3.7 2.8

Source: Economic Reports; ILO Yearbook of Labor Statistics; World Tables

Table 1.7: Comparative Trends In Sectoral Employment

Malaysia 1975 1980 1985 1990 1994

GNP per capita (S) 820 1690 1980 2360 -

Share of Agriculture in Employment 45 37 30 26 20

Index with moving base - 0.8 0.8 0.9 0.8

Korea 1975 1980 1985 1990 1992

GNP per capita (S) 580 1620 2340 5450 -

Share of Agriculture in Employment 46 35 25 18 16

Index wi.h moving base - 0.8 0.7 0.7 0.9

Japan 1955 1960 1965 1970 1975

GNP per capita (S) - - - 1930 4520

Share of Agriculture in Employment 40 32 24 19 14

Index with moving base - 0.8 0.8 0.8 0.7

Source: Economic Reports; ILO Yearbook of Labor StatistiCs; World Tables

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Conclusions:

1.27 The evidence on Malaysia's tightening labor market shows that skillsshortages are the result of supply constraints. Inadequate supply of skills inthe presence of strong demand has bid up the wages of skilled workers and haslowered the skills intensity of the labor force. This increases inter-personalincome inequality and also discourages skill intensive investment. Moreover, itis in direct contrast to the government's declared objective of upgrading thework force to move to higher value added products. Improving formal educationand occupational training programs will go a long way towards relaxing theconstraints on the supply of skills, which is essential for Malaysia to maintainits targeted growth rate in the medium term. The potential for increasing skillsin Malaysia is substantial, given the current enrolment gap in higher educationwith respect to its competitors. Another source for increasing the pool ofskilled workers is female labor. Female labor force participation rates can beimproved considerably by investing in female education and training, which willfurther reduce the gender wage gap and thus will encourage more women to work.Reduction in agricultural labor force and a slimmer services sector will alsohelp augment the manufacturing labor force.

B. The Wage Pattern and Investment

1.28 This section further interprets the evidence on the differential ratesof growth of skilled and unskilled worker wages. It also presents an explanationas to why skilled worker wages have increased so rapidly compared to those ofunskilled workers. It then evaluates the dampening impact of the rise of skilledworker wages, particularly at managerial and professional levels, on investmentfrom domestic sources as well as in the form of foreign direct investment.

1.29 The equity implications of the differential rates of growth of skilledand unskilled workers, touched on in part A, are also important. It would bebetter if the gains of the past few years were distributed in a manner thatequalizes incomes across social classes rather than exacerbate inequalities.Malaysia has been very successful in sharing the fruits of economic developmentover the past two decades. This period of rapid growth could have been one inwhich inequity was reduced. It is often easier to increase the incomes of lowerincome workers in a period of growth since there need be no reduction of theincomes of the relatively wealthy. The tax system has become no more progressiveover the past few years and the opportunity to improve the income distributionis being missed.

1.30 If the changes in wage structure led to better signals to workers asto the value of higher skilled and professional jobs and if the workers (andstudents in secondary school) could act on these signals, then the current changein relative wages would serve a good purpose in leading to larger university andtraining school attendance. In this case, the current wage pattern is temporary.Students will respond to the better income opportunities of professional andtechnical workers, undertake the appropriate training and eventually bring therelative wages back down. At least in the case of university, however, it is notpossible for them to do so (as will be discussed below) and the higher wages do

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not translate into improved allocation in the form of more use of the trainingand education sectors.

Why have skilled waaes risen so much?

1.31 There are a number of possible reasons for the more rapid increase inskilled wages relative to unskilled. Not all of them have policy implications.First, it is possible that the high level of investment in the economy itselfthat has increased wages for technical and managerial personnel relative tounskilled workers. It may be the case that higher investment disproportionatelyincreases demand for such people. This may be simply a characteristic oftechnology. Unless technology choices have been biased by policy-inducedincentives, there may be no problem which needs to be addressed by changes inpolicy. Social equity goals which are compromised by the differential growth ofwage rates should be handled directly with the fiscal system.

1.32 Second, it may be that there are fewer substitutes for technical andmanagerial workers and that an increase in the demand for workers will translateinto higher wages for a given supply. Again, this is a feature of technology andunless there is a distortion which artificially reduces substitutionpossibilities, there may be no policy implication.

1.33 Third, it is possible that the supply response of skilled workers tohigher wages may be lower than that of unskilled workers. If this is the case,then an increase in demand for technical and managerial workers will not be metby an equal increase in their supply. This, too, would have the effect ofdriving up wages until the higher demand is restrained. Once again, this doesnot necessarily have policy implications unless there is a market failure orpolicy failure which unduly constrains labor supply response.

1.34 In order to disentangle the contribution of these three possibleinfluences, a supply and demand system for different types of labor wasestimated. The data came from the industrial surveys conducted every year in themanufacturing sector. The details of the estimation procedure and results arepresented in Appendix 1A. The formal analysis is quite clear on the relativeimportance of the alternative explanations.

1.35 First, it is n the level or pattern of investment that has beenpushing up skilled wages. According to the estimates of labor demand, a givenincrease in fixed assets increases the demand for unskilled workers more than forskilled in the manufacturing sector. As for the subsectoral pattern ofinvestment: as suggested above, the higher wages for skilled workers hasdepressed investment in skill intensive industries. Therefore, there has beenless investment in skill intensive industries and the investment that has takenplace has had greater effect on unskilled than skilled labor demands.

1.36 Second, there is some evidence that the demand for skilled workers isless elastic (responds less to higher wages) than that for unskilled. Therefore,some of the gap can be explained this way but the amount so explained is low, asdiscussed below.

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1.37 Third, the most important determinant of the difference in wage rategrowth is the smaller supply elasticity of skilled workers. In fact,desegregated estimates indicate that managerial and technical workers have thelowest supply response, followed in order by skilled, semi-skilled and unskilledworkers. [It is hard to distinguish the supply elasticity of managerial andtechnical workers from zero or that of unskilled workers from a regime of fixedwages (an elasticity of 24)].

1.38 While both supply and demand elasticities are lower for skilledworkers, most of the difference in wage growth is attributable to the differencein supply elasticities. It is important to identify possible distortions whichmight account for the difference in supply response.

1.39 Both the statistical analysis and the basic facts surrounding thelabor market argue for the supply response story as the best explanation of wagebehavior. As noted in part A, the ratio of skilled to unskilled workers has beenfalling in most subsectors in manufacturing and in the economy as a whole. Thishas happened at the same time that the wages of skilled workers have been rising.This pattern is consistent with a lower supply response to increased wages in theskilled sector as established in the statistical analysis, and difficult toreconcile with a demand determined explanation.

The rise in skilled wages dampens investment

1.40 The rise in wages in high skill workers discourages both foreigndirect investment (FDI) as well as domestically financed investments in the veryindustries that Malaysia needs to transform itself into an industrial economy.

1.41 The evidence for this comes from two kinds of sources. On FDI, arecent survey was conducted examining the decisions of Japanese investors inseveral East Asian countries. The survey examined a variety of factors whichmight influence investment. For Malaysia, a consistent theme in the results isthe importance of labor costs and recruitment difficulty, particularly for highskilled labor.

1.42 Tables 1.8 and 1.9 from two separate surveys show that the issue oflabor cost is an important impediment to future investments to Malaysia. Tables1.10 and 1.11 show comparative data for other countries in the region on the costof workers of different skill categories and on the ease of recruiting andretaining skilled labor. Table 1.10 indicates that the wages for engineers inMalaysia is the highest in the region and those of managers nearly so. Also, thegap between managers and engineers on the one hand and workers on the other arehighest (or nearly so) in Malaysia. On ease of recruiting and retaining skilledworkers, the difficulty reported was near the highest for Malaysia (4.9 versus5.0 as the maximum difficulty reported on a scale of 1 to 7) and the turnoverrate for supervisors and technicians was second highest in the region (it shouldbe noted that Thailand has very much the same sort of problems as Malaysia).

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Table 1.8: Determinants of Future Japanese Investment In East Asia's Manufacturing Sector

All Countries Malaysia and Indonesia and China and VietYhailand Philippines Nam

Domestic market + + + + + + + +

Labor cost + + + + +

Parts and equipment + +

FDI policy + + + +

Political risk ++ +

Note: + + means very significant (at 5 percent). + or - means significant (at 10 percent). Sec details in Appendix 2.

Source: World Bank staff estimates based on regression analysis using the World Bank survey, 1993.

Table 1.9: Operational Impediments by Japanese Afiliates in East Asia

Impediments Total Malaysia Thailand Indonesia Philippines China(708) (186) (246) (103) (70) (103)

Labor supply XXX XXX XXX X X XX

Infrastructure XXX X XXX XX XXX XXX

Subcontract XX X XX XX X XX

Infation X X X XX XX XXX

Ownership restriction X X X XX X

Local employment restriction X XXX X

Distribution system X X X XXX

Local finance X X X

Export requirement X

Conflict with partners X

Political risk XXX X

Note: ()shows total number of responding affiliates in the country.XXX indicates more than 50 percent, XX indicates between 35 pereent and 50 percent, and X does between20 percent and 35 percent, of responding companies that cited each item as an impediments to their businessoperation. Companies often cited more than one impediment per country. See details in Appendix 4.

Source: MITI survey, 1993.

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Table 1.10: Labor Costs and Increases, 1992(US dollas)

Malaysia Thailand Indonesia Philippines China iet Nam

Wages/month

Worker 137- 138- 25- 118- 45- 20-

Manager 1178- 1181- 197- 392- N.A. N.A.

Engineer 589- 394- 148- 235- 129- N.A.

Rate of increase in nominalwages (percent) 9.0 15.0 20.0 11.3 (91) 14.4 NA.

Source: MMII 1993, "Prospects and Challenges for the Upgrading of Industries in the ASEAN Region."

Table 1.11: Ease of Recruiting Skilled Labor(On a scale of 1. very easy, to 7, very difficult)

Country Dificulty of recruiting local Percent of supervisors and techniadawsupervisor and technicians who leave venture each year

Malaysia 4.9 11.4

lhiland 5.0 15.2

Indonesia 4.4 7.5

Philipines 5.0 9.2

China 4.1 7.6

Viet Nam 4.3 2.5

Note: Respondents were asked how easy it is to recruit local supervisors and technicians. The sample in Viet Namwas very small.

Source: World Bank survey 1993.

1.43 The combined effect of having high costs for skilled labor andreported sensitivity to this factor among investors is a potentially seriousobstacle to further investment prospects. To see that this may already beinfluencing investment flows, Tables 1.10 and 1.11 show the change in approvedinvestments from Taiwan and Japan in ASEAN countries from 1992 to 1993. Fromboth sources, the investments to Malaysia show the biggest decline.

1.44 The second kind of evidence that high wages in high skill jobsdiscourages investment comes from domestic sources. From data provided by theindustrial survey on wages in different skill categories and on investment infixed assets, it is possible to directly measure the impact of the former on thelatter. Table 1A.3 in the appendix shows the results of a regression analysisexamining this impact. The effect of managerial and technical wages on domestic

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investment is significant and negative. It is estimated that a 10t rise inskilled wages can reduce manufacturing investment by 4.71. While this may notseem like a large number, the cumulative impact of this difference in investmentrates on the size of the capital stock can be very large. Several alternativespecifications confirm the direction of this effect, even though the actualmagnitudes are not very robust (that is, alternative specifications can alter thesignificance of this relationship).

1.45 For Malaysia to attain its "Vision 2020", it is the high skill, hightech, high quality of life investments that are essential for growth. These areprecisely the type which are most discouraged by the disproportionately risingwages of highly skilled workers.

Table 1.12: Japan's FDI In East Asia(Millions of US dollars)

FY87-89 FY90-92 FY93 (4-12)'

East Asia 7,740 11,523 2,707 (-6)

China 1,961 1,998 1.157 (+47)

Indonesia 1,762 3,981 600 (-33)

Malaysia 1,224 2,308 314 (-45)

Philippines 409 619 128 (-11)

Thailand 2,384 2,621 490 (+12)

Viet Nam -- 18 (+7718)

Note: Notification basis.' ( ) shows the change from the same period of last year.

Source: Ministry of Finance

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Tabk 1.13: Taiwan (Chna)'s FDI in East Asia, 198&93(Milions in US dollars)

1986-89 1990-92 1993 (1-10)'

East Asia 344 1,910

China - 420 2,831b

Indonuia 3 262 19 (-42)

Malysia 167 783 62 (-58)

PhEippines 105 126 5 (+438)

Thailand 69 319 54 (-35)

Viet Nam -- 156 (+1534)

Note: Approval basis.'()shows the change from the same period of last year.b In Marh 1993, the Government of Taiwan (China) revised regulations regardingthe accuate reporing of PDI in China.

Source: Investment Commission, Ministry of Economic Affairs.

Why is the suoplv and waae resoonse of skilled labor so low relative tounskilled?

1.46 Two factors are likely responsible for the differential ability ofskilled and unskilled labor to respond to increased wages. On the lower end ofthe wage ladder, the availability of low skilled immigrant labor from Indonesiaand other poorer countries in Asia allows employment to increase substantiallywithout inducing upward pressure on wages. This issue is dealt with in chapter3. On the higher end of the wage ladder, the most plausible explanation is thevery small number of university graduates, a result of higher education policy.

1.47 For a country at Malaysia's level of income, the proportion of thepopulation attending university is very low. It is also low in comparison toother rapidly growing economies in the region. Table 1.14 shows the proportionof the relevant age group attending university in selected countries in Asia.The figure for Malaysia includes an estimate of students studying abroad (a verylarge number compared to other countries). The large number studying abroadreflects widespread use of a very expensive alternative to local education.

1.48 The impediment to developing a larger pool of technical and manageriallevel personnel is the tight limit on higher education. With n