Are Malaysian Workers Paid Fairly?

: An Assessment of Productivity and Equity

By Athreya Murugasu, Mohamad Ishaq Hakim and Yeam Shin Yau

A. Introduction: Aspirations, Perceptions and Assertions of Incomes in Malaysia

As we draw closer to 2020, conversations on incomes of Malaysians increasingly dominate the public sphere.
First mooted in 1991, Vision 2020 was seen as a notable milestone for Malaysia to achieve, with 2020 deemed as
the year that the country will attain the coveted “high-income nation” status. Partly motivated by a shared national
aspiration, the growing dialogue also reflects rising public angst over the rising cost of living, housing unaffordability
and household indebtedness. Ensuring a reasonable income level and sustainable income growth is integral to
manage these issues, especially for those in the lower and middle-income brackets.

Previous work done by Bank Negara Malaysia on the living wage1 highlighted that in 2016, up to 27% of households
in Kuala Lumpur earned below a level of income that allows a meaningful participation in society, opportunities

Economic Developments in 2018

for personal and family development, and freedom from severe financial stress. While the assessment of income
against expenditure reveals some degree of inadequacy in incomes from a consumption perspective, this article
aims to assess the appropriateness of income levels from productivity and equity perspectives. The findings suggest
that incomes received by Malaysian employees are not commensurate with the value of output they produce.
This article then discusses policy ideas to complement existing national strategies in ensuring equitable and
sustainable income gains.

B. Benchmarking Income against Productivity: Are Wages Reflective of Workers’ Efficiency?

The relationship between wages2 and productivity mainly reflects the dynamics of the interrelationship between
employees and their respective employers. Employees contribute to the production process by providing labour
input (i.e. skills, ideas, manual labour) to produce goods and services. The amount of value-add generated per
employee is commonly referred to as labour productivity.3 Employees are in turn compensated with wages. Thus, the
wage that employees earn should fairly reflect their productivity.

Comparing productivity and wage levels across economies shows that wages broadly exhibit a positive
correlation with labour productivity (Chart 1). Countries with higher labour productivity levels tend to have higher
wages. While Malaysia’s productivity level is comparable to other middle-income countries, it is still well below
that of advanced economies. This is due to a number of factors, including the slower pace of technological
advancements4 and human capital development5 that lag behind those of advanced economies. Thus, on the
surface, the lower wage rate earned by Malaysian workers relative to those in the advanced economies seems
consistent with their relative productivity.

To enable a deeper assessment of Malaysia’s wage level vis-à-vis the advanced economies, the article seeks to
determine how much Malaysians would earn if they were as productive as workers in the advanced economies.
In doing so, a ratio of wages to productivity per worker6 is calculated to measure the wage rate paid to an
employee for generating a dollar’s worth of output.7 This allows for cross-country comparison, as the value of
the output produced is kept constant. The economies used as benchmarks in this analysis are the United States
of America, United Kingdom, Australia, Germany and Singapore. These economies were chosen based on two
factors - the more advanced state of economic development (for aspirational comparisons) and availability of data.

1
The Living Wage: Beyond Making Ends Meet, Bank Negara Malaysia’s 2017 Annual Report.
2
The term ‘wages’ is used instead of ‘income’ in the following sections as the analysis utilises wage statistics. In contrast, the term
‘income’ is used when narrating the broader context of compensation in the economy.
3
Labour productivity is formally defined as the ratio of gross domestic product to the total number of employed persons in the economy.
4
Robot density in the Malaysian manufacturing sector was approximately 50% lower than the Asian average and 93% lower than that of
Singapore (International Federation of Robotics, 2017).
5
Malaysia ranked 55th out of 157 countries in the Human Capital Index (HCI). Malaysia’s HCI score at 0.62 (high-income economies: 0.74)
indicates that children in Malaysia will be only 62% as productive as they could be in adulthood (World Bank, 2018).
6
All nominal values are deflated by the GDP deflator.
7
This article attempts to analyse wage levels in order to understand where Malaysian wages currently stand relative to productivity levels.
This contrasts with the existing literature largely dedicated to comparing wage and productivity growth.

Annual Report 2018 35

77
 Chart 1: Cross-Country Labour Productivity and Average Wages (2016)

Higher labour productivity is often accompanied by higher wages

USD thousands (PPP adjusted) USD (PPP adjusted)
150 6,000

5,000

100 4,000

3,000

50 2,000
Economic Developments in 2018

1,000

0 0
Philippines PR China Thailand Brazil Egypt Mexico Malaysia South Argentina UK Australia Norway US Singapore
Korea

Productivity (annual GDP per employed persons) Average monthly wages (RHS)

Note: Productivity is computed by taking a ratio of nominal GDP to the total number of employed persons in the economy

Source: Bank Negara Malaysia estimates using data from United Nations Statistics Division, International Labour Organisation (ILO) and World Bank

Analysis of the wage to productivity ratio shows that Malaysian workers are still being paid less than workers in
benchmark economies, even after accounting for the different productivity levels across countries (Chart 2). This
suggests that Malaysia’s current wage productivity levels are misaligned. To illustrate this point, if a Malaysian worker
produces output worth USD1,000, the worker will be paid USD340 for it. The corresponding wage received by a
worker in benchmark economies for producing the same output worth USD1,000 is, however, higher at USD510.8

Chart 2: Cross-Country Comparison of Productivity and Wages in 2017

Malaysian workers are paid less than workers in benchmark economies

even after accounting for differences in productivity
Ratio of wages to
productivity levels

0.51 Paid
USD340
to produce…

0.34 Malaysia …output

worth
USD1000

Paid
USD510
to produce…
Benchmark …output
Malaysia Benchmark Economies worth
Economies USD1000

Note: 1) The figures are derived by taking the ratio of wages to productivity, with productivity being defined as
GDP per worker
2) Data for all countries are as at 2017 except for Malaysia (2016) as Malaysia’s 2017 salaries and wage data
only represent citizens (instead of both citizens and non-citizens as per previous years)

Source: Bank Negara Malaysia estimates using data from National Account Statistics, Labour Force Survey Report
and Salaries and Wages Survey Report published by Department of Statistics, Malaysia, CEIC and national
accounts of respective countries

8
While workers in benchmark economies would produce higher output in a given time due to better technology (and hence earn a higher
wage), holding the value of output constant would have controlled for this technological effect.

36
78 Annual Report 2018
Further analysis reveals that most industries in Malaysia compensate workers less than those in the benchmark
economies, even after adjusting for productivity (Chart 3). This is particularly evident in the wholesale and retail trade, food
and beverage and accommodation industries that make up 19% of economic activity and 27% of total employment in
Malaysia. These industries are generally more labour-intensive, and dependent on low-skilled workers.

Several factors could explain this. The workforce in these industries typically lacks bargaining power, particularly due to the
abundance of low-skilled workers, including foreign workers.9 As a result, the mean wage in these industries, at RM1,727
in 2016, was nearly 30% below the national average of RM2,463. On the other hand, the disparity against benchmark
economies is considerably lower for the information and communication and utilities industries that typically hire more
high-skilled workers who are able to command a wage premium due to their specialised skillset and expertise. The average
wage level in these industries was RM3,556 in 2016, more than 40% higher than the national average.

Chart 3: Ratio of Wages to Productivity by Sector, Malaysia Against Benchmark Economies in 2017

Economic Developments in 2018

Malaysian workers are compensated less across most economic activities
0.62 0.64

0.53
0.47
0.38
0.29
0.52
0.42 0.17
0.11 0.32
0.22 0.23
0.17 0.16
0.05
Mining Manufacturing Construction Services Wholesale retail trade, Information Finance & insurance Utilities
F&B, accomodation & communication

Ratio of wages to productivity (Malaysia) Ratio of wages to productivity (Benchmark Economies)

Note: 1. The figures are derived by taking the ratio of wages to productivity, with productivity being defined as output per worker
2. Data for all countries are as at 2017 except for Malaysia (2016) as Malaysia’s 2017 salaries and wage data only represent citizens (instead of both citizens and
non-citizens as per previous years)

Source: Bank Negara Malaysia estimates using data from National Account Statistics, Labour Force Survey Report and Salaries and Wages Survey Report published by
Department of Statistics, Malaysia, CEIC and national accounts of respective countries

A Deeper Analysis of the Wage-Productivity Growth Link: Employer versus Employee

Real wage growth in Malaysia has outpaced productivity growth in recent years (Chart 4). The recent strength in wage
growth in Malaysia suggests that employers are compensating workers more appropriately for the output produced,
improving the wage to productivity ratio. However, public sentiments continue to suggest otherwise. To validate these
diverging sentiments, wage growth was adjusted through the lens of employers and employees.10 Specifically, wages
were adjusted using the output deflator to reflect employers’ perspective that wages are costs of production. On the
other hand, for employees, wages are compared to prices of goods and services consumed (Table 1).
Table 1
Adjusting wage growth to account for changes in price levels in the economy (Employer vs. Employee
Perspective)
Perspective
Agents Wage Deflator Rationale
of Wages
Cost of producing goods Change in the market value of goods
Employer Output Deflator
and services and services sold by the firms
Means to purchase goods Consumer Change in prices of purchasing a
Employee
and services Price Index “basket of goods and services”

10
Wages in this analysis are calculated in real terms by adjusting nominal values to exclude changes in prices over time. The price
indexes that are used to adjust for changes in prices are referred to as deflators.

9
Share of foreign workers in the wholesale retail trade, food and beverage and accommodation industries was 12% in 2017, nearly
double the share for the rest of the services sub-sectors in the economy.

Annual Report 2018 37

79
 Chart 4: Real Productivity and Wage Growth in
Malaysia (annual change, %)

Real wage growth has outpaced productivity growth

in recent years
6.0 5.8
5.7

4.3 4.5
3.8

3.7 3.5 3.5 3.6

1.6
Economic Developments in 2018

-0.9
2012 2013 2014 2015 2016 2017

Productivity per worker Wage per worker

Source: Bank Negara Malaysia estimates using data from Labour Productivity
Statistics and Salaries and Wages Survey Report published by Department
of Statistics, Malaysia

Contrasting the two perspectives, the gap between real wage growth from a firm’s and worker’s
perspective has significantly widened, particularly since 2015 (Chart 5). Wages have increased faster from
an employer’s perspective than a worker’s perspective as the market price of goods and services sold
by firms (output deflator) increased at a slower pace than the price of goods and services consumed by
employees (CPI).11 In the Bank’s engagements with industries, firms often cite rising wages as a squeeze
to business margins, while workers complain about “stagnant wages” and rising cost of living. This broadly
captures the sharply differing sentiments on sluggish wage growth between employers and employees
in recent years.

Chart 5: Comparison between Productivity per Worker

and Real Wage per Worker Index (2010=100)

Real wage has grown faster from a firm’s perspective

than from a worker’s perspective since 2015
Index, 2010 = 100 Basis Points
130 15
120 10
110 5
100 0
90 -5
2010 2011 2012 2013 2014 2015 2016 2017

Real wage per worker (output deflator) - employer's perspective

Real wage per worker (CPI) - employee's perspective

Productivity per worker

Gap (RHS, difference between wages deflated by the output deflator
and CPI)

Source: Bank Negara Malaysia estimates using data from Labour Productivity
Statistics and Salaries and Wages Survey Report published by
Department of Statistics, Malaysia

11
Divergence in CPI and output deflator could arise due to differences in coverage. While CPI only captures price movements of
items bought by consumers (both imported and domestically-produced items), output deflator covers all domestically-produced
items (for both exports and domestic consumption). Thus, the output deflator could be more affected by movements in prices of
exports, including commodities.

38
80 Annual Report 2018
C. Benchmarking Incomes against Equity: Workers vs. Capital Owners
In the production process, labour is only one of the factor inputs, in addition to factor inputs provided by the
employer (i.e. capital, land) in producing goods and services. From this perspective, one way of measuring equity is
to analyse the labour share of income12 as it represents the share of national income accrued to labour rather than
capital owners (i.e. firms).13

The labour share of income has been on the rise in Malaysia, from 31.7% in 2010 to 35.2% of GDP in 2017 (Chart 6).
This bucks the global trend where the labour income share has trended lower in recent years. However, Malaysia’s
labour share of income still lags behind most advanced economies (Chart 7). This implies that a larger fraction of
national income in Malaysia goes to capital owners rather than workers, that is capital owners benefit much more
than workers in Malaysia.

Chart 6: Labour Share of Income in Malaysia Chart 7: Cross Country Comparison of Labour Income
(2010-2017), % of GDP Share (Latest Year Available), % of GDP

Economic Developments in 2018

Malaysian labour share of income has risen over Nonetheless, the level of labour income share still
the years lags that of advanced countries
56.5
35.3 53.8
35.2
34.8 46.6 47.6
44.2 44.8 44.8
34.3
33.9
35.2
33.0
33.2
26.7 28.0
22.3
32.1
31.7
Philippines

Mexico

Egypt

Thailand

Malaysia

Argentina

Singapore

South Korea

Australia

Norway

US

UK
2010 2011 2012 2013 2014 2015 2016 2017

Source: Bank Negara Malaysia estimates using data from Department of Source: Bank Negara Malaysia estimates using data from Department of Statistics,
Statistics, Malaysia Malaysia and ILO

Intuitively, the lower share of income accrued to labour may suggest that capital is playing a bigger role in the production
process. Accordingly, a lower share of labour income should be associated with a relatively higher level of capital intensity.
For example, in a highly capital-intensive industry, capital inputs such as machinery and equipment play a bigger role in the
production process and capital owners (rather than workers) should receive a larger share of income generated.

However, this relationship does not hold true for Malaysia. Malaysia’s capital intensity is significantly lower than the
benchmark economies (Chart 8) signalling that workers play a relatively larger role in the production process in the
Malaysian economy compared to benchmark economies. Yet, the labour income share in Malaysia is relatively lower.

A similar trend is observed at the industry level (Chart 9). Most Malaysian industries fall in the bottom-left quadrant
characterised by lower capital intensity and lower labour share of income relative to benchmark economies. Notably, labour
income shares in the wholesale and retail trade, food and beverage as well as accommodation industries were only about
half of benchmark economies despite capital intensity being far lower at only about 40%. Only two industries fall outside this
quadrant. First, the mining sector has a relatively higher capital-intensity. Hence, the lower labour share of income of 7% is
to be expected. In contrast, the construction sector is characterised by higher labour-intensity, and thus correspondingly
exhibits a higher labour share of income (73%).

12
The labour share of income is derived from the GDP by Income Approach that serves as an essential reference in gauging the economy
from the perspective of income provided by factors of production. The labour share of income comprises salaries, wages, allowances,
bonuses, commissions, gratuities and payment in kind.
13
The calculation of the labour share of income is broadly similar to the derivation of the wage to productivity ratio. However, they differ
in terms of concept, treatment of varying means of compensation and derivation. While the wage to productivity ratio motivates an
assessment of the workers’ productivity, the labour share of income addresses an assessment of the distribution of income.

Annual Report 2018 39

81
 Chart 8: Capital Intensity (USD `000 PPP per worker)
vs. Labour Income Share (% of GDP) in 2017
Despite being less capital intensive (more labour
intensive), Malaysian labour share of income is lower
Benchmark Benchmark
Economies Economies
301.6 52.7

Malaysia
35.2
Malaysia
128.9
Economic Developments in 2018

Capital intensity Labour income share

Note: 1. Capital intensity is measured by the ratio of net capital stock per employed
person
2. The benchmark economies here consist of the US, UK, Australia, Germany
and Singapore

Source: Bank Negara Malaysia estimates using data from the Capital Stock Statistics,
Gross Domestic Product by Income Approach and the Labour Force Survey
Report published by Department of Statistics, Malaysia, national accounts of
respective countries and ILO

Chart 9: Malaysia’s Sectoral Labour Share of Income and Capital Intensity to Benchmark Ratio in 2017

Most Malaysian industries have lower capital intensity (higher labour intensity) and lower labour income shares
Labour income share ratio

2.0
Higher than benchmark

1.5
Construction

Finance, insurance,
real estate and
1.0 business services
Other services (including government services)
Lower than benchmark

Manufacturing

0.5
Transportation & storage and Mining
Wholesale & retail trade, food & information & communication
beverage and accommodation

0.0
0.0 0.5 1.0 1.5 2.0 2.5

Lower than benchmark Higher than benchmark Capital intensity ratio

Note: Size of the circles represent the share of respective sectors in overall economic activity (share of total GDP). The benchmark economies consist of the US, UK, Australia,
Germany and Singapore

Source: Bank Negara Malaysia estimates using data from the Capital Stock Statistics, Gross Domestic Product by Income Approach and the Labour Force Survey Report
published by Department of Statistics, Malaysia, national accounts of respective countries and ILO

40
82 Annual Report 2018
D. Labour Income Developments in Malaysia
The article has thus far largely focused on establishing the relationship between Malaysian wages, productivity and
equity vis-à-vis selected benchmark economies. This section seeks to analyse two trends observed in the Malaysian
labour market in recent years.

I. The Rising Labour Income Share: Driven by Disquieting Factors?

Overall, Malaysia’s labour income share has been on an upward trend. While this is a positive step in ensuring
better income distribution, it masks some unsettling developments. A shift-share analysis14 reveals that 36% of the
improvements in Malaysia’s labour income share between 2010 and 2017 was driven by the reallocation of economic
activity into more labour-intensive sectors rather than gains in labour income share within each sector15 (Chart 10).

Specifically, between 2010 and 2017, the share of income accounted for by low- and mid- skilled workers has
increased16 (Chart 11) due to stronger expansion and employment growth in the wholesale and retail trade, food,

Economic Developments in 2018

beverage and accommodation as well as construction industries. While faster growth in these labour-intensive
industries has contributed towards improvements in the headline labour income share, these industries continue to
provide lower wages (Chart 12), negating ongoing efforts to achieve the “high-income nation” status.

This development highlights that higher labour income share does not necessarily imply higher incomes for
workers. Therefore, it is critical that the Eleventh Malaysia Plan target for a labour income share of 38% by 2020 be
achieved through higher wages instead of the creation of more low paid, labour-intensive jobs. This would require
a transition away from its labour-intensive structure through increased capital-17 and knowledge-based investments
that will result in a much needed demand for highly educated and skilled workers who can command high wages.

Chart 10: Sectoral Shift-Share Analysis on Labour Chart 11: Changes in Share of Employees Compensation
Income Share Growth (2011 – 2017) and Employment by Skill-Level (2010 – 2017)

Movement of workers into more labour-intensive Larger share of labour income accounted by low- and
industries drove growth in labour income share mid-skilled workers
Annual change (%), contribution to growth (percentage points) Change in share (percentage points)
4 1.5
3.6

3 1.5
0.6 0.5
2.1
2 0.0
1.1 1.6 -0.1
1.3
1.0 -1.2 -1.4
1

0 -1.5

-0.3 Change in share of Change in share of

labour income employment
-1
2011 2012 2013 2014 2015 2016 2017
Low-skilled Mid-skilled High-skilled

Within effect Intersectoral allocation Labour income share growth

Source: Bank Negara Malaysia estimates using data from Gross Domestic Product
Source: Bank Negara Malaysia estimates using data from Gross Domestic Product Income Approach, Labour Force Survey Report and Salaries and Wages
Income Approach published by Department of Statistics, Malaysia Survey Report published by Department of Statistics, Malaysia

14
The rise in labour income share is analysed to disaggregate the impact of inherent labour share gains within each sector (known as
‘within effect’) and the movement of economic activity (and presumably employment) across sectors (known as ‘intersectoral allocation’).
15
This corroborates with findings from “What Explains the Increase in Labour Income Share in Malaysia?” published by Khazanah
Research Institute in 2017.
16
Despite the rise in share of low- and mid-skilled workers since 2010, it was partially offset by a decline in share of both low- and
mid-skilled workers since 2016.
17
While this may reduce the labour income share in the short run due to the higher capital intensity, it will lead to higher-skilled occupations
and higher per capita income levels in the longer run.

Annual Report 2018 41

83
 Chart 12: Sectoral GDP Growth and Median Wage
Levels (2011 – 2017)

The construction and wholesale retail trade, food and

beverage and accommodation industries expanded
faster than most other sectors. However, they provide
workers with lower wage levels
Annual change (%) RM/Month
12 9.7 4,000

9 7.4 3,000
6.2 6.7
5.2 5.9
6 4.9 4.9
2,000
2.2 1.4
3 1,000
1,703 1,200 3,650 1,600 1,560 2,293 1,394 2,160 2,413 3,214
0 0
Total

Agriculture

Mining

Manufacturing

Construction

Services

Wholesale and retail trade,

food & beverages and accommodation

Finance and insurance, real estate

and business services

information & communication

Other services (incl. govt. services)

Transport & storage and
Economic Developments in 2018

Share of Total GDP (%)

100.0 8.2 8.4 23.0 4.6 54.5 18.0 11.2 9.6 15.6

Median wages (RHS) GDP growth

Note: Data for median wage levels are as at 2016 as Malaysia’s 2017 salaries and
wage data only represents citizens (instead of both citizens and non-citizens
as per previous years)

Source: Bank Negara Malaysia estimates using data from National Accounts Gross
Domestic Product by Economic Activity, Salaries and Wages Survey
Report published by Department of Statistics, Malaysia

II. Rising Share of Graduates in the Workforce: Is the Education Premium Narrowing?
Over the past decades, there have been concerted efforts to raise the quality and skills of the nation’s
workforce. The proportion of graduates18 in the labour force increased from 23.5% in 2010 to 28.3% in 2017
(Chart 13), a level comparable to a number of developed economies. However, a salary survey published by the
Malaysian Employers Federation suggests that nominal starting salaries for graduates remain at modest levels.
In fact, after adjusting for inflation, real starting monthly salaries for most fresh graduates has declined since
2010. A fresh graduate with a diploma earned a real salary of only RM1,376 in 2018 (2010: RM1,458) while a
Masters degree holder earned a real salary of RM2,707, a significant decline from RM2,923 in 2010 (Chart 14).

Evidence suggests that the lack of high-skilled job creation could have played an integral role in this. Between
2010 and 2017, the number of diploma and degree holders in the labour force increased by an average of
173,457 persons per annum, much higher than the net employment gains in high-skilled jobs of 98,514 persons
per annum.19 This suggests that the economy has not created sufficient high-skilled jobs to absorb the number
of graduates entering the labour force. In addition, a study by Khazanah Research Institute also found that 95% of
young workers in unskilled jobs and 50% of those in low-skilled manual jobs are over-qualified for these occupations.20

18
Graduates refer to diploma and degree holders derived from the variable ‘highest certificate obtained’ within the Labour Force Survey
published by the Department of Statistics, Malaysia.
19
Net employment gains are estimated as changes in the number of high-skilled persons employed as reported in the Labour Force
Survey (LFS) published by the Department of Statistics, Malaysia. While job creation data are available in the Quarterly Employment
Statistics (QES), the LFS data are utilised instead due to availability of longer time series and to allow for comparability with the graduate
statistics which are also derived from the LFS.
20
The School-to-Work Transition of Young Malaysians published by Khazanah Research Institute (2018).

42
84 Annual Report 2018
Chart 13: Labour Force with Tertiary Education Chart 14: Real Minimum Monthly Basic Salary for
(2010 – 2017) Employees Recruited Without Prior Working
Experience (2010 and 2018)
Number of graduates in the Malaysian labour force
continue to increase However, real starting salaries for graduates
% Millions
have declined
30 4.5 RM/Month %
28.3 3,000 4.6% 5

2,923
27.6 27.7 4
2,500

2,707
2,000 2.3% 3

2,228
2,169
26.1 3.0

1,993
2

1,983
1.3% 1.1%
1,500
1

1,458
1,376
25 24.3 24.2 24.2 1,000

1,140
0

1,050

1,045
953

949
23.5

892

793
500 -0.1% -0.3% -1

622
1.5 -0.7% -1.0%
0 -2

Economic Developments in 2018

PMR

SPM

Certificate

STPM

Diploma

Basic
degree

Honours
degree

Masters
degree
2.9 3.1 3.2 3.4 3.7 4.0 4.1 4.2
20 0.0
2010 2011 2012 2013 2014 2015 2016 2017 Non executives Executives

Labour force with tertiary Share of labour force 2010 2018 CAGR (RHS)
education (RHS) with tertiary education
Source: Bank Negara Malaysia estimates using data from MEF Salary Survey for
Source: Bank Negara Malaysia estimates using data from Labour Force Survey Non Executives and Executives 2010 and 2018 published by Malaysian
Report published by Department of Statistics, Malaysia Employers Federation

Thus, despite obtaining a high level of education, employees had to settle for jobs that typically do not require
such education levels. Consequently, with an ample supply of graduates and limited demand for them by firms,
graduate salaries have faced downward pressures.

Interestingly, this is in stark contrast to their peers without a tertiary education. The implementation of the
minimum wage has supported increases in the salaries of lower-skilled workers in recent years, allowing for
starting salaries for those at the bottom-end of the education attainment spectrum to catch up. While starting
salaries of graduates have declined in real terms, the real starting salaries of PMR and SPM educated employees
have risen by 4.6% and 2.3% respectively (Chart 14). This divergence in growth trends across education levels
alludes to a more serious phenomenon – the income premium for education has narrowed in Malaysia. If left
unaddressed, this could reduce the incentive for the younger population to pursue higher levels of education and
potentially exacerbate the “brain drain” issue in Malaysia.

E. Enhancing Policy Potency and Efficacy

Malaysia has made significant progress in transforming the economy from that of a low-income agrarian
country to an upper-middle-income country. Significant reduction in poverty was achieved while big strides
were made in improving living standards across the population.

Notwithstanding these achievements, more can be done to build on the progress made to ensure sustainable increases in
income. This entails generating quality labour demand, reducing labour mismatches, reinforcing wage-productivity links and
creating a conducive labour market through regulatory and legislative interventions (Diagram 1).

First, there is an urgent need to generate higher demand for quality labour through the creation of high-skilled
jobs. In this regard, it is vital to attract new quality investments from both foreign and domestic firms, pivoting
away from the low-cost business model. Among existing firms, this can be generated through automation and
moving up the value-chain, with higher reliance on knowledge and technology. Doing so requires coherent
investment policies, which likely involves reviewing and enhancing existing investment incentives.

The Government has recognised the need to enhance the investment incentives framework to attract quality
investments and spur automation. However, most incentives are largely confined to the manufacturing and
manufacturing-related services industries. Importantly, given the overall significance of the services sector to

Annual Report 2018 43

85
 Diagram 1: Labour Market Reforms to Raise Incomes

Comprehensive labour market reforms necessary to

raise incomes

Generate quality labour demand

Reduce labour mismatches

Comprehensive
Reforms
Reinforce wage-productivity links

Create a conducive labour market

Economic Developments in 2018

the economy,21 the coverage should be extended into new modern services. Amid rising labour costs and the
high proportion of low-skilled positions in the services sector (20%; total economy: 13%), targeted investment
policies can transform the services sector into a knowledge-led and technology-driven industry. Policy
considerations should also involve a critical review of incentive instruments.22

Second, it is critical to reduce clear mismatches between labour demand and supply. Policies could include
reducing labour recruitment costs and skill mismatches, as well as increasing the employability of the incoming
and existing workforce. The proposed addition of one-stop job centres at Urban Transformation Centres
(UTCs) and Rural Transformation Centres (RTCs)23 is a welcome development and could be further supported
by linking them with existing career services in higher education institutions.

Greater collaborations between the industry and educational institutions have proven successful in easing the
transition of students into the workforce. Models similar to the Collaborative Research in Engineering, Science
and Technology (CREST) in Penang could be emulated for other sectors throughout the nation. Concerted
efforts should also be channelled towards upskilling and reskilling initiatives for the existing workforce. The
Human Resources Development Fund (HRDF) should expand its coverage of sectors and through more
targeted use of the funds to address critical skills gaps. Studies have also shown that 74% of Malaysian firms
do not allocate internal funds for education and training of staff.24 There is a need for employer organisations,
trade unions and respective chambers of commerce to urge, nudge and persuade businesses to invest more
in enhancing the capacities and capabilities of their workforce.

Third, the relationship between wage and productivity must be reinforced to ensure that workers’ wages are
commensurate with their respective productivity levels and growth. While this has been advocated by the
Productivity Linked Wage System (PLWS) since 1996, its outreach remains suboptimal (Chart 15), hampered
by the lack of legislative power, low transparency on the part of employers and resistance by trade unions.25

Going forward, several key initiatives can strengthen the role of PLWS. These include strengthening its
legislative and enforcement capabilities, actively publicising successful case studies and promoting PLWS
among Government-Linked Corporations (GLCs), including their suppliers and vendors. Components of PLWS
could also include mandatory disclosure of factors underpinning employees’ compensation and increment,
allowing for more open and direct discourse on compensation packages.

21
The services sector accounted for 55% of economic activity (GDP) and 62% of total employment in 2017.
22
Rethinking Investment Incentives, 3Q 2017 BNM Quarterly Bulletin.
23
This was outlined in the Mid-Term Review of the Eleventh Malaysia Plan.
24
The School-to-Work Transition of Young Malaysians published by Khazanah Research Institute (2018).
25
The resistance could stem from the uncertainty in income prospects, once wages are linked with productivity. Based on news flows, trade
unions want contractual bonuses and annual increments in collective agreements to remain the same. Source: http://www.mef.org.my/
news/mefitn_article.aspx?ID=160&article=nst070321a [Accessed 14 February 2019].

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Beyond PLWS, the link between productivity and wages could be enhanced through closer collaboration
between the National Productivity Council (NPC)26 and the National Wage Consultative Council, with the
mandate to strengthen the link between productivity and wages in Malaysia, in both level and growth terms.
There is also scope to further engage small and medium enterprises (SMEs) on micro-level productivity
enhancements, involving changes to work processes and automation. Leveraging on the WayUp portal and
the ezBE Assessment Tool developed by the Malaysia Productivity Corporation, more relatable measures of
productivity could be introduced to improve outreach and encourage the adoption of accessible productivity
enhancement approaches among SMEs (e.g. number of plates washed by staff per hour).

Lastly, a concerted effort is necessary to advance regulatory and legislative labour reforms. There remains ample
room to promote better treatment of workers. This may include the freedom of association and elimination of forced
labour and discrimination. Some key labour market legislations in Malaysia have yet to undergo comprehensive
review in recent decades. For instance, the Industrial Relations Act was first enacted in 1967 and last revised

Economic Developments in 2018

in 1976. The on-going effort by the Ministry of Human Resources to review nine labour-related acts27 is timely.

The growing sharing economy, the advent of technologies and increasing demand for flexible working
arrangements are transforming the intrinsic nature of Malaysia’s labour market. Own-account workers28 in
urban areas as a share of total employment rose from 10.9% in 2010 to 15.4% in 2017 (Chart 16). Public
discourse and legislative action are necessary to ensure that all types of workers are accorded the protection
they deserve. For example, the United Kingdom, New Zealand and Singapore have already launched formal
reviews into their existing legal structures to accord self-employed workers greater protection. In Malaysia, the
passing of the Self Employment Social Security Act in 2017 was a right step forward and should be expanded
to other self-employment sectors, beyond taxi drivers and e-hailing service providers.

Chart 15: PLWS Coverage Gap (as at August 2018) Chart 16: Share of Own Account Workers in Urban
Areas (% of total employment)
Large proportion of workers in Malaysia still not
covered by PLWS Share of own-account workers have risen in
Millions of workers urban areas
%
16
72% 15.4
10.8 of total
employment
14.9 as at
August 2018
14

4.1

Covered Total Not covered 12

by PLWS employment by PLWS

Source: Bank Negara Malaysia estimates using data from the Ministry of Human
Resources* and the Labour Force Survey Report published by Department
of Statistics, Malaysia 10.8
10
* The Edge Markets. 2018. Productivity Linked Wage System to lure overseas-based 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
skilled Malaysians. Available at: http://www.theedgemarkets.com/article/productivity-
linked-wage-system-lure-overseasbased-skilled-malaysians. Source: Bank Negara Malaysia estimates using data from Labour Force Survey
[Accessed 22 December 2018]. Report published by Department of Statistics, Malaysia

26
In its current iteration, the main mandate of the NPC is to provide leadership, set the strategic direction and drive the national
productivity agenda – this includes the implementation of initiatives proposed in the Malaysia Productivity Blueprint. However, its
mandate is limited to advancing initiatives to raise national productivity, rather than linking it with wages.
27
The nine acts refer to the Employment Act 1955 (amended 2012), Sabah Labour Ordinance 1950, Sarawak Labour Ordinance 1952,
Industrial Relations Act 1967 (revised 1976), Trade Unions Act 1959 (amended 2008), Children and Young Persons Act (Employment)
Act 1966 (amended 2011), Occupational Safety & Health Act 1994, Workers’ Minimum Standards of Housing & Amenities Act 1990,
and Private Employment Agencies Act 1981 (amended 2018).
28
Refers to a person operating his own business without employing any paid workers.

Annual Report 2018 45

87
 Conclusion: Preserving and Enhancing the Welfare of Workers for the Future
In the current environment, income levels in Malaysia remain a highly contentious subject. Workers face significant
pressures due to the rise in living costs while firms continue to contend that the level of incomes remains appropriate
and reflective of productivity.

This article has highlighted that Malaysian workers receive lower compensations relative to their contribution to national
income from productivity and equity perspectives. First, Malaysians are paid a lower wage compared to benchmark
countries, even after taking into account productivity differences. Second, Malaysia has a lower labour share of income
despite its labour-intensive nature. This suggests workers are not adequately compensated for their contributions.

While employers need to be fairly compensated for their respective factor inputs, the question remains, why is the share of
compensation accrued to employers instead of employees higher relative to our aspirational peers? How can Malaysia’s
taxation and distributive policies positively impact and enhance the division of incomes? These are hard questions that
Economic Developments in 2018

require judicious deliberation and committed action.

In totality, while these policy challenges seem daunting, the responsibility of advocating for a more equitable distribution of
incomes among all economic agents remains. Over the past decades, the nation has successfully navigated its passage
from a factor-driven to an efficiency-driven economy.29 In its next evolutionary step towards an innovation-driven economy,
it is important that the welfare of Malaysia’s labour force is well preserved, if not enhanced. This will ensure that workers
continue to be properly incentivised to raise their productivity, thus achieving greater value creation in the economy.

References
Bank Negara Malaysia (2017). “Rethinking Investment Incentives”. Box article in 3Q 2017 BNM Quarterly Bulletin.
Kuala Lumpur.

Bank Negara Malaysia (2018). “Divergence of Economics Performance and Public Sentiments”. Box article in 2Q
2018 BNM Quarterly Bulletin. Kuala Lumpur.

Bank Negara Malaysia (2018). “The Living Wage: Beyond Making Ends Meet”. Box article in Annual Report 2017.
Kuala Lumpur.

International Federation of Robotic (2017). “World Robotics Report 2017”. Germany.

Khazanah Research Institute (2018). “The School-to-Work Transition of Young Malaysians”. Kuala Lumpur.

Khazanah Research Institute (2017). “What Explains the Increase in Labour Income Share in Malaysia?”. Kuala Lumpur.

Malaysian Employers Federation (2010). “MEF Salary Survey for Executives 2010”. Kuala Lumpur.

Malaysian Employers Federation (2010). “MEF Salary Survey for Non Executives 2010”. Kuala Lumpur.

Malaysian Employers Federation (2018). “MEF Salary Survey for Executives 2018”. Kuala Lumpur.

Malaysian Employers Federation (2018). “MEF Salary Survey for Non Executives 2018”. Kuala Lumpur.

29
Factor-driven economies are dominated by subsistence agriculture and extraction businesses, reliant on natural resources; Efficiency-driven
economies are increasingly competitive, with more efficient production processes and increased product quality. Innovation-driven
economies are the most developed. In this phase, businesses are more knowledge-intensive, and the service sector expands. According to
the World Economic Forum (WEF), Malaysia is currently transitioning from an efficiency-driven to an innovation-driven economy.

46
88 Annual Report 2018
Ministry of Economic Affairs, Malaysia (2018). “Mid-Term Review of the Eleventh Malaysia Plan 2016 - 2020”. Putrajaya.

New Straits Times (2007). MTUC ‘agreed to productivity wage system in 1996’. Available at: www.mef.org.my/news/
mefitn_article.aspx?ID=160&article=nst070321a. [Accessed 14 February 2019].

The Edge Markets (2018). Productivity Linked Wage System to lure overseas-based skilled Malaysians. Available at:
http://www.theedgemarkets.com/article/productivity-linked-wage-system-lure-overseasbased-skilled-malaysians.
[Accessed 22 December 2018].

Tun Dr. Mahathir Mohamad (1991), “Malaysia: The Way Forward (Vision 2020)”. Kuala Lumpur.

World Bank (2018). “Malaysian Economic Monitor: Realising Human Potential”.

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