Report No. 131 h3 -MiY

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

( Xlrllls I)t d i- [)i% i -, I

G LIII II IIIj.t 'l ' ' w>.1., ! ;iwt 1'<1 III( R,-wl,,i

Document of the World Bank

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

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 . . . . 89

c. Demand-side Incentives for Training . . . . . . . . . . . 103Appendix a: Estimating the Labor Market outcomes of

Public training ................... . 125Appendix 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.

- ii -

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

- iii -

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

- iv -

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.

v

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.

- vi -

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,

- vii -

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

- x -

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.

- 14 -

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.

- 15 -

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

- 16 -

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

- 17 -

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.

- 18 -

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).

- 19 -

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.

- 20 -

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

- 21 -

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

- 22 -

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 no private sectorallowed to grant degrees, the supply of highly trained workers must come from therestricted number of slots in the state-run university or from the recentlyestablished "twinning" program of cooperative arrangements with foreignuniversities. The Ministry of Education budget is not likely to grow anywherenear enough to generate the current and future needs of the economy forgraduates. The twinning program, while helpful, still requires, in general, two

- 23 -

years abroad and increases the costs of higher education substantially relativeto what could be met domestically.

Table 1.14: Gross Enrolment Rados (%) by Level of Educaion, Asi 1970-1985

Country Primary Secondary Higher

1970 1985 1970 1985 1970 1985 (4)

Bangladesh 54 60 - 18 - 5.2

Bhutan 6 25 1 4 - 0.1

Burma 83 107 21 23 2.1 5.4

China 89 118 24 39 0.6 1.7

India 73 92 26 41 8.6 9

Indonesia 80 118 16 42 2.4 6.5

Korea (1) 103 96 42 75 10.3 31.6

Laos 53 94 3 19 - 1.5

Malaysia 87 99 34 53 2.3 6 (8.6)

Nepal (2) 22 82 10 25 2.3 4.6

Papua New Guinea 52 70 3 13 2.5 2

Philippines 108 106 46 65 18.4 33

Singapore 105 115 46 71 9 11.3

Sri Lanka 99 103 47 63 1.3 4.6 (3-1)

Thailand 83 97 17 30 3.4 19.6

Average (3) 76 94 26 42 4.9 10.1

Source: Mingat and Tan, Educational Development in Asia: A Cooperative Study Pocusing on:

(1) The data for a secondary school education in 1985 is lower than that reported inUNESCO (1987) since it is the average over both subcycles of secondary education. TheUNESCO data refer only to the first subeycle.

(2) The statistics for primary education for 1985 may be overestimated due to inaccuraciesin official estimates of the relevant school-age population;

(3) Excludes Bangladesh, Bhutan, and Laos since data for these countries are incomplcte.

(4) Figures in parentheses refer to the estimated enrollment ration if students abroadare included. They are shown only for Malaysia and Sri lanka, countries with sizablestudent populations abroad.

1.49 An expanded higher education system does not necessarily have to usemore public funds. Indeed, there need not be any budgetary implication at allfor the expansion of the private sector beyond that of establishing an office ofaccreditation. Given the current, regressive, nature of subsidies to higher

- 24 -

education (Table 1.15), an increase in fees in public institutions which wouldbe able to cover such a modest extra cost and would not sacrifice thegovernment's concerns with equity in service delivery. These issues werediscussed at length in a previous reportf'. This is also the theme of theproposed GOM-Bank sector study in higher education.

1.50 In addition to improved higher education, the government will need toimprove the quality, as well as increase the capacity, of skill training programsin the country. This is taken up in Chapter 4 below.

Table 1.15: Proportion of Federal Subsidy on Education Received per QuintUe ofHousehold per Capita Income

Quintile

1 2 3 4 5

1973Primary 28% 22% 22% 18% 9%

Secondary 19% 20% 24% 19% 18%

Higher Ed. 3% 6% 19% 19% 51%

1984Primary 34% 27% 20% 12% 8%

Secondary 29% 26% 21% 15% 8%

Higher Ed. 7% 13% 17% 35% 28%

1989Primary 36% 27% 18% 12% 7%

Secondary 31% 25% 20% 14% 9%

Higher Ed. 10% 15% 21% 31% 24%

Source: 1973, Meerman, 1984 and 1989, Malaysia Household Income and Expenditure Survey.

F Fiscal Reform for Stable Growth, World Bank, Report No.10120-MA, April 1992.

- 25 -

Appendix lA: Zstimates of Labor Supply and De^mnd

1. In order to assess alternative explanations for the differentialgrowth rate of wages between skilled and unskilled workers, a system of supplyand demand equations for labor was estimated. The purpose of the analysis wasto distinguish between and assess the relative contribution of the threeexplanations for differences in the evolution of wages as discussed in the text:

1) differences in the demand for types of labor due to increases inthe capital stock

2) differences in supply elasticity of labor3) differences in demand elasticity of labor

2. The data available for this purpose are the annual surveys ofmanufacturing. For each of the subsectors in manufacturing, time series dataexists for wages and labor use of four categories of workers: managerial andtechnical, skilled, semi-skilled and unskilled. In addition, information isavailable on the value of fixed assets and prices of output. Data for sevenyears (1985 - 1991) for each of the twelve manufacturing subsectors was used,giving a panel structure to the data. The underlying assumption is that thereis a common structure for supply and demand of labor for each of the subsectors.

3. The equations of estimation for each type of labor (indices areignored) are as follows:

Supply: log(L.') a v . log(Wl + ) 2 log((4t) + *,

Demand: log(LD) = a + b1. log(Wpe) + b* log(P'l) + b3 * log(K't) + *lit

where:Lk - Labor supply in sector i, time tWi' . Real wage (deflated by the consumer price index) in sector i, timetW - Average of the real wage in all other sectors' for the same typeof laborLA a Labor demand in sector i, time tWO . Real wage (deflated by output price in i)Pi - Output priceK4 a Value of fixed assets

4. The coefficient on the wage in the supply equation (for any level ofaggregation) is the supply elasticity of labor to that subsector ofmanufacturing. If all wages in manufacturing were to rise together (as would betrue in a competitive labor market), the net supply elasticity to manufacturingwould be the sum of the two coefficients in that equation. This number could be

- 26 -

higher than ordinarily assumed (often near zero for overall labor supply) sincethis is still only a subset of jobs (only manufacturing) at each skill level.

5. Estimation of the supply and demand equations (with the additionalequilibrium condition that supply equal demand) was done with the two stageleast squares technique. The supply equation is identified by output prices andreal assets (from the demand equation), demand equation is identified by consumerprice deflated wages in the other sectors (from the supply equation).

6. Different levels of aggregation were examined:

1) for each of the four types of labor separately2) for an aggregation into high skilled (managerial, technical andskilled) and low skilled (semi-skilled and unskilled) workers3) for the aggregate of all workers

Results

7. The equations for the three levels of aggregation are presented inTables l.Al and 1.A2. Results will be discussed primarily in terms of the secondlevel of aggregation - high versus low skilled workers. Estimates tended to bemore consistent and stable the higher the level of aggregation For the mostaggregate model (column 1), the supply equation is highly significant and makesperfect sense. The own wage supply elasticity is very high (and positive) whilethe cross price (with other sectors) wage supply elasticity is also very high(and negative). That is, increases in the wage in each subsector induces asubstantial supply response into the sector and higher wages outside the sectorinduce workers to leave for the better opportunities.

8. For the more disaggregated models, the basic story remains the samethough the cross price effects seem to be less stable. However, since the mainhypothesis (that labor at different skill levels have different supplyelasticities) could only be tested in disaggregated models, attention must turnto them.

9. The main coefficients of interest are those on sector wages in boththe supply and demand equations and on fixed assets in the demand equation.Faster wage growth in the high-skill sector (the fundamental fact we wish toexplain) can be due to lower supply elasticities in that segment of the labormarket, lower demand elasticities and higher elasticity of demand with respectto investments.

10. As for the supply elasticity, it is noteworthy that the higher theskill level, the lower the labor supply elasticity. This is true in the modelwith two skill levels as well as that with four. In fact, in the four skilllevel model, the supply elasticity of the highest skill level cannot bedistinguished from zero while that on the lowest skill level cannot bedistinguished from infinity, i.e, the case of fixed real wages (the inverse ofthe coefficient cannot be distinguished from zero).

11. It is also the case that demand for skilled workers is less elasticwith respect to wages than is demand for unskilled. This can be due to greater

- 27 -

complementarity with respect to advanced machinery and (as is found in developedcountry contexts) greater substitution between labor and energy intensivetechniques at the lower skill levels. In any case, the relative contribution ofsupply and demand needs to be examined more closely.

12. The one hypothesis which can be rejected is that the wagedifferentials between high and low skilled is due to greater demand for highskilled workers as a result of investments. The demand equations indicate thatinvestments in fixed assets increase the demand for unskilled workers more thanfor high skilled.

13. In order to assess the relative contribution of the various componentsof wage growth and delineate some policy implications, Figure lA.l below isuseful. The figure consists of two demand curves and two supply curvescorresponding to skilled and unskilled workers. The curves are based on theestimated demand and supply elasticities reported in Table lA.1. Note thatconsistent with the estimated elasticities, both demand for and supply ofunskilled workers is flatter than the demand for and supply of skilled workers.The implication of this for the labor market outcomes is as follows. Startingfrom some initial equilibrium (point A), the market for skilled workers clearsat point B and for unskilled workers at point C. These points show that wagegrowth of skilled workers is much higher and employment much lower than that ofunskilled workers. Now if policy intervention improves tertiary education andupgrades skills of the labor force, thus reducing the difference between skilledand skilled workers, the new supply curve would lie between the two older supplycurves. This will result in new market equilibrium points D and E. The newequilibria show that employment of skilled workers increases and the differencein wage growth between skilled and unskilled workers disappears.

Wages5

4 5 Demand-Skilled

3 Supply-Skilled

2D emand-Unskilledd

Supply-Unskilled

0 2 4 6 8 10 12Employment

FIG 1A.1

- 28 -

Appendix 13: Investment Rates and Skilled Wages

1. As described above, investment in fixed assets were the driving forcein increased demand for, and wages of, wages in the recent period. However, wecan ask the reverse question: how have investment rates responded to theincreased wages themselves. Specifically, have the higher wages in skill-intensive segments of the labor force had a dampening effect on investmentlevels?

2. The same data as in the labor supply and demand model can be used toexamine this point. The variable to be explained is changes in fixed assets(i.e., investment) by subsector in manufacturing by year. The explanatoryvariables are lagged wages in skilled and unskilled sectors, lagged prices ofoutput and, as an exploratory feature, the lagged share of skilled workers andthe interaction of the share and the wage of skilled workers in each subsector.The idea is to see if wages depress investments and if this effect is greater forhigher skill wages.

3. The results are in table 1.A3. While not exceptionally strong, theresults indicate that higher wages for highly skilled workers do have adepressing effect on investment while low skill wages do not. This is consistentwith the survey data presented in the text which identified the difficulty ofobtaining skilled workers as an important deterrent to foreign investment. Thesame appears to be true for investments from all sources.

- 29 -

Table IA.I: Labor Supply and Demand Estimates

Wage * Competing Output Fixed RIWage Price Assets

Manufacture Workers

Supply 6.54 -5.55 .73(2.09) (2.17)

Demand -.828 .105 .486 .98(.223) (.181) (.059)

Managerial, Technical, Skilled Workers

Supply5.108 .892 .869(2.51) (2.16)

Demand -2.14 -.383 .669 .893(.094) (.286) (.069)

Semi Skilled, Unskilled Workers

Supply 24.04 -7.55 -.05(14.8) (7.48)

Demand -4.64 -3.06 1.03 .78(2.37) (.652) (.28)

* Deflated by CPI in Supply equationsDeflated by sector's Producer Price index in Demand equations

(Standard errors in parentheses)

- 30 -

Table 1A.2: Supply Estimates: Disaggregated Labor Categories

Wage Competing Wage

Managerial and Technical -18.13 19.8 -.15Workers (31.4) (28.4)

Skilled Workers 6.32 2.43 .83(3.55) (2.33)

Semi Skilled Workers 11.58 -2.60 -.15(6.49) (3.77)

Unskilled Workers 26.59 -2.32 -.71(32.14) (9.48)

(Standard errors in parentheses)

- 31 -

Table 1A.3: Investment Equations

[K IDependent variable: log i-0 K = real value of fixed assets

tK-1J

Independent variables:

log (Skilled log (Unskilled log (Skilled (3)*(2) log (Output R2

wages)-, wages)-, share of price)-,employment)-,

(1) (2) (3) (4) (5)

-.091 .061(.043)

-2.13 .326 .385 .083(1.08) (.220) (.237)

-.473 .488 -1.38 .137 .486 .089(.212) (.247) (.63) (.088) (.255)

(Standard errors in parentheses)

X-1 = lagged value of X

- 32 -

II. NONWAGI COSTS OF LABOR

Introduc:ion

2.1 Nonwage costs of employment are often neglected in otherwisecomprehensive labor market analyses. Recent evidence from OECD countriesindicates that this may be a critical omission. Samuelson (1994) reports thatnonwage expenses -- mainly payroll taxes and fringe benefits -- often representhalf of total labor costs. These are 52 percent in Italy, 46 percent in Germany,39 percent in Spain, 28 percent in the U.S., and 24 percent in Japan. In France,payroll taxes alone are more than 40 percent of wages. It is not coincidentalthat with roughly equal populations, while the US generated 41 million jobs since1970, the European Community created only 8 million jobs, mostly in thegovernment sector, since that year.

2.2 Reassuringly, this report estimates that average nonwage -osts inMalaysia are between 20 and 25 percent of wages, but intersectoral varieitions inthis ratio are disconcerting. While this ratio varied between 15 and 20 percentin manufacturing between 1985 and 1991, the plantation sector had a ratioexceeding 45 percent. The performance of these sectors in job creation is eerilysimilar to international differences referred to above. While job creation isnot an overriding concern in Malaysia today, nonwage costs cannot be ignoredbecause of links between performance-based nonwage compensation (such as bonuses)and labor productivity. Malaysia's aspirations to make the transition fromincome growth based on employment increases to growth based on productivityincreases implies that the composition of total nonwage cost (not just the level)becomes an important variable to monitor. Additionally, foreign directinvestment depends critically on unit labor costs, which in turn are a compositeof wages, nonwage costs, and productivity.

2.3 Also worrisome are the trends in nonwage costs. The Figure 2.1 belowshows that the ratio of nonwage costs to wages in manufacturing remained below15 percent between the period 1985 to 1990. In 1991, the ratio jumped to 17percent.1' With the 1 percent increase in EPF contribution rates effective from1992, and the 1 percent Human Resource Development Levy for large manufacturingfirms in 1993, measured nonwage costs in manufacturing are likely to be morethan 20 percent today.

2.4 The issues of interest regarding nonwage costs can be grouped intothree broad categories: The first set consists of payroll levies for thepurposes of providing social (old-age) security and occupational hazardsinsurance, especially those relating to intersectoral differences in effectiverates of these levies. The second set of issues relate to mandated and

l' While a significant proportion of this increase was due to the rapid increasein the ratio of nonwage to wage costs in food products and processing (sector311), figure Al in the annex shows that 15 out of 20 subsectors experienced anincrease in this ratio during 1991 relative to the 1985-90 average, while only5 experienced declines.

- 33 -

collectively bargained fringe benefits such as housing, bonuses, and allowances,in particular, differences across sectors and worker-types in nonwage costs ofemployment (e.g., the asymmetries in employing female versus male workers, andin employing domestic versus foreign workers). The final, possibly the mostcritical, set of issues relates to the use of nonwage compensation as a deviceto keep labor costs flexible in the face of changing trends in foreigncompetition, cyclical fluctuations and unionization; in particular, the use andlegal treatment of bonuses, overtime wages, and other incentives.

NONWAGE COSTS AS A FRACTION OF WAGESMSnufJctLrSin Roctor, 1BS5-.9910

17.6

17,4-

17.2-

17

16.8

16.6

16.216.

L15.G0

15.6

15.4

15.2

14.8

14.6

14.2 19J I 197 19b9 I iSbi1977 10 190

Yomr

Figure 2.1

2.5 Payroll taxes, such as employers' contributions to EPF, SOCSO, andHRDF which are proportional to wages, are mandated by law, so the main issue isthat of compliance. Fringe benefits, consist of housing and health benefits,allowances, retirement benefits, and leave, and are generally not proportionalto wages. These can be mandated by law or negotiated as part of individual orcollective contracts. The third component of nonwage benefits are other rewardsto work, such as bonuses and overtime payments, which are usually proportionalto wages. These are generally negotiated as part of individual or collectiveagreements or used as incentives to tie productivity with total compensation.

2.6 In the following pages, a brief quantitative summary of nonwage costsin Malaysia is provided. It is usefil for this purpose to distinguish nonwage

- 34 -

costs that are proportional to wages, and those that are nonproportional towages. In the former case, the proportionality quotients may vary across timeand sectors. Nonwage costs that are not proportional to wages, such as fringebenefits, are more difficult to study. Nevertheless, an effort is made here toprovide a comprehensive picture of the cross-sectoral variations in these costsover time. Finally, a hitherto unexamined establishment survey of themanufacturing sector is analyzed to determine the factors influencing theadoption of bonuses and flexi-wage schemes as instruments of tying compensationto performance.

A. Social Security and Other Payroll Levies

2.7 Employer contributions to the EPF, raised from 11 to 12 percent ofpayroll in 1993, have become a topic of lively debates in both the private sectorand the government. While these contributions almost certainly raise the costof employing labor, the government has traditionally used these funds to keep thecost of public borrowing low. This implies that the EPF can be used to altercapital-labor ratios. Since one of the objectives of the Malaysian governmentis to encourage the adoption of labor-saving capital-intensive techniques, thispolicy seems to be consistent with the Government's goals. However, privatesector employers seem concerned about the contribution of EPF and other payrolllevies to labor costs in a tightening labor market, and the implications forMalaysia's international competitiveness.

2.8 From a domestic policy point of view, therefore, employercontributions to the EPF can be thought of as raising labor costs relative tocapital costs; the net effect on the economy may be consistent with thegovernment's goal of fostering higher productivity by increasing the capital-intensity of production. From an open economy viewpoint, though, there are twoadditional concerns. First, to the extent that mandated EPF contributions (andother payroll levies) raise the cost of labor, this will affect the internationalcompetitiveness of the Malaysian export and import-competing sectors.Y That is,increasing labor costs will serve as a deterrent to the outflow of goods.Second, given the Government's objective of an export-oriented push towardsdeveloped economy status, this implies that foreign capital must be attractedregardless of total domestic savings and investment ratios. Increasing costs oflabor will serve as a deterrent to the inflow of foreign capital and knowhow.Since the Government perceives the need for labor substitution most in servicesand construction, both of which are largely nontradables, there may be somepotential for both encouraging labor-substitution and foreign capital inflows.This potential decreases as the labor market becomes more and more competitive(as it has): in a unified labor market, capital-labor ratios in the tradablessector cannot be determined in isolation of the developments in the nontradablessector.

Y It is beyond the scope of this study to definitively answer whether EPFcontributions raise the cost of labor one-for-one, or whether workers view thesecontributions as postponed wages and hence can be paid less than they wouldaccept if employer EPF contributions were reduced. An earlier World bank studyon Social Security provides some lessons for the management of contributoryschemes. (See Box 2.1 for ......)

- 35 -

Payroll Levies in Malaysia

2.9 Table 2.1 below summarizes payroll levies in Malaysia. The mainpayroll levies are employer contributions to the EPF (12 percent of wages), SOCSO(1.75 percent of wages), and HRD fund (1 percent of payroll for manufacturingfirms with more than 50 employees). While it cannot be determined whether thetax rate is too high or too low, it is clear that there are substantialvariations in definitions of what constitutes the tax base for these payrolllevies. Table 2.2 summarizes the differences in definition across the four mainstatutes governing payroll levies. Even within the Employment Act, there arefour separate definitions of wages. Employers seem unanimous in pleading forgreater uniformity in defining "wages", so that it becomes less cumbersome tocompute the taxes owed.

Intersectoral Differences in Incidence of Payroll Levies.

2.10 There is considerable evidence that the incidence of payroll leviesdiffers both across and within sectors. For example, while theoretically uniformat 12 percent, EPF coverage differs across sectors depending upon the proportionof self-employed and foreign worker -- for whom the contribution is optional --and of the relative importance of small-scale entrepreneurs and contracted labor,for whom the levy is difficult to enforce. Table 2.3 below presents theapproximate proportions of employees actively contributing to the EPF.

2.11 These numbers should be cautiously interpreted. It would beinaccurate, for example, to interpret these numbers as sectoral indicators of theextent of evasion of payroll taxes: these numbers need not equal 100 percenteven if there is no evasion of the tax, since contribution is voluntary for theselfemployed, for foreign workers, and for civil servants with more than tenyears of service (since they are eligible for government pensions) . Inagriculture, where selfemployment may be the rule, less than 25 percent ofworkers contributed to the EPF in 1992. Thus, for example, only about 20 percentof workers in construction -- where foreign workers are a large fraction of totalemployment3' -- are active members in the EPF. One-third of all civil servantsdo not contribute, implying that they have qualified for the government pensionprogram.

3/ Official estimates of the share of foreign workers in manufacturing rangefrom 3-5 percent of sectoral workforce; that for construction is about 70 percent(Midterm Review of the Sixth Malaysia Plan, 1993).

- 36 -

Table 2.1: Nonwage Costs Proportional to Wages, Various Sectors

SCHEME COVERAGE MIvEMBERSHIP RATENumber (Year) (SO)

(Nlillions)

Emplovee Provident All employees agedFund (EPF) 16-55 years with(a) Employer contracts: mandatory

1952 - 1974 for private sector 0.07 (1974) 5.001975 - 1979 0.10 (1979) 7.001980 - 1992 0.21 (1992) 11.001993 -present 0.22 (1993) 12.00

(b) Employee1952 - 1974 2.48 (1974) 5.001975 - 1979 3.54 (1979) 6.001980 - 1992- 6.62 (1992) 9.001993 - present 7.02 (1993) 10.00

Employees' Social All employers with moreSecurity (SOCSO) than 5 employees; all employees(a) Employer earning less than RM2000

(i) Empluyment Injury per month: casual employees 1.25(ii) Invalidity Pension are not covered; all 0.50

(b) Employee production employees(i) Employment Injury are covered regardless 0.00(ii) Invalidity Pension of camings level. 0.50

Human Resource All employers with 50Development Fund (HRDF) or more employees in(a) Employer the manufacruring 1.00(b) Employee sector 0.00

Government Pension 'Pensionable' govemmentScheme employees, usually with(a) Employer more than 10 years of Defined Benefits(b) Employee scrvice. Noncontributory

Private Provident Employees in selectedFunds occupations and companies(a) Employer e.g.. teachers. Variable(b) Employee Variable

Sources: EPF Bulletin (1992), Asher (1993).

- 37 -

Table 2.2: Differences In Tax Base for Various Payroll Levies

Component of Pay Employment Act EPF Act SOCSO Act HRDT Act1955, as at 1985 1991 1969 1992

Basic Definition of All remuneration All Money All Money Basic salary & fixedWages Remuneration Remuneration cash allowanc

Overtime Include Deduct Include Include

Bonuses and Deduct only Include Deduct DeductCommissions Noncontractual

Gratuity on Discharge Deduct Deduct Deduct Deductor Retirement

Service Charge Deduct Deduct Include ?

Retirement Benefits, Deduct Deduct Deduct DeductPensions, ProvidentFund

Travel Allowance or Deduct Include Deduct DeductTravelling Concession

Compensation for Job- Deduct ? Deduct Deductrelated Expenses

Note: "?" implies the treatment is unclear.Sources: Employment Act, 1955 (as in 1985), Employees Provident Fund Act, 1991, Human Resource Development Act, 1992.

& Employees' Social Security Act, 1969 (as in 1992).

2.12 The ratio also varies because of variations in the degree to which

subcontracting is practiced. While subcontracting may be the efficient form ofemployment where it is difficult for the principal to monitor the effort oroutput, subcontractors are also more difficult to police. The more troublingstatistics are for manufacturing and transport and communication. Less than 50percent of workers in manufacturing, and less than 25 percent in transportationand communication are active contributors. These are the sectors whereenforcement efforts should be concentrated. These efforts should especiallytarget the manufacturing sector, where official figures indicate that only about

5 percent of workers are foreign.

2.13 Additionally, some payroll taxes, such as the human resourcedevelopment levy, are levied only on the manufacturing sector, and within themanufacturing sector, only for large firms. Even for similarly sized firmswithin a sector, nonwage costs can differ across workers. The main differences

are for domestic versus foreign workers, and contract versus directly employedworkers. Poor enforcement of payroll levies for contract labor may result in

distortions in contract-type, with adverse efficiency and equity effects.

Nonwage Cost Differences Between Foreign and Domestic Labor

2.14 Nonproportional and erratically enforced foreign labor taxes, combinedwith exemption of foreign labor from employer EPP levies may distort the use of

- 38 -

foreign labor. Foreign labor taxes, examined in more detail in chapter 3, haveboth a fixed and a roughly proportional component. Annual levies on foreignworkers plus medical examination fees are about RM 500, which is between 10 to15 percent of the annualized wage of a worker (for semi-skilled and unskilledworkers respectively) in the plantation sector, but only about 8 to 12 percentof manufacturing wages (for semi-skilled and unskilled workers respectively).Payroll levies for domestic workers, on the other hand, are about 15-20 percentof wages. In the manufacturing sector, for the same money wages, this resultsin a nonwage cost advantage of hiring foreign labor of about 5 percent forunskilled workers, and about 10 percent for semi-skilled workers. That is, giventhe large fixed component of levies on employment of foreign labor, the gap innonwage costs increases with wage in both the manufacturing and the plantationsectors, creating a stronger incentive to hire semi-skilled rather than unskilledforeign labor. The cost advantage is less in the plantation sector, but thecosts of employment by plantations include housing and hospital benefits (moreon this in the section on fringe benefits).

2.15 In the construction sector, employers avoid the burden of payrolltaxes by hiring labor through labor contractors. Enforcement of payroll levieson contractors is difficult for these contractors: there is often no formalestablishment address, and there is some confusion on the interpretation of thelaw between what constitutes a "contract for service" -- which makes thecontractor liable for employer shares of payroll taxes and a "contract ofservice" which leaves the burden of taxes on the principal employer.Construction labor is overwhelmingly foreign (estimated to be about 75 percentof construction employment), and any scheme advocating the extension of payrolltaxes to foreign workers must be accompanied by steps to facilitate enforcementof payroll taxes on contractors.

2.16 In general though, it appears that while administrative policies havein the past restricted imports of semi-skilled foreign labor, economic incentivescreated by employment-related taxes inadvertently encourage it.

- 39 -

Table 2.3: Sectoral Differences In EPF Coverage

Sector Active Members Total Employment Percent Covered

Agriculture, Forestry & Fishing 455.2 1837.6 24.8

Mining & Quarrying 25.2 39.1 64.4

Manufacturing 613.3 1290.2 47.5

Construction 89.3 426.9 20.9

Public Utilities 33.1 45.9 72.1

Transportation & 70.9 285.4 24.8Communication

Services 1430.6 1845.7 77.5

Government Services 574.3 850.2 67.6

Total 3436.9 6612.0 52.0

Sources: Statistical Bulletin, 1992, Employees Provident Fund.Labor Indicators, 1991, Ministry of Human Resources.

Notes: Agriculture etc. includes agricultural products requiring processing; Services includes commerce and services.

Recommendations

2.17 The first recommendation is that the definition of the tax base(payroll) be made uniform for the EPF, SOCSO, and HRD levies, so that it isadministratively easier to calculate the dues. Relatedly, the rebate fortraining costs should be made less distortionary by making it uniform for alltypes of training. Variable rates presume that the HRDC knows better thanindividual employers what is beneficial for them, unlikely in a sophisticated anddynamic economy such as Malaysia.

2.18 The second recommendation is that the EPF redouble efforts to reduceevasion of contributions by employers. In particular, the incentive tosubcontract workers should be eliminated by expanding the enforcement machinery,especially for contractors and employment agencies, and removing the distinctionbetween contract-of-service and contract-for-service. Since this is a difficulttask, it may be necessary to restructure the EPF, possibly by spinning off theinvestment functions to the private sector. A recently completed World Bank studyon Social Security provides some lessons for the management of contributoryschemes. (See Box 2.1 for the experience of Chile with private management ofprovident fund contributions).

2.19 The third recommendation is that the employer contribution rates notbe raised in the near future, since this will increase the incentives to evadethe levy altogether. Analysis of EPF data between 1961 and 1993 (reported inannex Table 2A.1) indicates that increases in employer contribution rates arenegatively related to total EPF contributions, when other influences such asemployees, contribution rates, the real rate of return to EPF deposits, and the

- 40 -

number of contributors are controlled for. In stark contrast, expanding coverageof employers (and employees) is associated with significant gains in totalcontributions.y For both budgetary and efficiency reasons, therefore, thisreport advocates expanding coverage of payroll levies, especially targeting themanufacturing and transport and communication sectors.

Box 2.1

CHLE'S PROVIDENT FUND: THE SUPERIORITY OF PRIVATE MANAGEMENT?

A recent survey of social secunty systems around the world documents that amongpublicly managed mandatory savings schemes in the 1980s, the average anmial real investmentreturns were 5.0 percent for Malaysia (1984-88), 3.2 for Singapore (1980-89), and 0.3 percentfor India (1980-1990). It seems that the EPF has done well relative to other countries withsimilar systems. In sharp contrast, however, the average return for Chile's funds (AFPs), whichallow workers to pick the management company for their own funds, was 12.6 percent (1981-90).While there are considerable year-to-year fluctuations, and the net retums may be lower becauseof fees and commissions, giving workers this choice also facilitates administrative simplicity:unlike Singapore and Malaysia, Chile does not allow withdrawals for housing, education andother personal purposes.

From all accounts, workers are quite satisfied with the publicly administered-privately managed system. The scheme also has positive allocative efficiency effects since thegovernment must compete for funds, rather than being assured of cheap funds from a forcedsavings pool. As in 1991, 40 percent of AFP funds were in state securities, 32 percent incorporate securities and bonds, and 14 percent each in mortgage bonds and bank deposits. AFPshave also invested heavily in the privatization of public utilities in the mid-1980s, accounting for10 to 35 percent of the equity capital of privatized utilities.

Source: Income Security for Old Age, World Bank (1994).

' The analysis also shows that the real rate of return is not significant indetermining total contributions, indicating the forced or inframarginal natureof savings generated by the scheme.

- 41 -

2.20 The fourth recommendation is that the HRDF levy should be extended tosectors other than manufacturing, which will reduce the intersectoral differencesin payroll levies. This could be accompanied by a simplification of the rulesregarding recovery of training costs for contributors to the HRDF. Inparticular, recovery should be uniform for all types of training.

2.21 The fifth recommendation regarding payroll levies arises from thefinding that sectoral EPF coverage is negatively correlated with the relativeimportance of foreign workers in the sector. Since this creates a perverseincentive to hire foreign labor, especially for highly paid jobs, we recommendthat payroll levies be extended to include foreign workers. Employeecontributions can be individualized, and returned as a lump-sum payment when theforeign worker is repatriated. Employer contribution rates can be used tostrengthen the administrative capacity of the immigration department, so thatapplications to bring in foreign workers can be processed quickly, as canapplications to renew licenses to employ foreign workers. The underlyingprinciple for levying the same overall EPF levy (22 percent) for foreigners asfor domestic workers is to remove any artificial incentive to hire foreignersrather than Malaysian workers. The rationale for foreign workers' access totheir individual contributions -- payable upon their final departure fromMalaysia -- is to create an incentive for foreigners to leave the country whentheir wages fall. The rationale for using employer contributionB forinstitutional strengthening is to reduce the incentive to hire foreign workersillegally; employers claim that if the time for processing their applications tohire foreigners is reasonable, they would not hire illegal immigrants.

B. Fringe Benefits

2.22 Malaysian employers are both required by law and otherwise provideconsiderable fringe benefits to their employers. In analyzing fringe benefits,a simple rule is that while fringe benefits paid to non-executive employees aremandated by law (largely through the Employment Act, 1955, which applies to onlyproduction workers and nonproduction workers who earn less than executive-levelsalaries) or negotiated in collective agreements, fringe benefits received byexecutives are generally negotiated individually. Table 2.4 below summarizes themandated benefits under the Employment Act.

2.23 Figure 2.2 below shows the compliance to the Employment Act by 900manufacturing and non-manufacturing firms studied by the Malaysian EmployersFederation in 1993, and non-mandatory benefits offered by firms to both non-executive and executive employees. All firms offer paid annual and sick leave,and almost all allow extended hospitalization leave. All firms offer paidmaternity leave for women, while about 2/3rds of all firms offer paternity leave.Allowances offered include those for medical consultations and hospitalization(almost 100 percent of firms), overtime allowance (mandated for non-executiveworkers, with 20 percent of firms offering it for executives),

Sectoral Differences in Mandated FrinQe Benefits

2.24 Nonwage costs are about 20 percent of wages in manufacturing, but morethan 40 percent in the plantation sector. The difference is largely attributableto mandated housing and medical benefits. These mandates were in response to

- 42 -

poor health and living conditions in the plantations, and were perceived to benecessary for political and social stability during the 1960s and 1970s. Morerecently, though, the plantation sector has moved from reliance on family laborto single -- often foreign -- workers." As the labor force in the plantationsector undergoes a demographic transition -- from domestic family labor toforeign and single workers, these benefits compensate less and less for therelatively low wages that necessarily accompany relatively high nonwage costs.This in turn implies that the ability of the plantation sector to retain orattract workers becomes weak relative to sectors where these benefits are notmandated, say services or construction. Mandated fringe benefits imply that theplantation sector cannot pay high wages, and hence be disadvantaged relative toother sectors. This reasoning is consistent with the "revolving door" nature ofthe sector for foreign workers who use the sector as an entry-point to employmentin services, manufacturing and construction, since these relatively unregulatedsectors can afford to pay higher money wages.

;' It is estimated that at least 30 percent of workers in plantations areforeigners. There also is anecdotal evidence that the mean age of plantationworkers has fallen, and so has the percentage of plantation workers who aremarried.

- 43 -

Table 2.4: Nonproportional Nonwage Benefits Under Employment Act, 1955(Incorporating Amendments In 1989, as in 1992)

Benefits Tenure of Employee Coverage

<I Year Ito2 2to5 > 5Years Years Years

1. Paid Leave (days/year) All production workers earningless than RM 1250 per month

Annual 8 *T 8 12 16

Sick For non-work-related episodes.Work-related infrmities covered

- Not Hospitalized 14 14 18 22 under Workmen's CompensationAct, 1952.

- Hospitalized 60 days regardless of tenure Total paid leave for sickness andhospitalization not to exceed 60days annually.

11. Maternity (days/birth) 60 days regardless of tenure All female production employeesor those earning less than Rm1250/month, who have fewer than6 surviving children.

111. Severance (days) 0 10*T 15T 20*T No benefits for resignations

IV. Spec,,al Benefits Only for Plantation Sector

- Marndated Housing enterprses with more thanemployees

- Heatth Facilities

Source: Employment Act 1955 and Regulations Made Thereunder, Malaysian Employers Federation, 1993.Notes: T is tenure in years. The rate of pay is generally the ordinary wage rate, or a stipulated minimrum wage if the ordinary

rate of pay is below this.

2.25 Just as unionization is known to have a wage effect, it may alsoaffect nonwage compensation such as fringe benefits. Both plantation andmanufacturing sector workers are relatively unionized, and collectively bargainedfor norwage benefits are relatively high in this sector. However, legallystipulated fringe benefits in the plantation sector result in a higher nonwageto wage ratio than in manufacturing.

The Additional Costs of EmDlovina Women

2.26 The main issues of policy interest relating to the employment of womenare the gender differences in mandated fringe benefits of Malaysian workers, andwhether labor laws affect the employment of women due to nonwage costdifferentials. The main components of compensation that drive a wedge between thecosts cf employing men and women are entitled maternity leave and allowances.Under the Employment Act, a female employee is entitled 60 consecutive days ofpaid maternity leave for each pregnancy, as long as she has fewer than 6surviving children. The allowance must be the higher of the ordinary rate of pay

- 44 -

or RM 6 per day (in 1990).5' Women with 6 or more surviving children areentitled to 60 days maternity leave without allowance.

2.27 The employment of women is also restricted by the following additionalrules: First, women cannot be employed for underground work. Second, womencannot be required to work, without special exemption, in industrial oragricultural work, between 10 p.m. and 5 a.m. Third, women cannot be dismissedfrom work four months before confinement due to pregnancy, and for absence fromwork for upto three months after expiration of maternity leave. Finally, womencannot be required to commence work for the day without having had 11 consecutivehours free from such work. The first three laws can be justified on grounds ofspecial circumstances of women relative to men, and occupational and relatedsafety. However, the law stipulating that women cannot be required to workwithin an interval of 11 hours of stopping work for the day may be needlesslyrestrictive for both workers and employers.

2.28 It is quite likely that the gender wage differentials (reported inChapter 1) reflect these differences in nonwage benefits. Given the relativelyliberal mandated maternity benefits and restrictive employment laws for women inMalaysia, it is probably not coincidental that the male-female wage differencesare large compared to most other East Asian countries. While investments ineducation and diminished fertility have led to increases in wages for women, theaggregate gender wage gap in Malaysia remains the highest in the region. Z'There is also evidence that employers have hired fewer women in Malaysia relativeto other East Asian countries between the period 1975 and 1987 (Figure 2.3below). In addition, Figure 2.4 below shows that the share of women inincremental employment between 1975-1987 is lower in Malaysia relative toSingapore, the Philippines, and Thailand for all occupations, and even to Korea(well-known for a very unfavorable labor market for women) for occupations otherthan managerial and professional. The reluctance of employers to hire women isin turn likely to diminish the incentives for women to seek market work in thefirst place. It may not be coincidental that female labor force participationrates in Malaysia have stagnated at less than 50 percent (for all three ethnicgroups, weakening cultural explanations) while those of other East Asiancountries -- with the exception of Japan -- have increased significantly.

2.29 In fact, there is some evidence that mandated maternity benefits (paidleave) are considerably less generous in the Philippines (45 days), Thailand (60days, but only for firms with more than 20 employees), and Korea (wherematernity-related laws are not enforced). Besides, tenure requirements foreligibility for maternity benefits are also considerably lower in Malaysiarelative to most other East Asian countries. Malaysia's newest competitor,

f The conditions for qualification are that the woman must be in employment forat least one day in the four months preceding confinement, and at least 90 daysduring the nine months preceding confinement.

2' The aggregate female-male wage ratio in Malaysia was estimated to be about 50percent in 1990. The respective female-male wage ratios in other East Asiancountries between 1988-1990 were Thailand (90 percent), Philippines (74 percent),Japan (59 percent), Korea (51 percent), and Indonesia (49 percent).

- 45 -

China, has both higher female participation and -- given China's significantlylower fertility rates -- much lower maternity-related costs of employment.

Recommendations

2.30 The first recommendation is that mandated housing!' and medicalbenefits for the plantation sector be reduced or eliminated, so thatintersectoral variations in fringe benefits reflect economic rather thanlegislated differences. Fringe benefits can vary across sectors for reasons suchas the size distribution of firms and the nature of work, which result insectoral differences in the wage-nonwage composition of remuneration for work.While these differences reflect adjustment to differences in industrialstructure, making fringe benefits mandatory may rob the system of flexibility andhence efficiency. Nowhere is this more evident than the Malaysian plantationsector. These changes warrant the repeal of laws mandating housing and otherfringe benefits for the plantation sector.

2.31 The second recommendation is that mandatory maternity allowances bere-examined, while leaving intact legislation that protects women from beingdismissed or laid off due to reasons related to childbearing. Maternity benefitsrequired by law are quite generous. While the desirability of these benefitscannot be determined by economic considerations alone, their existence make itdifficult to determine whether higher labor force participation by women isconstrained by the higher costs of employing women relative to men, or whetherthe constraints lie elsewhere. Rapid decreases in fertility rates during thelast decade may have diminished the desirability of generous mandated maternityleave and benefits, while employers may continue to view women as relativelymore costly to employ, leading to a downward "adjustment" in the wage componentof compensation. Labor force participation rates of women -- after registeringmoderate increases -- have stagnated at levels significantly below those of othercountries in the region. If the wage-effect on female labor force participationis greater than the effect of nonwage compensation on the decision to participatein market work, then these mandated nonwage benefits may be inhibiting fullerutilization of an increasingly scarce resource in Malaysia -- skilled domesticlabor. The option of providing creches located conveniently to the place of workalso needs to be examined. International experience suggests that sucharrangements reduce the time women take off for childbearing and can be quitecost-effective.

2.32 The third recommendation is that the stipulation in section 34 of theEmployment Act of 1955 -- that women cannot be required by employers to "commencework for the day without having had a period of eleven consecutive hours freefrom such work" -- should be deleted, since it is unlikely to benefit eitherworkers or employers. Such restrictions may be a barrier to employment of womenin dynamic sectors which need to respond swiftly in an increasingly competitiveglobal environment. While special laws are needed to ensure a safe workenvironment for women, some changes in the Employment Act are periodicallyrequired to respond to changing expectations of women and men in household work.

!'Housing is mandatory in the sense that refurbishing of houses is required bylaw.

- 46 -

FIRMS OFFERING FRINGE BENEFITS, 1993Manufacturlng & Nonrmnutacti-ring Flrmr

110

100-

90-

?0-

50

40

30

20

10

0

SICIK MatQrnrty8QnQ!C0nsult. Ovrrtltro rnift AI l

Tyvg of 2QnQf ItENon-Execut lve

rExecutlvQ

Figure 2.2

SHARE OF WOMEN IN INCREMENTAL EMPLOYMENTAll Occupations, 1975-1987

so

50

40

wo 30Er

20

Maleygla Honrgong rorfa Thalland PhiMlpolnoo Singapore

COUNTRY

Figure 2.3

- 47 -

SHARE OF WOMEN IN INCREMENTAL EMPLOYMENTVarious Countries, 1975-1927

1so

zwuJ

0 tA ^A bPoresional Clerical Servico

Me.agerll ahles OthWr

OCCUPATION

MIhlysla I Ph I IIppInes S1ngapore

F Thalland I Korea

Figure 2.4

C. Work Incentiveg. unions and Employment Flexibility

2.33 Malaysian employers use bonuses, overtime, and other nonwageincentives to retain flexibility in wages and employment, and to lower turnover.While bonuses have a component that is collectively bargained, more than half ofbonuses paid in manufacturing in 1992 were incentive-based;; in services thisfraction is higher. Similarly, employers have incentive-, and tax-, andflexibility-related reasons to pay workers overtime premia rather than higherbase wages. Employers argue that this allows them to keep on workers duringtimes of adjustment. Figure 5, based on a 1993 survey of more than 900manufacturing and nonmanufacturing enterprises (MEF, 1994), below documents thatabout 50 percent of firms paid contractual bonuses and about 60 percent paidincentive-based bonuses. Few firms engage in profit-sharing either directly orindirectly (e.g., through share option contracts). "Merit increments," asomewhat misleading term for cost-of-living adjustments, are provided bypractically all firms to non-executive workers. These incentive programs areexamined in greater depth below.

(a) Labor Unions and Bonus Payments

2.34 Bonuses, paid at the end of the year, are an important vehicle forprofit-sharing by firms in Malaysia. Table 2.6 below shows that in 1992, bonusesin the manufacturing sector -- the most dynamic of all sectors during the lastfive years -- were almost RM 6000 for managerial workers, more than RM 2000 for

- 48 -

technical and supervisory workers, about RM 1000 for clerical and semi-skilledworkers and more than RM 600 for unskilled workers. These magnitudes reflectbetween 1.5 and 2 months of the respective wages. Figure 2.5 below also showsthat contractual bonuses were more important for non-executive workers (56percent of firms offer contractual bonuses to nonexecutives, as compared with 40percent of firms for executives), and incentive-based bonuses for executiveworkers (56 and 72 percent of firms respectively).9'

2.35 These numbers help to highlight the important three-way interactionbetween bonuses, unions, and work incentives that tie earnings to productivity.Since collective agreements generally do not apply to executives(managerial/professional and most technical workers), however, all bonuses paidto this class of workers are likely to be incentive-based. Contractual bonuses,determined by collective agreements between unions representing non-executiveworkers and management, averaged about 0.85 months. Hence incentive-basedbonuses were about 50 percent of total bonuses for supervisory, clerical andother workers in these 86 manufacturing firms. The effects of this onproductivity are difficult to measure; but its effects on turnover are relativelytransparent. Figure 2A.2 in the annex shows that executive turnover drops withinabout 4 months of tenure to 0, while that for non-executive workers remainshigher than 10 percent (of workforce) for workers with tenure upto 8 months.In an atmosphere of job-hopping and consequent decreases in firm-sponsoredtraining and skill accumulation, incentive-based bonuses are likely to be animportant instrument of retention of workers. Nonwage incentives appear to berelatively higher for nonproduction workers, and may be linked to lower employeeturnover for nonproduction than for production workers. Any tendency to makeincentive-based bonuses a part of collective agreements will likely increaseturnover.

2.36 What are the determinants of incentive-based bonuses and contractualbonuses? To answer this question, an analysis was conducted of the responses toa questionnaire circulated to these 86 firms by the Ministry of Human Resources.Table 2A.2 lists results of these estimations. The analysis revealed that fornon-executive occupations, the presence of a union generally resulted in asmaller incentive-based bonus, and a greater contractual bonus. Thequestionnaire design made it difficult for us to distinguish the presence of in-house from industry-wide unions, and makes it difficult to validate or invalidatethe claim that in-house worker unions make incentive-based schemes relativelyeasier to implement.2' The results are, however, consistent with the view thatunions can effectively prevent the tying of rewards to performance.

2' The position of industrial courts is that if the bonuses are contractual, thecourts will not pressure unions to make them noncontractual, and similarly doesnot pressure employers to make noncontractual bonus payments parts of collectiveagreements. This treatment seems correct, and is reflected in good labor-management relations.

Lo' Firm size and national origin did not matter.

- 49 -

(b) The Potential for Introducing Flexi-Wace Systems

2.37 Firms in the manufacturing sector, when asked whether they wouldconsider the introduction of flexi-wage systems, generally responded that theywould not. The presence of a worker union and firm size were the main correlatesof a negative response. The analysis of survey data reveals that firms arereluctant to introduce flexi-wage systems, for two reasons: First, firms thatare not unionized or those that have in-house unions seem to be using bonuses,commissions, piece-rate payments and overtime wages to tie wages to productivity,and to keep wages flexible over the long term. These firms seem to believe thebenefits of flexi-wage systems are already captured by their current wagepackets. Second, firms that have industry-wide unions are reluctant to introducethese systems because they fear the unions will abort the schemes.

2.38 While it would be unwise to give up efforts to introduce flexi-wageregimes in Malaysian manufacturing, the short-term potential appears to belimited. Firms seem satisfied with wage-setting mechanisms as they have evolvedunder the current laws. As firms grow larger, tfhe potential diminishes further(since flexi-wage systems often require sharing important information withworkers, and this is harder to do with a larger workforce) . The decline ofindustry-wide worker unions may diminish the reluctance of firms to introduceflexi-wage, but it appears unnecessary. Labor regulations allow a satisfactorydegree of wage flexibility through the use of incentive-based and collectivelybargained bonuses, overtime wages, and miscellaneous discretionary allowances.

2.39 In the short term, therefore, the way to encourage wage flexibilityis to leave unchanged the government's policies towards unions, bonuses, andovertime wages. In the medium, to long term, however, flexibility of wages willneed to be encouraged if Malaysia is to achieve the objectives of maintaining acompetitive edge in unit labor costs and for employment stability. Butsuccessful implementation requires sound industrial relations and a broadconsensus on how productivity gains are shared. Institutions that help tosynchronize macro (unit labor costs) and micro (profit sharing) considerations.The foundations for these institutions must be laid now, when both wages andprofits are rising, and issues of relative shares are of secondary concern.

2.40 Nabi (1991) analyzes the experiences of Japan, South Korea, andSingapore with flexible wage systems. Table 2.7 below highlights the mainfeatures of the treatment of bonuses and the state of labor-management relationsin these countries. The study cites evidence that bonuses in Japan and Koreafluctuate more with the firm's financial performance than with wages. In ourterminology, this indicates that noncontractual bonuses are relatively moreimportant. In Korea, there is some evidence that overtime payments make wagesresponsive to business cycles, but poor labor-management relations preclude usingbonuses as a device for directly tying compensation to performance. Singapore'sexperience suggests that it is difficult to set and implement national guidelineson wage-setting mechanisms that are responsive to a rapidly changing

- 50 -

environment.L' Given the similarities in the perceived role of the government,and the state of labor-management relations, Japan's experience may be the mostreadily adapted to Malaysian circumstances over the long-term.

(c) Labor Unions. Collective Bargaining and Legislated "Merit Increments"

2.41 In Figure 2.5, the component that appears most disconcerting is the"merit increment" in wages, payable only to non-executive workers. Thisincrement is in fact based on increases in the cost of living during the previousthree years. Production workers are "entitled" to receive wage increasesequivalent to two-thirds of the rise in the cost of living. Arbitration courtsmore or less automatically support claims by unions for these increments, sinceit is argued that firms have to be coerced into sharing their large profits withworkers. Arbitration courts have often awarded 100 percent or more of theincrease if it is believed that the firm is "doing well". This may have theeffect of ratcheting up wage costs, squeezing out true merit-based incentives,and slowing down productivity growth.

2.42 These increments have the effect of building in wage increases intothe basic wage. Singapore experienced this problem in the late 1970s and early1980s, in response to which the National Wages Council (NWC) set up theSubcommittee on Wage Reform. The subcommittee identified the followingrigidities: First, high annual increments which were predetermined in collectiveagreements for 2-3 years, insufficient incorporation of firm and workerperformance in implementing NWC guidelines on profit sharing; annual and meritincrements becoming permanently built into the salary structure and could not bedownwards adjusted when company performance deteriorated, and the annual wagesupplement, which was originally a year-end bonus become frozen by law. The NWCaltered its guidelines to remedy these shortcomings.

2.43 While Malaysia's labor policies are far less centralized than thoseof Singapore, the pattern seems to be similar, and a similar re-evaluation oflegislated merit and annual increments is recommended. Legislated cost-sharingbetween the firm and workers is difficult to effectively implement, and may infact result in downward rigidity of wages. To be effectively legislated, "meritincrements" must be based on the current and prospective profitability of thefirm, and the latter is increasingly difficult to determine with any accuracy ina competitive economy open to outside influences. Besides, the argument thatfirms will not voluntarily share the gains during prosperous times seems withoutbasis: Malaysian firms seem to use bonuses to do so, and meet unpredictedincreases in demand by liberally using overtime labor.

W' There is little evidence that wage flexibility attained through bonusesresults in higher employment. Given the difficulties in measuring productivity,there is also no clear evidence that such profit sharing leads to higherproductivity, leading to conjectures that workers may dislike the variability inearnings associated with profit-sharing schemes.

- 51 -

(d) Recommendations

2.44 The first recommendation is that the treatment of bonuses and otherperformance increments in labor law and arbitration courts should be continued,but a parallel in-depth review of the role of collective bargaining in nonwagecomponent increases is needed. In particular, this report recommends re-examining the role of unions in negotiating bonuses and "merit increments" inwages, along the lines of Singapore's April 1986 review by the NWC's Subcommitteeon Wage Reform. Bonuses are currently being used as the main instrument of wageflexibility; in 1991, more than half of total bonuses paid were noncontractual,and so were presumably to reward employers for their or the firm's performance.But international experience indicates that there is a tendency for bonuses tobecome contractual where compensation is collectively determined. Japan'sexperience indicates that a truly flexible wage system in the presence ofcollective agreements can be instituted with in-house workers' unions.

2.45 The second recommendation is to design and implement appropriatelegislation and economic incentives to strengthen in-house worker unionsW, 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 othernonwage incentives should be avoided.

Table 2.6: Total Bonuses Paid, By Occupational Categoryan Survey of 86 Manufacturing Firms, 1992)

Occupa*onaI Average Mazhmwa AmounCategory Months/Year Month/Year Ringgit/Year

Managerial 1.77 4.5 5837.5

Technical 1.91 4.5 2072.5

Supervisory 1.75 4.3 2030.0

Clerical 1.68 4.0 1150.5

Skilled 1.56 3.4 1041.0

Unskilled 1.48 3.4 630.5

Note: Tbe average contractual bonus in the sample was 0.85 months per year, ranging from 0 to 2.5 months. Contactulbonuses generally do not apply for executive positions (managerial and technical workers).

22' In-house unions are preferred over trade or industry-wide unions in profitsharing wage-systems, since workers respond to firm specific productivityincentives rather than at the wider trade or sector level. Japan's success within-house unions while implementing wage-flexibility is instructive.

- 52 -

FIRMS USING INCENTIVE SCHEMES, 1993manuafctur Ing No& rnuf KturinoG Piro

on ~ n¢tl qto

7'

so

so

40

20

Thr. f Sm~nal

Tn-t0 ut I t

I a utlv.

Figure 2.5

- 53 -

Table 2.7: Bonuses, Union Membership, and Labor-Management Relaions In ThreeHigh-Performing Asian Economies

Japan Korea Sinppore

Bonuses

Frequency Twice each year Predetermined by Generally AnnualNegotiation

Share of Compensation 20 percent 10-15 percent*

Share of Profits 42-76 percent

Method of Negotiation Separately from Wages Collective agreements; National Wages CouncilRatio of base wages guidelines

Main purpose Wage-flexibility and work "Bribes" to attractincentives workers from other firms

and to prevent dissonance

Union Membership

Enterprise-based 90 percent

Industry-wide 10 percent

Labor-Management Relations Generally good Generally poor Generally good

Notes: * More recently. Korean firms have begun using productivity-based bonuses that range as high as 50-200 percent ofwages.

Sources: Nabi (1991)

- 54 -

ANNEX FIGURES AND TABLES

NONWAGE COSTS AS A FRACTION OF WAGESW 3-Dlgrt UtnutctLrilng, 1U-1I91

3s2 311 3J~1 33115 143 J3 32j

3-dlf t cOMCo 00

+ 1tSt o X Inc-v"

Figur Al

TURNOVER I N F IIRMS, JUNE '92 TO MAY '93

, "-kol I,t .,".*, .

+ sctkw_

Figure A

- 55 -

Table Al: Determinants of EPF Contrlbutions, 1961.1993(Dependent Variable is Total EPP Contributions in RM Mifliom)

Equation I Euation 2 Equaton 3 Mm

Time 161.73 177.52* -205.90* 1977(4.76) (5.08) (-6.27)

Contribution Rates:1. Employee (percent) 2361.38* 4406.20* 1711.85S 6.78

(4.86) (5.01) (4.35) a

2. Employer (percent) -2877.55* -2979.19* -1219.41* 7.75(-4.44) (-4.67) (4.34) I

Real Rate of Return 55.17 12.05 3.37(1.49) (0.82) 4

Number of Contributors: 1539.40* 3.411. Employees (millions) (4.36) 3

2. Employers (mi1lions) 23372."* 0.09(2.32) s

R-Squared 0.882 .891 0.985

Sample Size 33 33 33

Notes: All regressions include a constant. * denotes significant at 5 percent level or smar.Sources: Al data is from Statistical Bulletin, 1992 (EPF).

- 56 -

Table A2: Determinants of Bonuses(Dependent Variable is Occupation's Noncontractual Bonus in Months)

Union Foreign Firm Size Consr. Obs.Present Firm (J Employees)

Managerial -0.445 -0.359 0.000 1.099* 79(-1.50) (-1.28) (0.36) (2.13)

Technical -0.164 0.958 -0.000 0.108 80(-0.29) (1.83) (-0.42) (0.91)

Supervisory -0.727* -0.238 0.000 1.279* 81(-2.77) (-0.99) (0.39) (2.89)

Clerical -0.573* -0.139 0.000 1.66* 86(-2.78) (-0.71) (0.06) (3.23)

Skilled -0.713* -0.159 0.000 1.000* 78(-3.36) (-0.85) (0.14) (2.86)

Unskilled -0.722* -0.069 -0.000 0.771* 85(-3.89) (-0.39) (-0. 50) (2.38)

Dependent Variable is Contractual Bonus in Months

All Occupations 0.927* 0.023 -0.000 0.760* 86(5.45) (0.15) (-0.90) (2.55)

Note: All regression include industry dummies. * indicates significant at I percent level. Sample consists of 86 manufacturingfirms; survey conducted in 1991.

- 57 -

Tabl A3: Propensty to Adopt Flei-Wage Sysem(Resuls of Probit Estimats)

Dependent Variable is Answer (Yes- 1, No -0) to Qution:Will You Adopt a Plexi-Wage System?

Variabe Equdon 1 Equwon 2 Jqotion 3

Union -0.779* -0.783* -0.587(-2.12) (-2,12) (-1.50)

Finn Size -0.001* -0.001' 0.001'(-2.59) (-2.56) (-3.14)

Foreign Firm -0.040 -0.066(-0.12) (-0-15)

Unskilled Workers/ -3.338 -3.337 -3.610Total Employment (-1.68) (-1.68) (-1.70)

Skdlled Workersl -2.974 -2.981 -3.121Total Employment (-1.51) (-1.51) (-1.44)

Clerical Workers/ -8.758* -8.779* -10.5S7Toul Employment (-2.22) (-2.22) (-2.50)

Supervisory Workezs/ 6.450 6.393 8.751Totl Employment (1.59) (1.S6) (1.95)

Constant 3.881* 3.908* 3.903(2.05) (2.05) (1.86)

ndustry Dummies Not Included Not Included IwAcded

Chi-Squared 18.61 18.63 25.24

Observations 81 81 81

ANote: * indicales sipificant at S percent level or lower.

- 58 -

III. AUGMNNTING THF LABOR FORCS: THE ROLZ OF INNIGRATION

Introduction

3.1 Between 1987-93, Malaysia created 14 million jobs at the rate of 3.9percent compared to domestic labor force growth rate of 3.1 percent. The gap hasbeen filled by immigrant workers. It is now estimated that almost 1 in 6 workersemployed in Malaysia is an immigrant, and immigrant workers generate about 1/8thof Malaysia's GDP. The Mid-Term Review of the Sixth Malaysian Plan issued inDecember 1993 states that *the use of foreign labor should not be regarded as apermanent solution to overcome the tight labor market situation.' (EconomicPlanning Unit. 1993, 52). The report described the share of foreign workers inthe Malaysian labor force as 'already high,' and noted that the Malaysiangovernment will encourage labor-saving production processes, promote labormobility, and encourage women to join the workforce to avoid dependence onforeign workers.

3.2 The central issues examined in this chapter are:

how to assure local and foreign investors that a workforce with thenecessary skills will be available to fill the jobs created by their investments

* how to manage migration in a manner that avoids being too strict, riskinga wage spiral and reduced investment in Malaysia, and too open, risking thedependence of some sectors on continued reliance on immigrant workers.

3.3 Malaysia can benefit in dealing with these questions from theexperiences of the traditional immigration counties, such as the United States,Canada, and Australia, from the experiences of reluctant lands of immigration inWestern Europe, and from the experience of rotating guestworkers in Singapore.

A. Immiaration: Stocks and Flows

3.4 The most widely cited estimate of the number of immigrant workers inMalaysia uses Malaysian Trade Union Congress (MTUC) assumptions about the shareof foreign workers employed in four economic sectors. It concluded that therewere 1.2 milliony' immigrant workers in Malaysia in 1991, i.e., immigrants wereon average 17 percent of Malaysian employment in 1991, and 19 percent of thelabor force employed in these 4 sectors (Pillai, 1992, p. 43). Almost half ofthese immigrant workers were believed to be in agriculture and forestry, followedby construction and services.

V' Using the same data that appears in Pillai (1992), 43) there were in fact 1.1million foreign workers in 1991.

- 59 -

3.5 Most of the public and private sector people interviewed in March 1994had neither an estimate of immigrant stocks and flows nor a proposed methodologyto obtain such data. For this reason, it seemed most appropriate as a first stepto apply 1991 immigrant shares to 1993 employment data. This procedure indicatesthat there were 1.2 million immigrant workers in the non-public sector in thecountry in 1993, suggesting that the number of foreign workers has beenincreasing by 17,000 per year.

Table 3.1: Estimated Immigrant Workers in Malaysia by Sector In 1991 (non-publlc employment)

Employment Immigrant Share Estimated Immigrant Distribution1991 (000) Percent Workers (000)

Agriculture and Forestry* 1,835 30 550.5 48%

Construction 456 70 319.2 289%

Manufacturing 1,374 3 41.2 4%

Non-government Services 2,290 10 229.0 20%

Total Employment 6,849 17 L,140 100%

Source: Adapted from Pillai, 1992, 43.

* There is general agreement that 30 percent of the plantation estate workers are immigranLt, but the share of immigrants iatotal Malaysian agriculture and forestry employment is less clear. Navamukundan (n.d., 24, 32-3) asserts that one-third of250,000 plantation workers are immigrants, suggesting 82,500 foreign workers. There are additional immigrant workers insmallholder agriculture, such as Thais who work seasonally in northern Malaysian rice farms, and in forestry, but there appearto be no data to suggest that they number 550,000 - 82,000 - 468,000. This means that the number of foreign workers inagriculture obtained by assuming that 30 percent of al those employed in agriculture and forestry may be an overestimate.

3.'6 This procedure makes non-public employment growth the sole determinantof the estimated number of foreign workers. For example, the projected decreaseof 76,000 immigrant workers in agriculture between 1991 and 1993 reflectsdecreased employment there, and the 66,000 increase in immigrant constructionworkers reflects increased employment there. Foreign workers share analysissuggests that foreign workers will be a declining share of Malaysia's workforce,since employment growth is projected to be fastest in manufacturing and services,sectors with relatively few immigrant workers.

3.7 Since there was considerable uncertainty about immigrant shares ofemployment by sector, it seemed appropriate to generate high and low scenariosby halving and doubling them. If the immigrant share of the labor force in these4 sectors was only half of the 1991 estimates, then the number of immigrantworkers in 1993 would have been 587,000. Alternatively, if the immigrant sharewere 50 percent larger (100 percent of those employed in construction), thenumber of immigrant workers would have been 1.7 million.

3.8 Share analysis suggests that immigrants might be 8 to 23 percent ofMalaysia's non-public employment. The medium scenario indicates that immigrantswere 16 percent of the 7.4 million employed workers in Malaysia in 1993, and thatimmigrant worker employment increased at a slower rate (3 percent) than did totalemployment (18 percent) between 1991 and 1993.

- 60 -

Table 3.2: Estimated Immigrant Workers In Malaysia by Sector In 1993

Employment Immiugrant Share Estimated mmigran Numerical Change Percentage Change1993 (000) Percent Workers (000) 1993-1991 1991-1993

Medlum ScenadoSector

Agriculture and Forestry 1,580 30 474.0 -76.5 -14%Construction 550 70 385.0 65.8 21%Manufacturing 1,766 3 53.0 11.8 29%Non-goverrnentServices 2,617 10 261.7 32.7 14%

Total Employment 7,411 16 1,174 33.8 3%Low ScepnaroSector

Agriculture and Forestry 1580 15 237.0 -313.5 -57%Construction 550 35 192.5 -126.7 -40%Manufacturing 1760 1.5 26.5 -14.7 -36%Non-government Services 2617 5 130.9 -98.2 -43%

Total Employment 7,411 8 587 -553.1 -49%

HikUMMcepScctor

Agriculture and Forestry 1580 45 711.0 160.5 29%Construction 550 100 550.0 230.8 72%Manufacturing 1766 4.5 79.5 38.3 93%Non-governmentServices 2617 15 392.6 163.6 71%

Total Employment 7,411 23 1,733 593.1 52%

Source: Immigrant shares are from Pillai, 1992, 43; Employment data re from EPU Mid-Term Review, 1993, 38

Medium scenario assumes that the percentage of immigrant workers by sector in 1993 is the same as estimated for 1991.Low (high) scenario assumes that the percentage of immigrant workers by sector in 1993 is half (1.5 times) the percentage estimatedfor 1991.

3.9 There are several ways to consider the relationship between foreignworker employment growth and the increase in total employment. According to themedium immigrant share scenario, foreign worker employment increased 3 percentbetween 1991 and 1993, while total employment rose 8 percent. Alternatively, 6percent of the 562,000 net new jobs in Malaysia between 1991 and 1993 were filledby foreign workers.

3.10 The demand for foreign workers seems to be declining. But immigrantworkers are not of declining importance in the Malaysian economy for threereasons:

* First, manufacturing and service employers are complaining oflabor shortages and requesting permission to employ immigrantworkers. If the manufacturing workforce were to have a 16percent foreign worker share by 1995, there would be anadditional 320,000 immigrant workers in that sector alone.

* Second, the traditional immigrant ports of entry-agriculture andconstruction-are revolving door labor markets, in the sense thatimmigrants enter these sectors from abroad and then move into theinformal economy of street hawking and service jobs. So long asthese sectors remain dependent on immigrant workers, some of whommove into the informal economy, the number of immigrants willgrow faster than foreign worker employment by sector.

- 61 -

* Third, the Malaysian government has announced ambitiousdevelopment projects in Sabah, which is believed to have over 40percent of all Malaysia's foreign workers. Development there maydraw additional immigrant workers to east Malaysia.>

3.11 The number of immigrants in Malaysia may also increase if foreignworkers marry Malaysians or unite their families in the country. In Europe, thenumber of spouses and dependents, plus second and third generation foreignersborn or raised in the country recruiting foreign workers, typically surpassed theforeign workforce with two decades after the entry of the first foreign workers(Martin, 1994).

Other Immiczrant Data

3.12 The Immigration Department has no estimates of the number ordistribution of immigrant workers .3' The Department reported that 447,000illegal aliens 'registered" between November 1, 1991 and June 30, 1992, meaningthat they got temporary passes and, after medical examinations and payment of theforeign worker levy, they were eligible for 2-year work permits. However, only190,000 of them obtained such work permits by December 31, 1993. Between July1992 and December 1993, a total 54,155 aliens were apprehended. About half werereleased after being offered jobs by Malaysian employers, and 4866 illegal alienswere reportedly being held in 8 detention centers in February 1994.

3.13 The only regularly published data on immigrant workers are in theestablishment survey. The survey divides immigrant employees into two groups:workers hired directly by the employer, and workers hired indirectly throughlabor contractors. It is widely conceded that the number of foreign employeesin the establishment survey is underreported, both because employers misclassifydirectly-hired foreigners as Malaysians, and because they understate andmisclassify the foreigners brought to their worksites by labor contractors (LCs).

3.14 There are also non-governmental surveys that obtain data on foreignworkers. Both Azizah and Hugo, for example, report data on surveys of immigrant

' The state governments of Sabah and Sarawak were given control over immigrationin 1963 to prevent peninsular Malaysians from moving there and depriving nativesof economic opportunities. The National Front Coalition which came to power inMarch 1994 has promised to remove controls on travel between peninsular Malaysiaand Sabah.

31 There are a number of press and other speculative estimates. For example, anApril 15, 1994 press account reported that Malaysia "officially" estimates thatit has "nearly half a million" foreign workers, while NGOs "say the real figureis close to 2.5 million." (Interpress Service) . The U.S. Embassy's economicreport on Malaysia in 1994 put the number of foreign workers at 2 million of thecountry's 7 million workforce, and reported that 1 million of the foreigners wereillegal aliens (Reuter Asia-Pacific Business Report, January 22, 1994).

- 62 -

workers in Malaysia, but there have not yet been enough such surveys carried outto determine the generalizability of their findings. Much of the data on migrantcharacteristics seems to be derived from anecdotal press accounts. The followingtable, for example, includes two references to academic-style studies of thedifferences in earnings for foreign workers in their country of origin and inMalaysia, and 8 journalistic accounts. It makes the point that wages in Malaysiaare 3 to 10 times higher than in Indonesia.

Table 3.3: Some Wage Differentials Between Indonesia and Malaysia

Year Source Area Wage in Source Wage in Destination Diference Source1990 Lombok Rp50>-1000 per Rp7-8000 per day (oil 800 percent Vatikiotis, 1990

day p/a/m)1989 Indonesia SS70-100 per SS500-700 per month 500 percent 300 Guinnes, 1990

month (Singapore) S$300 per percentmonth (Malaysian)

1988 Indonesia Rpl50-250,000 per month Kompas, 9 August 19881991 Indonesia M$2.15 per day M$12.50 per day 580 percent Dorall and Paranmasivam,

(Females) 19921992 Indonesia Rp3000,000 per month Jakarta Post, 9 October

(Bruneiminimum wage)1984 East Java Rp3000 per day Rp9000 per day 300 percent Termpo, 7 April 19841982 Tanjung Pinang Rpl500 per day Rp700 per day 467 percent Tempo, 27 February 19821982 Bawean Rp500 per day Rp9000 per day 1800 percent Tempo, 27 February 19821990 Indonesia Rpl ,000 per day RplO,000 per day 1000 percent Straits Times, 7 December

19901991 Semarang Rp25000 per day RplO,800 per day 432 percent Suara Karga, 6 November

(Sarawak) 1991

Source: Hugo, 1993, 26.

3.15 Malaysia needs better data on immigrant stocks and flows. Such datacould be obtained by modifying the establishment surveys currently used to obtaindata on employment and earnings, perhaps by conducting a separate survey ofworkers hired through labor agents or contractors. Useful data could also beobtained by surveying some of the aliens apprehended to determine how theyreached Malaysia, what they earned at home and what they expected to earn inMalaysia, and what kinds of penalties they feared most. Finally, employers whereillegal workers were apprehended and those who employ illegal workers but whoseplaces of employment have not been inspected could be surveyed to determine whyforeign workers were hired.

Future Immigration

3.16 Malaysia is not a declared country of immigration; the government doesnot anticipate an annual influx of immigrants. However, Malaysia does welcomebusiness and tourist visitors, and has programs under which non-immigrants canwork temporarily in the country. It is generally believed that the number ofillegal migrants in the country exceeds the number legally present.

3.17 There need be little concern about the future supply of immigrantswilling to work in Malaysia. Malaysia is akin to a small island in a sea of

- 63 -

potential foreign workers. Indeed, what distinguishes Malaysia from WesternEuropean and North American nations that are grappling with illegal immigrationis the fact that only Malaysia is dwarfed in size by the countries from whichmost foreign workers come. The United States, for example, is almost three timesmore populous than Mexico, France is larger than Algeria and Morocco, and Germanylarger than Turkey and the former Yugoslavia, but Indonesia has almost ten timesmore people than Malaysia, Bangladesh six times, and the Philippines and Thailandthree times.

3.18 Rapid economic growth in Thailand may reduce the availability ofmigrant workers from that country,- but it is unlikely that job growth will befast enough to reduce incentives to migrate from Indonesia, Bangladesh, and thePhilippines for jobs in Malaysia. If even more foreign workers were needed,Vietnam, China, and India and Pakistan could provide enough workers to meet anyconceivable labor shortfalls in Malaysia.

B. Benefits and Costs of Immigrant Workers

3.19 In virtually all countries with foreign workers, employers requestthem, unions oppose the importation of migrant workers, and the government actsas referee. In the US and Western Europe, governments have established programsthat admit foreign workers after employers convince the Labor Department thatthey suffer from labor shortages that are best filled with foreign workers.union opposition is often pro forma, since most foreign workers are imported whenthe economy is booming and unemployment is low, and most foreigners are employedat the bottom of the labor market, where there is rarely competition with unionmembers.

3.20 Managing labor migration has proven to be a difficult challenge forgovernments. In Western Europe, most foreign workers returned to their countriesof citizenship as planned, but enough settled that controlling immigration hasbecome a major socio-political issue from the UK to Italy. In the US, illegalimmigrants accompanied legal guestworkers, and an amnesty for some of them hasincreased the number of immigrants enough that, according to opinion polls, over60 percent of Americans want legal and illegal immigration reduced.

3.21 The short-term effects of foreign workers are generally seen to bepositive, while their longer-term effects are usually perceived to be mixed, apoint made by Kindleberger in 1967: 'the short-run economic benefits ... arepositive, although there are social costs. In the intermediate and long run, theeconomic advantages become less clear... to rely heavily on foreign laborconstitutes a positive risk... 30 percent is too high. 10 perCent seemsacceptable.. .To locate the discontinuities more precisely is probablyimpossible.' (1967, 213).

' Thai workers migrate to northern Malaysia seasonally to work in the rice andsugar harvests. There is apparently little data on this seasonal worker program;Malaysian employers of seasonal workers, however, reportedly do not have to paythe foreign worker levy

- 64 -

3.22 There is relatively little analysis of the effects of foreign workerson the Malaysian economy and society. Instead, there are several assertions madeabout the economic impacts of immigrant workers. Their benefits may include:

* immigrant workers expand Malaysia's GDP and relieve laborshortages

* immigrant workers can serve as counter cyclical economic policyinstruments, imported to prevent wage inflation during boom timesand returned home when unemployment rises

* immigrants can raise productivity by expanding the market in amanner that allows for economies of scale.

The costs associated with immigrant workers may include:

* their availability may depress wages and increase unemployment,especially if employers prefer immigrants because they work "hardand scared"

* the availability of immigrants may slow the development anddiffusion of labor-saving production processes, making Malaysianindustries competitive on the basis of low wages rather than highproductivity

* migrants may be using social services without paying for them.

Inadequate data makes it hard to answer these assertions definitively, but thedata available suggests that there is little evidence of significant costs.

Macro Effects

3.23 If immigrant workers are paid the same wages as Malaysian workers, andif the immigrant workers are as productive as Malaysian workers in the sectorsin which they are employed, then immigrants contributed about 12 percent toMalaysia's M$100 billion GDP in 1993. The immigrant GDP contribution is lowerthan their employment share because immigrants are concentrated in lower-paidsectors.

Table 3.4: Estimated Immigrant Contribution to GDP: 1993

1993 GDP-MS mils 1978 Immigrant Employ Share Immigrant GDP Conmflbutionprices

Agriculture and Forestry 15,985 30 4,796Construction 4,013 70 2,809Manufacturing 30,216 3 906Non-government Services 34,389 10 3,439Total 100,475 11,950

Source: EPU, 1993. 28.

- 65 -

3.24 Furthermore, if the immigrant workers earned an average M$300 monthlyor M$3600 annually, then 1.2 million foreign workers would earn M$4.3 billionannually. Studies of migrant workers suggest that they spend an average 2/3 oftheir earnings in the country in which they are temporarily employed; if true inMalaysia's case, this would suggest that about 3 percent of Malaysia's GDPdepends directly to migrant worker spending, and perhaps as much as 6 to 10percent when the multiplier effects of migrant expenditures in Malaysia areconsidered.

3.25 Migrant workers also remit savings to their countries of origin. Ifthe foreign workers in Malaysia remit 1/3 of their earnings, they would besending about M$1.4 billion out of the country every year, or over MS100 millionmonthly.' Pillai (1992, 18) arrived at a similar estimate of remittances, andhe considered negatively this 'significant capital outflow. However,remittances from migrant workers in Malaysia may also increase trade betweenMalaysia and their countries of origin, as migrants and their families buyMalaysian-made goods with which they became familiar because of employment there.

Sector Effects

3.26 The leading students of Malaysian migration tend to emphasize itscosts rather than its benefits, and they base their arguments on what theyperceive to be the negative effects of migrants on what happened in particularsectors. Mehmet, for example, argued that tolerating an influx of unskilledimmigrants to work on plantations contradicted one of the major goals of the NEP:the elimination of rural poverty. According to Mehmet 'reliance on importedcheap labor_.tends to reproduce poverty, contrary to NEP objectives" (1988, p.26). Pillai seems to agree. He concluded that: (1) immigrants displacedMalaysians and depressed wages in agriculture and construction; (2) relying onmigrants to attract Direct Foreign Investment was a false hope because Malaysiacannot hope to compete with Indonesia, Thailand and the Philippines for DFI thatrequires large numbers of unskilled workers; and (3) 'the availability oflow-cost foreign labor' may impede the restructuring of the Malaysian economy andlabor market (1992, p. 18-19).

3.27 Until December 1991, there were relatively few non-Malaysians employedin manufacturing; of the 21,162 non-Malaysian workers only 2 percent of the wageand salary workers were employed in manufacturing. Over half of thesenon-Malaysian workers were employed in just one of the 12 manufacturing

' According to some estimates, worker remittances to Indonesia alone were M$2billion in 1991, although no basis for this figure was given (Financial Times,July 1, 1992, 6). In December 1992, the then Deputy Prime Minister Ghafar Babastated that foreign workers send M$3 to 4 billion out of the country inremittances annually (Xinhua News Agency, December 24, 1992). A 1992 World BankDiscussion paper reported that remittances from Malaysia in the late 1980a wereless than $200 million annually(Russell and Teitelbaum, 1992, 75 and 79).

- 66 -

subsectors: in wood and cork manufacturing (excluding furniture), almost 12,000of 85,000 employees were non-Malaysians. (Employment of non-Malaysians increasedin 1992-93 but sectoral breakdown is not yet available).

3.28 The presence of immigrant workers in wood and cork manufacturing(where 14 percent of the workforce is non-Malaysian) has had few adverse effectson wages or productivity. Average annual earnings during the 1980s evolved verysimilarly in wood and cork manufacturing and all manufacturing--average annualearnings in wood and cork manufacturing were 2 percent lower than the average forall manufacturing in 1981, and 11 percent lower in 1990, while the share offoreign workers in this industry's workforce almost doubled.

Table 3.5: Malaysian and Non-Malaysian Workers in Manufacturing:1981-1991

Malaysian Citizen Non-Malaysian Citizen Immigrant Percentage1981 486,493 5,664 1%1982 514,536 6,378 1%1983 486,657 6,501 1%1984 491,173 7,779 2%1985 468,606 7,649 2%1986 471,718 7,202 2%1987 509,727 8,038 2%1988 588,327 10,251 2%1989 686,215 11,845 2%1990 828,060 16,669 2%1991 955,775 21,162 2%

Source: DOS Establishment Survey.

- 67 -

Figure 1 Aveage Annml Earninghfr AUMfg and Wood aud CorkWorkers: 191-1990

800070006000

> 50004 3000

X 3000. - -All Mir

2000 -- O--- Vood a CorkI100

o , . , | ~~~~~~~C. .h . 0-O NO Co 00 Lo CO Cl OC

co OD co eo co co co co _a

Figure 2. Unit Labor Costs and Capitol-Labor Ratios for All Manufacturing andWood and Cork, 1981=100

--*--- All Mrg-ULC-0--- All Mfg-KAL

250 . Wood and Cork-ULC

200 - - -- Wood and Cork-Ki

150

100

50

co 00 a coi > f > fi ff

Unit labor costs are wages and saaries divided by the gross value of outpug K/L s the value of fixod assets divided by endof year employmenL

- 68 -

3.29 Unit labor costs and capital-labor ratios also evolved similarlyin the economy; nearly 1 in 7 workers was a non-Malaysian and in all ofmanufacturing, 2 in 100 workers was non-Malaysian. Unit labor costs fellfaster in wood and cork sub-sectors than in all manufacturing. Thecapital-labor ratio rose in wood and cork sub-sectors, but slower than inall manufacturing.

3.30 The picture changes slightly if 1987 is used as the base year.In 1991, the value of fixed assets per manufacturing worker was aboutM$42,000, and about M$20,000 in wood and cork manufacturing. In 1981, theK/L ratio in wood and cork manufacturing was about 3/4 of the level of allmanufacturing, then slipped to less than 40 percent of the all manufacturinglevel in 1987-88, and has climbed to almost 50 percent in 1990.

3.31 Other sectors of the economy (where DOS's establishment surgesallow the breakdown of the total labor force into Malaysian and non-Malaysian workers) are also affected by the presence of immigrant workers.The evidence is that there were 4007 non-Malaysian workers employed inservice industries that ranged from shipping companies to travel agenciesin December 1991, but most were employed by shipping companies(40 percent)or in road haulage(23 percent) . In these industries data are available onlybetween 1987 and 1991, but there are few differences in the evolution ofannual average earnings in sectors more and less dependent on foreignworkers. Sectors more and less dependent on non-Malaysians did not changetheir place in wage ranking.

3.32 Both unit labor costs and capital-labor ratios were remarkablystable in the Malaysian service sector between 1987 and 1991--wages andsalaries were about 15 percent of the gross value of output, and the valueof fixed assets per worker remained steady at about M$57,000. The twosectors that employ almost 2/3 of the non-Malaysian workers in services areat opposite ends of the spectrum of K/L ratios. Shipping--which accountsfor about 45 percent of all the fixed assets in the Malaysian servicesector--has a high K/L ratio that is 7 times the average, and road haulagehas a K/L ratio that is 1/5 the average. However, while shipping unit laborcosts and capital-labor ratios evolved along with the rest of the servicesector, road haulage had slightly faster falling unit labor costs, and asignificant jump in the K/L ratio in 1991.

- 69 -

Figure 3. Unit Labor Costs and Capitol-Labor Ration for All Manufacturing

and Wood and Cork, 1987-100

-1-- All Mfg-ULC

- °--~ AD Mfg- KWood and Cork-ULC

140 T0- Wood ad Cork-KA,

100 = 0.

80

20

o* A0 r f o 8 > 0g 8

Unit labor costs are wages and salaries divided by the gross value of output K/L is the value of fixed assets divided byend of year employmenL

Piue 4. Avrage AnanmIEamxtw inpe3d SvKes 1987-1991

Rosa HAuia-*- Servies

14'000 T . . .12000

10000 -1.

6000P4

2 4000

2000

0- II1987 1988 1989 1990 1991

govrce: Dtpartmeat of Statistics Estalisha.at Ovny

- 70 -

Figure 5. Unit Labor Costs and Capitol-Labor Ratios for Road Haulageand All Services, 1987=100

' ULC-Road*-~<>~~ K/L-Road

ULC-Services2.00 -0-- K/I-Scrvices

1.00t

0.001987 1988 1989 1990 1991

Unit labor cosu are wages and salaries divided by the gross value of output; KJL is the value offixed assets divided by end of yea employmenL

Public Finance Effects

3.33 It is sometimes asserted that migrant workers make use ofMalaysian infrastructure and public services without paying for them. Thecalculation of taxes paid and the costs of providing services to immigrantsis rife with controversy, but three points are often overlooked:

* First, most migrant workers are young men eager to work, whoin all countries make relatively few claims on socialservices. Since these migrant workers received free publiceducation in their home countries, it could be argued thatthe immigration country gets a windfall by their presence.

* Second, migrant workers do pay taxes when they purchasegoods and services and user fees when they use publicservices. Most have relatively low earnings, so that, evenif they were required to participate in the income taxsystem on the same basis as natives, they would payrelatively low taxes. If migrant workers do not paysufficient user fees for the public services they consume,the solution is to raise user fees for all consumers.

* Third, most industrial countries require legal and illegalmigrant workers to pay income, employment, and socialsecurity taxes, even if they are not or will not be eligiblefor benefits under these programs. Malaysia currentlyexempts non-Malaysian workers from most of these programs,and this provides employers with an incentive to employimmigrants workers. An earnings-based levy could removethis incentive to hire immigrants and generate funds to dealwith labor shortage issues.

- 71 -

Suecial Cases: Agriculture and Construction

3.34 Malaysia imported immigrants in the 19th century to develop itsplantation and mining sectors. Since both plantations and mines offeryear-round jobs, permanent immigrants were encouraged to move to Malaysia.Many of the immigrants from South India, South China, and to a lessor extentJava were indentured servants, who promised to work for several years forthe Malaysian employer who paid their transportation.

3.35 Malaysia became independent in 1957, and the 1968 EmploymentRestrictions Act required Malaysian employers to obtain work permits for thenon-citizen workers they employed. This resulted in the removal from thecountry of a 'large number" of Indian and Chinese workers (Nayagam, 1992,478) . Their departure had few labor market impacts because Malaysia at thetime had a fast growing labor force.

3.36 Plantation owners began to complain of labor shortages in the1970s. Rural "labor shortages' were in part a consequence of NEP policiesthat encouraged rural-urban migration to better-paying factory jobs; manyyoung people migrated rather than following their parents into rubber andpalm oil weeding and harvesting.

3.37 Since 1978, the United Planting Association of Malaysia (UPAM) hasconducted periodic labor shortage surveys, and they found that one-third totwo-thirds of the responding plantations reported that they required 5 to10 percent more workers (Pillai, 1992, 42 and Rahman interview, March 24,1994). The Rubber Research Institute of Malaysia (RRIM) conducted similaremployer surveys, and it found that plantations reported vacanciesequivalent to 2 to 8 percent of current employment. Both RRIM and UPAMsurveys indicate that the plantation labor shortage worsened in the 1980s;the RRIM surveys reported that the labor shortage was less during the mid1980s recession; the UPAM survey suggests that high unemployment did notcurb the shortage.

Figwe 6. Empbk -R-ptirtd Pbltatz Labow amtmspMaeh3f: 190-1991

14 12

O~ ~ O UA

4,

1980 1982 1984 1986 1988 1991

Novoce: Hayapa,1993,10. The peteatop iste slottafUof wovkersas a shrer.eo( w teabyueasothe iil 1991, UPAMiV ealoyers epiottel the they ve e shott about 11,600 workers (11.6 pe rea at of 100,0O).

- 72 -

3.38 Plantation employers since the 1970s have maintained that thewages and conditions they offer should be sufficient to attract Malaysianworkers, but plantation jobs remain vacant because they are not desired byyouth in a country that has announced a goal of industrializing, and alsooffers educational opportunities for young people. Furthermore, plantationsshould not be allowed to shrink for lack of labor, they argue, becauseagriculture can earn foreign exchange for Malaysia with only importedlabor.F The National Union of Plantation Workers (NUPW), with 61,000members,7' largely agrees that plantation agriculture's contribution toMalaysia's economy is not fully appreciated.

3.39 The two extreme options to deal with plantation labor shortagesare to deregulate the plantation labor market and open up the sector tolegal foreign workers, versus retain current regulations and upgrade socialservices to make plantation jobs more attractive to Malaysian workers. Itis clear that there are incentives to hire single male foreign workersthrough labor contractors--they do not have to be housed at plantationexpense, and there is no need to make EPF contributions on their behalf,thus saving employers the cost of fringe benefits. According to Nayagam,employers prefer immigrants because they work more hours per month and aremore reliable workers(1992, p. 484);!' these labor savings more than offsetthe M$360 annual levy on each foreign worker imposed in 1992,1' plusadditional processing and medical examination fees of M$150.

3.40 A new system that involves government, employer, and unionrepresentatives should be established to deal with foreign workers in theplantation sector. This system would be financed by a levy based on theearnings of legal foreign workers, and it would allow those closest to thelabor problem to work out a Malaysian solution to the plantation labordilemma.

W Plantation representatives observe that much of Malaysia's manufacturingeconomy has a maquiladora flavor, with little local value-added except for labor.In 1993, electronic goods were 40 percent of Malaysia's total exports.

1/ According to the US Department of Labor's Foreign Labor Trends:Malaysia(93-37, 17), the NUPW is Malaysia's largest union, with 61,423 membersin 1992. This represents a sharp drop from 77,653 in 1991 and from 115,746 in1980.

V According to UPAM, the typical estate must employ 4 to 5 percent too manyworkers so that someone can go to work when Malaysian employees do report forwork. Foreign workers, by contrast, reportedly are eager to work long hours 7days a week.

' The levy on foreign plantation workers was reduced to M$300 in April 1993.

- 73 -

3.41 The system could work as follows. If there are 500,000 foreignworkers employed on Malaysian plantations and in forestry today, and theyearn an average M$3600 annually, a 12 percent levy--equivalent to whatemployers do not pay in EPF contributions--would raise M$216 millionannually. If such a fund were available, it is likely that monies would bespent (1) by the government to process foreign workers and enforce laborlaws, (2) by employers to search for labor-saving innovations and (3) byunions to upgrade the quality of life on plantations.

Construction

3.42 The construction industry appears to have the highest percentageof immigrants in its workforce . Pillai estimated that 70 percent of thecountry's 335,000 construction workers in 1991 were immigrants, while pressaccounts quote the MHR as saying that 45 percent of construction workers areforeigners (Los Angeles Times, December 6, 1993, D3). The establishmentsurvey tells a different story-it reports that only 15 percent of theconstruction industry workforce throughout the 1980s were non-Malaysians.

P1ge 7. PaM Warhers l!mplod In Cmstucdm at the Eind of the Year: 1981-1991

350000 T300000

250000 _--"t-

200000

150000 - Ma]ysiaas

100000 O Noh-?hayi.AWs

50000

- N X r0' r o c O Co Co _ n cr o 0 0W0

3.43 The Malaysian construction industry found it hard to attract localworkers during the building boom of the late 1970s and early 1980s. Toovercome the labor shortage, immigrant workers-who were paid lowerwages-were hired, and a three tiered wage system evolved in which immigrantsearned M$14-16 per day, Malays M$20-25, and Malaysian Chinese M$25-35(Pillai, 1992, p. 10). Immigrant workers were substituted for Malaysiansso fast during the 1980s that, by 1987, some 60 percent of the 300,000 to350,000 construction workers were immigrants.

- 74 -

3.44 After the immigrant network was established in the late 1970s andearly 1980s, it became progressively easier for immigrant workers alreadyemployed on, e.g., estates, to abandon farm jobs for construction jobs, orto enter Malaysia and go directly to a construction job. At the same time,construction booms in Taiwan and Japan attracted some experienced Malaysianconstruction workers to migrate to these countries for higher wages.

3.45 In 1991, the establishment survey reported that there were 363,000construction employees, including 52,000 non-Malaysians. Two-thirds of thenon-Malaysians were hired through labor contractors. A 12 percentearnings-based levy on average annual earnings of M$5000 would raise M$600per foreign worker. If there are 52,000 foreign construction workers, anearnings-based levy would raise M$31 million annually; if there are 385,000foreign construction workers, as employment share analysis suggests, M$231million would be raised. In either case, an earnings-based levy that wasadministered by employer, union, and government representatives would havefunds to improve the administration and enforcement of the foreign workerprogram; levy funds might also be used to re-attract to Malaysia some of themore skilled construction workers who have left for Taiwan, and to establishtechnical schools to teach construction skills.

C. Immigration Policies

3.46 Malaysian immigration policies aim to control the employment offoreign workers by:

* border and interior enforcement to prevent the entry andemployment of illegal aliens

i providing a mechanism whereby Malaysian employers can employforeign workers legally if there are shortages of Malaysianemployees

* :.nfluencing foreign worker employment by deciding whichsectors can employ each type of worker and charging a perworker levy

3.47 Malaysia began to regulate immigration when it achievedindependence in 1957. There was relatively little attention paid toimmigration or emigration until 1968, when the 1968 Employment RestrictionsAct required Malaysia employers to get work permits to lawfully employnon-citizen workers. Sabah and Sarawak retained control over immigrationwhen they joined Malaysia in 1963.

Foreign Worker Proarams

3.48 In 1984, the Malaysian government signed the Medan agreement withIndonesia, and this agreement, under which Malaysian plantations couldrecruit immigrant workers if there were no Malaysian workers available, wassoon extended to the Philippines, Thailand, Bangladesh, India, and Pakistan.Only agricultural employers could legally recruit foreign workers, and then

- 75 -

only after the local employment office agreed that Malaysian workers -

unavailable. The process for legally obtaining foreign workers wasconsidered cumbersome, and there was little enforcement, so that illegalimmigration continued.

3.49 On January 4, 1989, the Malaysian government launched a programto regularize foreign workers employed in agriculture by requiring theIndonesians among them to be taken to the port city of Malacca and thenreturned to Sumatra. There they were issued work permits, and then returnedlegally to Malaysia-this 'drying out the illegals' process took one week andcost $M300 per worker, and was thus avoided where possible by both alienworkers and Malaysian employers, so that fewer than one-third of theestimated 550,000 illegal alien farmworkers were legalized (Azizah, 1991,23).

3.50 Relatively few workers were legalized or brought into Malaysiaunder the 1989 program because the process was too slow and expensive. Asthe following table indicates, there were at least 12 steps involved in the2 to 6 month wait between an employer request and the arrival of foreignworkers.

- 76 -

Table 3.6: The Process for Recruiting Lepl Forelgn Pntation Workers (Pre-1992)

1. An employer approaches a local agent (LA) with a request for foreign workers for the agricultural sector.

2. The LA writes to the Immigration Department (1D), requesting permission to import foreign farm workers.

3. lhe ID writes to the Ministry of Human Resources (MHR), requesting verification that the type of labor required bythe employer is not available in Malaysia.

4. The MHR writes to the ID, verifying the need for such workers in Malaysia.

S. The ID gives permission to the LA to recruit foreign workers.

6. The LA then informs his contacts overseas (CO), who recruit workers.

7. The CO recruits foreign workers, and sends their names to the LA in Malaysia.

B. The LA sends the list of foreign workers to the ID. to provide them to the police for screening.

9. The list of names is then discussed at a meeting of the Jawatankuasa Pengambilan Pekera Asing(JPPA) or Committee for the Recruitment of Foreign Labor under the Ministry of Home Affairs.

10. If the JPPA approves the list, the ID issues work permits to the LA.

11. The LA then aks the CO to get the necessary travel documents for the workers and to send them toMalaysia by air or by boat.

12. When the foreign workers arrive in Malaysia, the LA tansports the workers to the prospective employers.

Note: The time between the initial employer request to the arrival of the foreign workers is usually 2 to 6months.

Source: Adapted from Pillai, 1992, 50.

3.S1 On October 16, 1991, the Malaysian government revised itsimmigration policies. The new policy, to be effective for 5 years, requiredall foreign workers to have a legal status and to receive the same wages andbenefits as Malaysian workers. A three-step procedure for determiningwhether Malaysian employers truly needed foreign workers, and for regulatingtheir entry and employment, was established:

* labor-short employers first contact the Ministry of HumanResources (MHR) to determine if unemployed Malaysian workersare available and, if local workers are not available, theycan have their need for foreign workers certified,

* an employer certified to import foreign workers provides aaregistered agent or broker with the details of theforeign workers needed, and the agent in turn arranges withthe Immigration Department to have a Malaysian consulabroad issue entry and work documents to foreign workers,

* the foreign workers undergo a medical screening and are

- 77 -

brought to the Malaysian worksite on 1 or 2 year temporarywork visas, and they or their employers pay an annual levy(from M$360 to M$2400 per worker per year, but M$420 perworker in most cases).

3.52 The October 1991 policy change also included Malaysia's thirdamnesty or registration program for illegal alien workers since 1984.Unlike amnesties in Europe and the United States, which grant legalimmigrant status and the right to eventual citizenship to illegal aliens whomet certain criteria, the Malaysian registration program initially permittedillegal aliens employed in the plantation and construction sectors toregister with Immigration authorities between November 1 and December 31,1991 and, after a medical exam and the levy was paid, they could obtain2-year legal work permits.'2' Registration was encouraged by the threatof stepped-up enforcement after the end of the registration period.Relatively few illegal aliens registered during the last two months of1991,L' and employers, fearing labor shortages, persuaded the governmentto extend the registration periodLV-and defer stepped-up enforcement-untilJune 30, 1992.

' Permanent immigrants--those with red identity cards--had the restrictions onwhere they could wok lifted in October 1991.

-Wi Employers complained that illegal Indonesian workers who registered had tobe taken to Melacca, undergo medical examinations, be taken the 24 miles acrossthe Strait of Melacca to be issued an Indonesian passport and a Malaysian workpermit, and then, after the levy was paid, the now legal worker was returned tothe plantation or construction site. The costs of this were estimated at M$ 500per worker, plus 2 to 3 weeks of lost employment.

l' Extending the registration period allegedly encouraged additional illegalaliens to enter Malaysia--there were numerous press accounts of aliens who paidsmugglers to get them into the country, leading in some cases to tragedy andabandonment(Pillai, 1992, 31).

- 78 -

3.53 By the time the registration period ended on June 30, 1992 andsome 447,000 illegal aliens-equivalent to 6 percent of Malaysianemployment-had registered.i Indonesians dominated the illegal aliens whocame forward; they accounted for 83 percent of all those who registered, and5 countries accounted for 99 percent.

Figure 8. Illegal Aliens who Registered in Malaysia between December 1, 1991 and June 30, 1992

90%

709'o

60%

50%.

40%..

30%

2D%

109.

0%

Indonesia TliaiJand Bangladesh Burma (Myn mar) India

Countries with 2 percent or morc of 400,552 registrants

3.54 Immigration authorities began a well-publicized operation toarrest the estimated 100,000 remaining illegal aliens"' in PeninsulaMalaysia, including spending M$10 million to build 9 detention centers to

' Most of those who registered and got temporary passes did so in the lastmonth of the registration period. In mid-May 1992, there were 19,900 maids,21,600 plantation workers, and 65,100 construction workers registered(The StraitsTimes, May 11, 1992, 19) . By mid-June, there were 206,300, 80 percentIndonesian(Xinhua News Agency, June 25, 1992, and by the end of June, 320,000illegal aliens had taken the first registration step. In September 1992, thefinal tally was 447,000 illegal aliens who had registered(The Straits Times,October 27, 1992, 19). There were apparently no studies of the characteristicsand earnings of these illegal aliens who registered, although the mandatoryhealth screening produced reports that e.g. one-fourth of those who had medicalexaminations had diseases ranging from malaria and venereal disease toleprosy and the human immunodeficiency virus (HIV). Malaysia deports foreignerswith these diseases(Japan Economic Newswire, December 22, 1992).

BY During the first week of July 1992, some lB00 aliens, 3/4 Indonesians, weredetained.

- 79 -

hold the aliens arrested (Pillai, 1992, 31). Between July 1, 1992 andOctober 31, 1993, about 52,000 illegal aliens were detained; 70 percent wereIndonesians, and 15 percent Bangladeshis. However, fewer than half of thosedetained during this period were deported.

Table 3.7: Illegal Aliens Apprehended in Xalaysia betweenJuly 1, 1992 and October 31, 1993

Country Illegal AliensIndonesia 70%Bangladesh 15%Thailand 6%Burma (Myanmar) 4kIndia 2%Pakistan 1iNepal 1%

Source: Immigration Department; total apprehensions were 52,037

3.55 Many of the workers who registered with immigration authorities, andreceived provisional work permits, never completed the process to securemachine-readable 2-year work permits-only 190,000 or 42 percent had such workpermits by December 31, 1993. Half of the alien workers receiving work permitsunder this legalization program were in the construction sector.

Table 3.8: Work Permits Issues by Sector: December 1lI-93

Sector Work Permits Issued DistributionAgriculture and Forestry 49,059 26%Constriction 95,366 50%Manufacturing 2,099 1%Non-government Services 43,741 23%Other (inci Mining) 78 0%Total 190,343 100%

Source: MHR, Manpower Department

A total of 47,000 illegal aliens registered and received temporary passes, but only 42 percent were issuedwork permits through December 31, 1993.

3.56 Malaysia's foreign worker policy since October 1991 has had a stop-goquality. Initially, only plantation, construction and households seekingmaids-plus manufacturers on a case-by-case basis-could recruit unskilled foreignworkers. However, other industries complained of labor shortages and requestedpermission to hire foreign workers, and in July 1992 restaurants, gas stations,and small factories were given permission to recruit foreign workers. In 1993,foreign workers earning M$700 to M$1000 monthly were required to pay Malaysiansincome taxes at the same rate as Malaysians, under the theory that they make useof Malaysian infrastructure. Beginning in 1993, foreign workers employed inmanufacturing were required to pay a M$120 annual levy, while the levy forplantation workers was reduced from M$360 to M$300.

- 80 -

3.57 In April 1993, unskilled foreign worker recruitment was suspended but,after a wave of protests, the recruitment freeze was lifted for manufacturers inJune 1993. The purpose of the recruitment ban was to give the government timeto re-assert control over illegal immigration. However, the ban may havebackfired by promoting the use of labor contractors and brokers to obtain foreignworkers--their raison d'etre in labor markets in industrial countries is oftenan ability to evade immigration and labor law enforcement.

3.58 Requests for foreign workers poured into the government from Malaysianemployers. Between Marcn 1992 and December 1993, there were over 4,400 employerrequests for 431,000 foreign workers. The MHR certified that 179,000, or 41percent of these foreign workers, were needed.

3.59 A comparison of the distribution of work permits issued to illegalaliens who registered and employer requests for foreign workers demonstrates thatmanufacturing and agriculture are the two sectors that most want additionalforeign workers: they accounted for 27 percent of the work permits issued tolegalized workers, and 85 percent of the requests for additional workers.Manufacturing is the most dramatic case-accounting for 1 percent of regularizedworkers, and almost two-thirds of additional foreign workers requested. The MHRcertified an above average percentage of requested foreign agricultural andconstruction workers, and below average percentages of manufacturing and serviceworkers.

3.60 On January 7, 1994, when it was clear that the October 1991registration, recruitment, and enforcement program had failed to stop illegalimmigration, the legal recruitment of unskilled and semi-skilled foreign workersfrom outside the country was stopped. This recruitment freeze led to complaintsfrom employers whose need for foreign workers had been certified, but who werenot allowed to bring to Malaysia the foreign workers they were counting on. Thegovernment responded by permitting such certified employers to hire illegalworkers who had been detected and were being held in camps, and by lifting therecruitment ban on skilled foreign workers needed by manufacturers.

81 -

Table 3.9: Imnmigrant Workers Requested and Certified: March 1992-December 1993

Sector Entployer Requests Distribution Immigrant Workers Distribution Certified by Distribution Percentfor inmmigrants Requested MHR Ceriified

Agriculture and 492 11% 97,897 23% 50,687 28% 52%ForestryConstruction 313 7% 46,876 11% 22,364 13% 48%Manufacturing 3,329 75% 265,553 62% 102,227 57% 38%Non-government 307 7% 20,164 5% 3,153 2% 16%ServicesOther (incl. 15 0% 866 0% 271 0% 31%Mining)Total 4,456 100% 431,356 100% 178,702 100% 41%

Souirce: MHR, Manpower Department.

The annual levy that must be paid for each legal foreign worker employed is MS420 except for agriculture (M$300), mnaids (M$360),and unskilled [M$360), semi (M$540) and skilled (M$900) manufacturing workers.

Figure 9. Foreign Workers Issued Work Permits, Requested by Employers, and Certified:December 1991.93

70%

60%--509le - -4099' - -

3096 - -

10%0109S- 4-S

Agriculture and Construction Manufacturing Non-goverunentForcstry Services

Pcrmits Issued---- 190,343 0 Workers Rquested--431.356 U Workers Certified-- 178,702

3.61 Today, there are three major issues surrounding Malaysian foreignworker policies:

* Can employers count on the availability of foreign workers? TheOctober 1991 policy was supposed to provide 5 years of access,but between April and June 1993, and again in January 1994, therecruitment of foreign workers was halted.

* Will illegal immigrant workers continue to be available? Manyillegal immigrants who registered did not receive work permits,suggesting that they are still in an underground economy in which

- 82 -

neither a levy is collected nor worker protections areavailable.L'

* Will additional sectors, especially in manufacturing, bepermitted to employ legal foreign workers?

3.62 There have been indications that the government is relaxing the banon foreign workers. In March 1994, "skilled" electronics workers from Indonesiawere admitted despite the fact that they were paid only M$400 monthly, below theaverage for such workers. In May 1994, the Rural and Development Ministry waspermitted to import unskilled foreign workers for FELDA, FLCRA, and RISDAprojects, even though the January 7, 1994 ban on unskilled foreign workersremains in effect(Business Times, May 24, 1994).

D. Emigration: Stocks and Flows

3.63 Malaysia both imports and exports skilled, semi-skilled, andprofessional workers, making the country somewhat unique in its migrationpatterns. During the 1950s and 1960s, unskilled and semi-skilled Malaysiansmigrated primarily to Singapore-although part of the Malaysian Federation until1966, Singapore maintained control over immigration. In the mid-1970s, perhaps3,000 Malaysian workers-from dock workers to nurses-left for the Middle East, butthe 1985 recession encouraged Malaysian workers to seek jobs in 'new' countries,from Taiwan to Canada(Pillai, 1992, 25) . Pillai notes that 'almost all" of theseMalaysian emigrants are 'of Chinese origin' (1992, 25).

3.64 An estimated 150,000 non-professional Malaysians work abroad;two-thirds in Singapore. These workers earn 2 to 4 times the wages they wouldearn in Malaysia-for semi-skilled workers earning M$500 monthly or M$6,000annually in Malaysia, an average doubling of wages would mean that Malaysia gains6,000x150,000 or M$900 million annually in additional national income. Sincemany of Malaysia's non-professional migrant workers commute to Singapore, acommute that should soon be easier with an improved rail system, a second bridgelink, and perhaps a 'smart' border-crossing card, Malaysia can take advantage ofits proximity to Singapore by 'exporting' workers who are likely to return withmost of their earnings.

3.65 Malaysians also work in Taiwan and Japan. Many of those in Taiwan areChinese Malaysian construction workers; their number was estimated at 5,000 to30,000 in the early 1990s. The number of illegal Malaysians detected in Japanwas 4,500 in 1990.

3.66 Non-professional migration from Malaysia seems to represent specialcases in which some Malaysian workers can earn high wages because of theirlocation (near Singapore) or language and job contacts (Taiwan and Japan). The

& Reportedly 100,000 of those who registered did not pay their levy (StraitsTimes, November 24, 1993, 19).

- 83 -

demand for non-professional Malaysian workers is limited by Singapore's size andits policy of upgrading jobs and skill levels which, if successful, will limitthe number of unskilled foreign workers needed. The number of Malaysians whocould find employment in Taiwan or Japan is larger, but both countries haveambiguous policies toward foreign workers, source countries such as China canoffer far more workers, and the wage gap between Malaysia and these countries isnarrowing.

3.67 It is unlikely that the number of non-professional emigrant workerswill exceed 200,000-or 3 percent of Malaysia's labor force-and most of them arelikely to return eventually. Their exit may require policy adjustments, such asmanaging employment of foreign workers in Johor, where wages are influenced bySingapore, and dealing with the exit of Chinese construction workers, but suchadjustments should be in the nature of policy fine-tuning.

Professional Emigrants

3.68 During the 1980s, an average 5,000 Malaysians annually were recognizedas immigrants in Australia, New Zealand, Canada, and the United States.According to press accounts, these professional emigrants were among the 'bestand brightest Malaysians-with advanced degrees, in their mid to late 30s, inmiddle or senior management positions, and with a monthly salaries of M$2,000 ormore (Malaysia Business, April 16, 1988).1'

3.69 The emigration of professionals is influenced by economic conditionsin Malaysia and the destination country, as well as the destination countriesemigration policies. Australia and Canada admit some immigrants under a pointsystem that makes entry easiest for young persons who speak English and haveprofessional training. After the Canadian point system was introduced in 1986,and the Australian system in 1989, more Malaysian professionals emigrated tothese countries(Pillai 1992, 28) . The United States revised its employment-basedentry system in 1990, making it easier for up to 140,000 professional and skilledworkers (and their families) from around the world to enter each year.

3.70 There are many reasons why professionals emigrate from Malaysia. Themost obvious is that incomes are higher in the destination countries.' Yet

W6 Of the 2235 Malaysian immigrants admitted to the US in FY1992, 1243 listedoccupations, and 73 percent of those with occupations were professionals ormanagers. Of the 388 Malaysian immigrants who became naturalized US citizens inFY1992, 221 listed occupations, and 45 percent of them were professionals ormanagers. Ten percent of the 57,186 Malaysian non-immigrants admitted to the USin FY 1991 were students. Statistical Yearbook of the Immigration andNaturalization Service, 1993, 68, 104.

0' The Australian and Canadian recessions in the early 1990s, compared to theeconomic boom in Malaysia, have slowed such economically-motivated migration.Between mid-1992 and mid-1993, for example, only 1,555 Malaysians immigrated toAustralia, versus 3,123 the year before (Straits Times, October 10, 1993, 18).In 1988-89, 7,681 Malaysian immigrants arrived in Australia.

- 84 -

there are many suggestions that non-economic factors also encourage theemigration of non-Malays. One carefully-phrased hypothesis is that 'thepredominantly non-Malay migration out of multi-racial Malaysia is hypothesizedto be mainly the result of an uneven opportunity structure for non-Malays ineducation and other government-related economic activities' (Gunasekaran andSullivan, 1990, 53). Professional Malaysians seem to place a high priority onobtaining a university education for their children, and Pillai (1992, 30) notesthat some professional emigration is motivated by 'a strong desire to providechildren with an overseas university education' without having to pay steepforeign student tuition.

3.71 The number of Malaysian immigrants admitted to the United Statesdoubled between 1982 and 1992, from 1000 to 2200. Another 5890 non-immigrantMalaysian students were admitted to the United States in 1992, more than fromPakistan (4038) and twice the number from Singapore (2598). The number ofMalaysians admitted to Australia fell from 8030 in 1986 to 5860 in 1990.Malaysians were about 10 percent of the 25, 000 immigrants admitted to New Zealandin 1990/91. The other major destination country for Malaysian immigrants isCanada.

Figure 10. Immigration to the United States from Malaysia and Asia: 1982=100

250

200 t I ; * ~Malaysians 150 -- Ain

100

O. II I I I I I Iffi ov > 0% 0\ fi cz > f0 i - N

Us +sU 0 @ 0 @ . 0

Source: SLaistical Yearbook of the Immipation and Nan=alizion Service. 1993, 30.

3.72 In addition to legal immigrants, Malaysians migrate illegally to thesetraditional immigration countries. For example, the estimated number ofMalaysian illegal aliens in the United States almost doubled from 6000 in October1986 to 11,000 in October 1992, making Malaysians almost 4 percent of the 300,000Asian illegal aliens in the United States (Warren, 1994, 26). Most of theseMalaysian illegal aliens are believed to be in New York (4000) and California(3000).

3.73 Fast-growing Asian nations such as Singapore, Taiwan, and South Koreahave programs to encourage the return of professionals abroad. Instead of or in

- 85 -

addition to such programs, Malaysia could take steps that make staying home moreattractive to potential professional emigrants. If Malaysia expandedopportunities to acquire a university education in Malaysia-perhaps by permittingprivate universities to operate-and reduced subsidies for study abroad,government revenues could be saved, local businesses could work more closely withhigher education institutions to produce professionals with needed skills, andthere would be less professional emigration.

E. Regional Approaches to Trade and Migration

3.74 Malaysia is a recognized leader in promoting East Asian economicintegration within ASEAN via AFTA. AFTA has no migration provisions, butMalaysia is the major destination for immigrants among AFTA member nations.

3.75 Migration is an increasingly important issue for ASEAN-AFTA countries,and it is not yet clear which regional forum will emerge as the focal point formulti-lateral discussions of migration issues, analogous to the EU in Europe.ASEAN's economic locomotives are considered to be Singapore, Malaysia, andThailand, and these countries face to some degree a dilemma between potentiallyinflationary wage increases or opening themselves to migrant workers. There isthe risk that too much migration could substitute a labor-led rather than theplanned 'investment-led economic integration of the region.' AFTAlabor-importing countries are likely to come 'under increasing pressure fromlabor-sending countries to introduce or enforce legislation that protects foreignworkers from abuse and exploitation,' forcing them "to work with labor-exportingcountries to control the flow of labor and the activities of labor-recruitingagencies,' perhaps through 'bilateral arrangements to manage the importation offoreign labor.' (Business Times, February 26, 1994, 4)

F. Recommendations

3.76 It is clear that the extreme positions on immigrant workers inMalaysia are unrealistic. A total ban will worsen the already tight labor marketand would increase wage escalation; plantations and construction would suffer inparticular. An open door policy would encourage a rush of immigration given theincome differential between Malaysia and migrant workers' countries of origin.This would be politically and socially unacceptable to the Malaysian hostpopulation. A rational immigration would have to take a judicious middle roadmindful of the following:

3.77 In order to better manage the immigration and employment of foreignworkers, Malaysia should:

3.78 Develop Transparent and Consistent Foreign Worker Policy. There isa great deal of confusion over Malaysia's immigration policies. As a result,there is misunderstanding among employers, unions, and Malaysian and non-Malaysian workers as to what the government's immigration policies are, and acertain degree of cynicism prevails that arises from contradictions betweenannounced economic and labor market policies and the immigration reality.

- 86 -

3.79 A clear horizon of continued immigration is needed instead of thepresent "stop-go" policy. That horizon is tied to the speed at which the economymakes the transition to high value added, high skills production wage.Explicitly recognizing the link between immigration needs and skills upgradingwill help to define the horizon more clearly.

3.80 Buttreas Immigration Controls with Economic Incentives. Malaysiashould consider an earnings-based foreign worker levy to generate funds toregulate the use of foreign workers and to improve the administration of foreignworker programs.

3.81 The Malaysian government must design its own policy, but one versionof an earnings-based foreign worker levy can illustrate the concept. Theemployers currently have incentives to hire foreign workers. In addition tolower daily or hourly labor costs, employers realize savings by not making EPFcontributions on behalf of immigrant workers; for an immigrant worker earningMS417 monthly or M5,000 annually, this 12 percent cost savings amounts to M$600annually, or more than the current foreign worker levy." If employers paidthis earnings-based levy on 500,000 foreign annually, M$300 million would becollected annually; on 1 million foreign workers, levy collections would totalM$600 million annually."2'

3.82 An earnings-based levy system would be a flexible economic instrumentthat influences employer incentives to hire immigrant workers. Under such asystem, employers would pay a percentage of the earnings of foreign workers intoa government fund-perhaps to the EPF to simplify collection. The amount of theforeign worker earnings levy could be set to reflect (1) the fact that EPFcontributions do not have to be paid on the earnings of foreign workers-12percent-(2) plus any other savings employers realize by employing foreignworkers, such as no annual bonuses, and no transportation allowances for e.g.construction workers housed on site. The employers would benefit from the levybecause it would be used to streamline immigration administration to reduce thetime for processing applications for foreign workers.

3.83 Foreign workers could also be encouraged to make EPF typecontributions (like local workers). The accumulated amount would be availableto them when they leave. This would facilitate adjustment of foreign workerdemand in the business cycle.

3.84 Irprove the I±mmgration Data Base; The most widely cited estimatesof the stock of immigrant workers are based on cross-sectional or one-shotassumptions about the immigrant share of employment in several economic sectorsknown to employ foreign workers. Studies are needed to assess the reliability

La' There is an even greater incentive to employ foreign workers if the employercan pay the worker less because the immigrant worker does not have 10 percent ofhis earnings deducted for the EPF, and if the Malaysian employer deducts theannual foreign worker levy from the immigrant worker's earnings.

' The Immigration department reported that M$41 million were collected in1992, and M$287 million in 1993.

- 87 -

of these immigrant share estimates, to provide indicators of how immigrantemployment shares are changing over time, and to determine what enforcementstrategies would deter unauthorized aliens from entering Malaysia and findingjobs.

3.85 Better data on immigrant stocks and flows could be obtained bymodifying the establishment surveys currently used to obtain data on employmentand earnings in the plantation, construction, manufacturing and service sectors.Since the data and anecdotal evidence indicate that foreign workers aredisproportionately hired through labor agents or contractors, a major need is formore data, and for more reliable data, on foreign workers hired through suchlabor market intermediaries. The data base could also be improved by addingquestions to the labor turnover survey to obtain information on worker movementbetween sectors in order to address questions such as how many immlgrant workersenter the Malaysian labor market through "easy" ports (plantations), and thenmove into construction jobs.

3.86 Regional Approaches to Trade and Migration: Theory and experience inWestern Europe suggest that trade and investment can be a substitute for themigration of labor, i.e., the nations in a region can integrate without extensivelabor migration. Despite freedom of movement guarantees, and policies thatencourage migration within the European Union (EU), for example, fewer than 2million citizens of one EU country are employed in another, making intra-EUmigrant workers less than 1.5 percent of the EU's 150 million labor force. Thereis little intra-EU migration despite earnings gaps of as much as 1 to 5, asbetween Portugal and Germany, and.even larger gaps between, for example, ruralPortugal and southwestern German cities (Martin and Ulmann, 1992).

3.87 In the first steps toward regional economic integration, growth isoften uneven, creating labor shortages in boom areas, and displacing workers andpeasants in other areas as industries privatize and restructure. Such unevendevelopment within an economic region tends to produce an initial wave of labormigration, as occurred during the 1960s when Italians and Spaniards sought jobsin Germany and France. A similar "migration hump" is expected in North Americaas NAFTA accelerates economic integration there.

3.88 Malaysia has been a leader in promoting East Asian economicintegration via AFTA. AFTA has no migration provisions, yet it will undoubtedlyhave effects on the migration flows underway in the region. Malaysia might wishto take the lead in considering how freer trade might affect migration into thecountry, since it is a major destination for migrant workers from AFTA countries.Such a forum is invaluable for checking illegal immigration into Sabah andSarawak, since both effective policing as well as regional trade and investmentpatterns will be needed to stem the flow.

- 88 -

IV. INDUSTRIAL SKILLS TRAINING

A. Introduction

4.1 Chapter 1 showed that not enough skilled labor is being produced tomeet the rapidly growing needs of industry. This chapter examines that questionin more detail. It first focuses on government policies to increase publicprovision of entry-level skilled labor, identifies several supply-side policyweaknesses, and makes recommendations to improve the public sector supply ofskills training. This is followed by an evaluation of two policy instruments--atax incentive scheme and a levy-grant scheme--designed to encourage companies totrain their employees flexibly in response to changing market and technologicalneeds. Several recommendations are made to improve the operation of thesetraining schemes. This recent, demand-side policy emphasis is a promisingdevelopment, and it has the potential for eliciting a greater private sector rolein meeting its own industrial skill needs..

4.2 A well functioning skills development system will have both short runand longer term benefits. In the short to medium term, an increased supply ofskilled labor will ensure that labor productivity growth matches or outstripsrecent increases in real wages caused by tight labor markets. Over the longerterm, it will be critical for (a) restructuring industry towards higher value-added production, (b) developing technological capabilities needed to exploit newinnovations and increase productivity growth, and (c) sustaining export growthbased on entry into new markets and improved product quality and service. Thisview is reflected in the report of the Cabinet Committee on Training (1990).Many of its key recommendations--improving the responsiveness of public trainingto market demands, expanding the training role of the private sector, andbuilding stronger linkages between training and technology--either have been, orare currently in the process of being, implemented.

4.3 The analyses and findings in this chapter concern the adequacy ofthese policy recommendations and the state of their implementation. Section 8describes the institutional setting of public training in Malaysia, identifiesthe lack of coordination among the various public training institutions as anissue, and analyses the performance of training institutions in terms of thelabor market outcomes of their graduates. Section C provides an overview ofenterprise training in Malaysia and an analysis of two demand-side trainingpolicies--the DDIT (Double Deduction Incentive for Training) scheme and the newlyimplemented HRDF (Human Resource Development Fund) scheme. It characterizes thetakeup of each scheme by firm size and subsector, and discusses recommendationsfor improving their effectiveness in encouraging more structured, firm-basedtraining of employees.

- 89 -

B. SuDplv-side Issues in Industrial Skills Trainina

4.4 Malaysia's skill development strategy has, until recently, focusedprimarily on increasing the supply capacity of public education and traininginstitutions to meet the skill needs of industry. Several supply-side issuesarise. Will the current and planned expansion of the supply capacity of publictraining institutions be sufficient to meet the projected future demand forskilled workers, both at the basic and advanced skill levels? How cost effectiveis the public training system, as currently structured, in meeting this skillsdemand? Is public training relevant to the needs of industry, both at the entry-level and for the retraining and skills upgrading of the existing workforce? Thefollowing analysis provides some insights into these questions.

Institutional Setting of Public Trainina

4.5 Table 4.1 provides an overview of the supply of skilled manpower inMalaysia from local public educational and training institutions. Between 1991-1993, these institutions together produced a total of over 146,000 graduates.Of this total, educational institutions produced 47,000 with degrees (32percent), 28,000 with diplomas (19 percent), and 14,000 with certificates (9percent) . The remaining 57,000 or about 39 percent were produced in local publictraining institutions. Between 1994-1995, these institutions are projected tograduate another 151,000 skilled individuals, with the local public traininginstitutions accounting for a significantly higher proportion (46 percent) ofgraduates. Considering only the graduates with technical/engineering-relatedtrade training, that is, the skill group most in demand by industry, it is clearthat public training institutions are the principal source of entry-levelindustrial skills.

4.6 These public training institutions play a relatively minor role inskills upgrading for the existing workforce. Between 1991 and 1993, they onlyprovided skills upgrading to 920 trainees. Several surveys of employers in threeregions--Klang Valley, Kedah and Perlis, and Pahang State--also revealed a lowreliance on public training institutions for retraining and skill upgrading.Y'Despite differences in the level of industrial development across regions,employers reported that only between 2-7 percent of skilled workers scheduled fortraining in 1991 were to be trained in public training institutions. In-planttraining was the principal source of training (58-93 percent). The two othermajor sources were training by the parent company (2-6 percent) and equipmentvendors (2-13 percent), each source being as, or more, important than publictraining institutions.

4.7 Vocational and technical training is provided by a multiplicity ofpublic training institutions under several ministries, each charged with specificareas of responsibilities and with carrying out their own skills training andvocational education programs. In total, there are 26 government industrial andskills training institutes. They include (1) 10 industrial training institutes(ITI) and the Centre for Instructors and Advanced Skill Training (CIAST) under

i' Department of Manpower (1991), Survey of Industrial Skill Needs, regionalreports.

- 90 -

the Manpower Department of the Ministry of Human Resources; (2) 9 MARA SkillsInstitutes (IKM or Institut Kemahiran Mara) and Pusat Giat MARA under theMinistry of Public Enterprises, and (3) 7 Youth Training Centres (YTC) under theMinistry of Youth and Sports. The Government has also set up two advancedtraining centers, the German-Malaysia Institute (GMI) and French-MalaysiaInstitute (FMI), in collaboration with the German and French governments.Finally, the Ministry of Education runs 70 vocational schools, 9 technicalschools, and 7 polytechnics providing vocational education similar to thatavailable in the public training institutions.

Table 4.1: Output of Skilled Manpower by Education and Training Institutions

Local Educ./Training Institutions. 91-93 % Total 94-95 % TotalEducational. Institutions

Degree graduates 46,810 31.9 43,038 28.4Engineering-related 3,940 4,770

Diploma graduates 28,340 19.3 25,720 17.0Engineering-related 5,540 6,670

Certificate graduates 13,900 9.5 12,900 8.5Engineering-related 8,750 8,150

Public Training InstitutionsSkillsemi-ski graduates 57,600 39.3 69,970 46.1

Engineering trades 38,380 48,460Skills upgrading 920 1,560

TOTAL 146,650 100.0 151,628 100.0

Source: EPU, Mid-Term Review, 1994.

Table 4.2: Output of Skilled Manpower-Public Training Institutions

Education/TraininR Instituinon 1991-93 1994-95ITI (MHR) 6,940 5,659

Engineering trades 2,755 2,787IKM (MARA) 9,905 8,225

Engineering trades 6,879 6,293YTC (MYS) 1,254 n.a.

Engineering trades 971 n.a.Technical Schools (MOE) 12,549 21,205

Engineering trades 9,478 15,057Vocational Schools (MOE) 28,633 36,287

Engineering trades 16,221 22,653

Source: EPU, unpublished data.

4.8 Table 4.2 provides summary data on the output of skilled and semi-

skilled graduates from these public training institutions. Together, the publictraining institutions under the Ministries of Human Resources, MARA, and Youthand Sports, currently produce about 7,000 trainees per annum in various technicalskills, primarily at the basic and intermediate levels. The Ministry ofEducations' s vocational and technical schools contribute twice as many per annum.All these institutions provide training in overlapping technical and trade areas,

- 91 -

including engineering trades (mechanical, electrical, and civil), building,printing, agriculture, and commerce-related trades. Of these, the engineering-related trades are most prevalent, making up roughly between half and two-thirdsof all training provided in each public training institution.

Basic versus Advanced Skill Training

4.9 Higher level skills will increasingly be needed for Malaysian industryto move towards higher value-added production. What role has public traininginstitutions played in supplying these higher level industrial skills? Figure4.1 provides a perspective on the supply of trained workers by level of skillfrom a variety of training institutions, both public and private. It shows,separately for basic and intermediate skill levels, the number of trainees takingthe national trade tests between 1981 and 1993, and the corresponding number thatpassed. Not all trainees of public institutions take the trade tests administeredby the National Vocational Training Council (NVTC), so this figure should not beinterpreted as being representative. Nonetheless, it has larger coverage inincluding trainees from small training programs in other government ministries,the army training center, private training institutes, employers, andindividuals. This latter group of providers are not inconsequential; in termsof output of skilled workers in 1993, as many trainees of private traininginstitutes took the NVTC trade tests as did trainees from the Department ofMlanpower's ITIs (4,700 versus 4,695 trainees).

4.10 Recognizing their limitations, the test data indicate that there hasbeen considerable expansion in the output of trainees at the basic andintermediate skill levels but not at the advanced skill level. The figure showsa five-fold increase in the number of trainees taking the NVTC trade test eachyear at the basic skill level between 1981 and 1993--from about 5,400 to 24,500trainees by 1993. The corresponding increase in the annual numbers of testtakers at the intermediate skill level was somewhat slower, rising from 1,200 to4,200 trainees by 1993. The numbers taking the trade tests at the advanced skilllevel are too small to show up in Figure 4.1. The numbers rose from only 38 in1981, to 120 trainees by 1993, when they represented just over half of onepercent of all NVTC test-takers.

4.11 The low production of graduates with advanced level skill training isof concern. Highly trained technical personnel play multiple roles in industry,as supervisors, as trainers of other less skilled workers, and as implementorsof new technologies. A shortfall in such highly skilled workers will haveimplications for the ability of companies to move towards higher-value added,more technology-intensive production. The Government has recognized this as anissue, and several centers for advanced skills training have been set up byvarious ministries, and by the Government in collaboration with Germany andFrance. However, even when they reach full capacity, their output of advancedlevel skills is unlikely to be very large.

- 92 -

Fig.4.1: Numbers Taking and PassingNVTC Trade Test

26

24-

22-

20-

16-

L 14-

12-

10-

2

0 p p

1981 1982 1983 1984 1985 1886 1987 1988 1989 1990 1991 1992 1993

0 kuglc-taut + Basic-page 0 Into -test a Inter-pass

Source: Unpublished NVTC data.

Strenathenina Coordination of Training

4.12 In Malaysia, more needs to be done to improve policy coordinationacross the different training institutions, both public and private. The NationalVocational Training Council (NVTC) was established in 1989 to promote andcoordinate vocational and industrial skills training programs. The NVTC hasinitiated the setting up of interagency committees to consult on issues relatingto training and trade certification, and has fielded several surveys which havea broader focus than the tracer studies which individual ministries haveconducted for training institutions under their purview.y However, to date, theNVTC has not received adequate staffing and resources needed for it t.o play aleading coordinating role. It does not have the legal standing to coordinatetraining across public and private training institutions. Private traininginstitutes are supposed to register with the Ministry of Education. Some private

v They include tracer surveys of graduates from a broad spectrum of traininginstitutions that sat for the MLVK trade tests, and a survey of the trainingneeds of enterprises in response to the introduction of new technologies.

- 93 -

institutes do, but many others only register with the Registrar of Companies, sothat little data are available on their training activities.3'

4.13 This coordination problem is not unique to Malaysia. Training systemsin many countries are highly fragmented, with many different vocational schoolsand training institutions being operated by different agencies and preparingindividuals for broadly similar occupations. Examples include Egypt, wherevocational and technical training is provided by six different ministries, andThailand, which opened the decade of the 1970s with two public vocationaleducation systems and closed with four, all offering the same range ofcertificates and diplomas. However, international experience also suggests thata strong national training authority can play an important role in reducingduplication and improving the cost effectiveness of the public and private sectorskills delivery system.4' Effective national training authorities are usuallyempowered to coordinate training across different public training institutions,and with participation from the private sector, develop strategic plans fortraining programs that complement key economic strategies, monitor labor markettrends, conduct evaluations of training programs to adjust training to meet newskill needs, and develop and maintain databases on public and private trainingprovision to estimate supply capacity.

4.14 In Malaysia, inadequate policy coordination raises questions about howefficiently resources are being allocated across training institutions. Theissue is especially critical in the current economic context, with acute skilllabor shortages and ever growing demands on the public education and trainingbudgets. There have been recommendations that a National Vocational Training Lawbe enacted to strengthen the NVTC, perhaps based on Singapore' s VITB (Vocationaland Industrial Training Board) . The VITB is responsible to the SingaporeEconomic Development Board and is empowered under the Vocational and IndustrialTraining Board Act, 1979, to be the national authority for the development,provision and regulation of industrial training, and the registration andregulation of apprenticeship training and private training institutes. Theserecommendations should be seriously considered.

EvaluatinQ Performance of Training Institutions

4.15 One of the roles of a national training authority is to makerecommendations about how resources should be allocated across different traininginstitutions, based on analysis of their internal and external efficiency. InMalaysia, such an analysis should also recognize the potential tradeoffs betweenefficiency criteria and equity considerations implicit in the mission of thedifferent ministries. On the most basic level, estimates of unit training costscan provide policymakers with rough tools to compare how much it costs differenttraining institutions to produce a trained worker. In addition to unit training

3' The only data available on private training institutes come from periodicsurveys of proprietary training institutes by the Department of Manpower, but thecoverage is limited to the larger institutes only.

1' The World Bank, Skills for Productivity: Vocational Education and Training inDeveloping Countries, Oxford University Press, 1993, chapter 7.

- 94 -

costs, the performance of public training providers should be evaluated in termsof their external efficiency, that is, how well their trainees do--onstandardized trade tests such as those administered by the NVTC, and in terms oflabor market outcomes.

4.16 The findings of such an analysis is reported below, using dataprovided by the NVTC.5' It was not possible to compare unit training costsbecause there is no centralized collection of unit training cost data. TheEconomic Planning Unit maintains records on the development budgets of differenttraining institutions, but not (except on an ad hoc basis), the operating budgetsnecessary to calculate and compare unit training costs across trainingproviders.' As such, the comparative analysis is restricted to pass rates onthe NVTC trade tests and to labor market outcomes.

Performance on NVTC Trade Tests

4.17 Table 4.3 shows pass rates on the NVTC trade tests for selected yearsbetween 1984 and 1993 for five different training institutions--ITI of theMinistry of Human Resources, IKM of MARA, YTC of the Ministry of Youth andSports, secondary vocational schools (SMV) of the Ministry of Education, and forcomparison, private training institutes--and the total of all traininginstitutions sending graduates for the trade tests.' The average passing ratefor training institutions as a whole was 61 percent in 1993, though this figurechanges from year to year. Particularly striking is the overall improvementbetween 1990 and 1993 in the pass rates of all training institutions. This isbrought out most clearly in Figure 4.lb, which graphs the levels and changes overtime in pass rates for the five major institutions and the total over the 1981to 1993 period.

'' Data on operating budgets of the different training institutions could not beassembled in time for this analysis.

6/ An effort was made to assemble operating budgets for training institutionsunder the different ministries, but not in time for this analysis.

2' The other smaller training institutions include the army training schools, PLKJohor, employers, and individuals.

- 95 -

Table 4.3: Numbers Taking Trade Tests and Pass Rates

Trainine Institut Year

Test Takers 1984 1987 1990 1993ITI 1966 2265 2768 4695IKM 3005 3894 5637 1313YTC 524 925 1403 1702SMV 483 2746 4020 16011Private Institutes n.a. 1963 2215 4700Total 9931 14166 20244 32860

Pass Rate (%)[TI 62.2 68.3 61.1 72.1IKM 70.2 59.9 51.0 78.3YTC 56.3 54.8 57.9 74.6SMV 44.7 39.0 37.5 55.6Private Institutes n.a. 45 1 39 6 58 4

Total 59.8 53.2 46.7 61.4

Source: Calculated from unpublished NVTC data.

4.18 In 1993, the pass rates on the trade tests (which are indicative ofstandards attained and not of cost effectiveness) were above the average for the

three public training institutions--ITI, IKM, and YTC--and below the average for

SMVs and private training institutes. As a group, the three public institutionshad pass rates ranging between 72 and 78 percent, as compared to the average of

61 percent. Among them, IKM had the highest pass rate of 78 percent. This has

not always been the case; IKM' s pass rates were lower than those of ITIs in the

period between 1987 and 1990. The pass rate of SMVs has consistently been lowerthan that of public training institutions over time, though SMVs also showed a

dramatic increase over time in pass rates--between 1990 and 1993, pass rates rosefrom 38 to 56 percent. The pass rate of private training institutes was only

marginally higher at 58 percent in 1993.

Fig. 4.1b

Pass Rates oni tile MINK Trade Tests by Tra ining Institution

111 .IKU I KBN

C-~~~~~~~~~~~~~~~~~~~~~~~~~~~-

.15

l, l I-

SMV P1 iv Total

.75-

U)

U)l' .2 5 - 1 9 9 3 t9_ _ _ _ _ _ _ _ _ _ 1 9 9 3_ _ _ _ _ 1 9 _ _ _ 1

r T~1911 1 19837 2993 19E11 1¶JII7 1993 1901 1987 199]

- 97 -

Performance in Labor Market Outcomes

4.19 Here, the relative performance of training providers is compared interms of four labor market outcomes of their trainees: (1) the probability offinding work after training, (2) time taken to secure a job, (3) monthly startingpay, and (4) relevance of training for work. An institution is judged to haverelatively better performance if its graduates are more likely to findemployment, take a shorter time to secure a job, receive higher starting pay, andfind their training relevant to their job.

4.20 The analysis is based on a 1992 retrospective survey of over 4,000individuals who took the trade tests administered by the National VocationalTraining Council in 1991, that is, between six and twelve months prior to thesurvey.!' Since some trainees may not take the trade tests, analysis using thissample of test-takers should not be interpreted as reflecting outcomes for alltrainees of these training providers. Training providers covered by the surveyincluded ITI, IKM, YTC, IKK (Institut Ketukangan Kementah or army trainingcenters), PLK Johor, private training institutions, employers, and otherproviders. For the analysis, the last two categories are combined.

Table 4.4: Summary Data on Labor Mbrket Outcomes by Training Instkudon

Workine Time to Find a Job Starlini Month Pav EaInsiitules Samvie in <6 mch 6-12 mth 12+ m h <4 M 4-600 R601 + MfM.

ITI 322 84.5 86.5 9.5 3.9 23.3 49.2 27.5 69.8IlKM 670 67.6 82.4 13.5 4.1 29.7 43.2 27.0 75.5YTC 81 66.7 83.3 10.4 6.2 34.7 42.9 22.4 77.8SMV 2621 55.4 79.3 17.1 3.6 62.0 29.7 8.3 43.5Pry. Inst. 159 89.3 66.9 20.3 12.7 15.8 35.3 48.9 80.3IKK 40 60.0 65.0 30.0 5.0 10.0 65.0 25.0 37.5PLK Job. 90 80.0 81.7 13.3 5.0 60.0 28.3 11.0 76.4Other 108 71.3 71.7 18.3 10.0 37.5 35.9 26.6 75.3

Total 4091 62.2 79.8 15.7 4.5 47.7 35.2 17.1 56.7

Source: Simple tabulations of outcomes from 1992 NVTC survey.

4.21 Table 4.4 shows the distributions of trade test-takers in each of fourlabor market outcomes, separately by training provider. The first outcome is thepercentage working at the time of the survey. The second to fourth outcomes arethe percentages of trainees in each outcome, conditional upon working in 1992.The simple statistics shown in this table suggest the following points:

1) Probability of Working. Among public training providers, ITIgraduates are most likely to be employed (84 percent), followed bygraduates of PLK Johor (80 percent); among public training providers,SMV graduates are least likely to be employed, with only 55.4 percent

s The National Vocational Training Council fielded this survey and kindly madethe data available for analysis.

- 98 -

finding work in 1992. Of all providers, public and private, thegraduates of private training institutes are most likely to find work

(89 percent), with trainees from employers and other providers also

doing well (71 percent). To the extent that many of the latter are

already employees (e.g. private training institutes and employers),

relatively high percentages finding employment might be expected.

2) Time To Find Work. Conditional upon working, ITI trainees are most

likely to find work within six months (86.5 percent). Trainees from

most of the other public institutions, including SMV, also find work

within six months when they get a job. Trainees from private

institutes are more likely to find work, but they appear to takelonger to find employmrent (67 percent versus the sample mean of 80

percent finding work within six months) . There does not appear to be

an obvious explanation for this finding.

3) Starting Pa . Conditional upon working, trainees of ITI, IKM, YTC and

IKK are most likely to get starting pay of between R 400-600 (43-65

percent) while SMV and PLK Johor trainees are most likely to get

starting pay of less than R 400 (60 to 62 percent). In contrast,

trainees from private training institutes are most likely to getstarting pay greater than R 600 (48.9 percent). Some of these

variations in starting pay may simply reflect location effects, an

issue addressed below.4) Relevance of Training to Work. Conditional on working, training

provided by most public training institutions (except SMV and IKK) was

reported to be relevant to their work for about 70-78 percent of

graduates. This figure is roughly consistent with the range of

estimates of training relevance--between 50 and 75 percent--reported

in studies of vocational school graduates in the United States. For

graduates from SMV and IKK, this figure was much lower, in the 37 to

44 percent range. As before, the graduates of private training

institutes were most likely to report the relevance of training to

their current job.

4.22 These simple comparisons are useful but potentially misleading. They

do not take into account differences between training providers. They serve

different student groups, varying by sex, trade areas, skill levels, and regional

markets, all of which can have an impact on measured labor market outcomes,

independent of the training efficacy of the institution. A training institution

may appear to perform well because its graduates are located in areas of high

labor demand and starting pay, as compared to other training institutions

situated in more rural and remote locations. Private institutes, for example,

will rationally select locations (e.g. industrialized urban areas) with the

greatest demand for their services, and with good prospects for job placement and

high starting pay for their graduates. Many public education and training

institutions, on the other hand, may locate in less favorable areas to better

serve less advantaged populations. Therefore, account should be taken of these

other variables in comparing the relative performance of different training

providers.

4.23 Table 4.5 shows the corresponding outcome distributions by training

provider once explicit account is taken of other factors such as sex, skill

- 99 -

level, trade area, and state of residence. The predicted labor market outcomesare based upon parameters estimates of several regression models (see Annex 4A),and the assumption that trainees from all training provider have the sample meansof all factors except where they got training.2' Sample means will primarilyreflect the characteristics of SMV trainees (by far the largest group), so thepredicted outcomes for them will be largely unchanged. Figures 4.2 and 4.2b graphthe predicted and observed outcomes to show how corrections for these othervariables affect judgements about the relative performance of different publicand private training providers.

Table 4.5: Predicted Labor Market Outcomes From Regression Analysis

Workine Time to Find Job Starring Monthly Pay JobInstitute Sample in 1992 <6 mth 6-l2mth 12+ mt cR40 R4I0 R601 + &Lv

ITI 322 79.8 85.5 11.8 2.5 36.0 43.8 20.1 66.7[KM 670 63.6 82.2 14.1 3.5 36.1 43.8 20.0 77.6YTC 81 68.7 81.7 14.5 3.6 36.7 43.6 19.5 75.2SMV 2621 52.1 79.5 16.0 4.3 62.9 30.7 6.3 46.2Prv. Inst. 159 78.6 64.7 24.8 10.3 22.2 44.4 33.3 75.8IKK 40 42.2 69.3 22.4 8.2 33.0 44.4 22.4 33.4PLK Joh. 90 64.3 78.4 16.8 4.7 66.4 28.2 5.2 74.3Other 108 70.6 70.4 21.7 7.7 37.1 43.5 19.3 76.2

Total 4091 58.2 79.6 15.9 4.4 51.4 35.9 12.5 57.8

Source: Predictions from regression models assuming that all trainees have the sample means of all other variablesexcept for where they got training (see Annex 4A).

Several results are suggested: by these graphs:

1) Group differences in the composition of sex of trainees, skill level,trade areas, and state of residence have an impact on measured labormarket outcomes. Controlling for these factors both reduces the variationin outcomes across institutions, and changes the relative ranking ofindividual training institutions. Thus, simole comparisons aive misleadinoconclusions about the performance of various public institutions, andabout the relative performance of public versus private trainingproviders.

2' This assumption is necessary but a little counter-intuitive for state-specificproviders such as PLK Johor.

- 100 -

Fig.4.2: Actual and Predicted PercentWorkr I n Ir 192

70

80

20

! ~ ~~~ It E ( - Prv . I nut. JlC PLr Jl.0j

| D~~~~~~ Job In IN92 + PNredicted

Source: Unpublished NVTC data and author's calculations in Annex

Tables 4A.1 and 4A.2.

Flg.4.2b: Other Observed and Predlcted:

40

swo

40-

3 D \9 A

20-

10

D LP IrN I P t. PLe Joh.

s W

o FM BOB. + P-F* oov in 1 tv t Ptotl vu

Source: Unpublished NVTC data and author's calculations in Annex

- 101 -

2) The estimated labor effects of the control variables (reported in Annex4A) are of some interest. First, they suggest that while female traineesare more likely to receive lower starting pay, their training is morelikely to be relevant to work. This result may reflect a concentration offemale trainees in low-paying gender-typed jobs such as hair-dressing.Second, compared to basic skills, higher level skill training improves allmeasured labor market outcomes. Third, trainees with engineering anddraughting-related trade training appear to perform best in most outcomes.Finallv, compared to the rest of the country, trainees residing in Perak,Johor, Penang, Kuala Lumpur and Melaka are more successful in findingemployment and higher paying entry-level jobs. Unless these locationaleffects are taken into account, those training institutions that serveoutlying regions of the country for equity reasons will score less well interms of labor market outcomes.

3) Among public trainina institutions, the relative ranking of ITI, IKK, andYTC trainees in most outcomes is largely unchanged, as in the proportionsfinding work (the range falls from 67-85 percent to 69-80 percent).However, the differences between them are greatly reduced, or in theproportion of trainees getting starting pay of R 600 or more, completelyeliminated (the range falls from 22-28 percent to 20 percent for all threegroups) . The high relative performance of PLK Johor graduates declines, asin the proportions working (from 80 to 64 percent) and getting startingpay of over R 600 (from 11 to 5 percent), possibly reflecting thefavorable labor market conditions in that state. SMV graduates, asbefore, rank lowest among all the different groups of trainees in alllabor market outcomes.

4) Comparing graduates of public and private trainina institutions, therecord is mixed as before, though the differences between them are nowgreatly reduced. Compared to the ITI, IKK, and YTC, some outcomes ofgraduates from private institutes are poorer (time to find a job); othersare comparable, as in the proportion working (79 percent for privategraduates and 80 percent for ITI) and reporting training to be jobrelevant (76 percent); and other outcomes are better, as in the proportionwith starting salary of R 600 or more (33 percent versus an average of 20percent in the three public training institutions).

4.24 This ranking of labor market performance--first, private traininginstitutes, then public training institutes, and finally vocational educationschools--appears to hold in many other developing countries as well.-L' Severalfactors are thought to be responsible for this common, but by no means universal,finding. Vocational schools tend to have low curriculum flexibility whilemarkets demand frequent changes; they face constraints on instructionalinnovation posed by semester scheduling and credit accumulation; difficulty inattracting qualified instructors because of civil service pay scales; and aninward focus on education rather than on the needs of employers. Public skillstrainino institutions have several advantages, including shorter course

1'W The World Bank (1993), op. cit.

- 102 -

offerings; freedom from time-serving requirements of formal education;flexibility in scheduling and curriculum redesign as demand changes; and closelinks with the private sector through in-service practical training for theirgraduates. Private trainina institutes, while often of variable quality, havethe most flexibility in adapting quickly to changing market conditions, and theycan attract qualified and experienced instructors by offering market pay scales.A study should be conducted to investigate these hypotheses and their efficacyin explaining the Malaysian findings.

Policy Implications.

4.25 The overview of industrial skills training and analysis of therelative performance of public training institutions suggest the followingimplications:

1) Coordination amona training institutions should be strengthened toavoid duplication and improve cost efficiency in resource allocation.The NVTC was set up for this purpose. It needs to be strengthenedfurther in terms of staffing, resources, and capabilities for policyanalysis. Concrete steps should be taken to implement previousrecommendations for a National Vocational Training Law to enhance theNVTC's authority and role in coordination of training across bothpublic and private training institutions, trade testing, andcertification of skills. The NVTC has already taken steps to improvetrade testing, certify previous learning and experience, and tointroduce NOSS (the National Occupational Skills Standard) to replacethe existing system.

2) Careful analysis of internal and external efficiency in trainingprovision should be conducted on an ongoing basis. These analysesshould help policymakers identify potential problem areas to beresolved, develop training strategies, and improve resource allocationboth among training institutions under one ministry, and acrossinstitutions under different ministries. Data on unit training costsshould be collected and analyzed on a systematic and system-widebasis. Broad based tracer surveys, such as those used in theanalyses, are an important source of data on how graduates from bothpublic and private institutions fare in the labor market, and shouldbe conducted on a regular basis by the NVTC.

3) There is considerable variation in performance of different traininginstitutions as measured by the entry level labor market experiencesof their trainees. In terms of these measures, the three principalpublic training institutions (ILP, IKM, and IKBN) do quite well ascompared to SMVs, though private training institutes appear to comeout ahead in terms of finding employment and higher starting pay. Interms of the relevance of training to work, the public and privatetraining institutions appear to be on par, with the SMV and IKKtraining being most likely to have low job relevance. The relativelylow performance of SMV graduates on all outcome measures is ofconcern, and requires further careful study especially since

- 103 -

vocational schools provide the single largest source of skilledtechnicians.

4) There should be systematic and on-going collection of information onskills training provided by Drivate trainina institutes. This may beachieved through the enactment of the National Vocational TrainingLaw, and registration of private training institutes with the NVTC.A streamlined reporting system should be developed, for monitoringpurposes and, more importantly, for providing policymakers withtraining data needed to plan effectively.

C. Demand-Side Incentives for Training

4.26 Policymakers recognize the critical importance of worker retrainingand skills upgrading if industry is to move towards higher value-added, and morecapital and technology-intensive production. Given the limited role of publictraining institutions in retraining and skills upgrading of the workforce, theGovernment has implemented two training incentive schemes--the DDIT (DoubleDeduction Incentive for Training) scheme and the HRDF (Human Resource DevelopmentFund) scheme--to encourage companies to play a greater role in meeting their ownskill needs.

4.27 Several issues arise in evaluating these incentive schemes. How muchtraining goes on in industry, in which firms, and is there any evidence of marketfailure requiring policy intervention? Have the two schemes had a salutaryimpact on the amount of employer-sponsored training, and can they be made moreeffective? The following analysis first characterizes the incidence of trainingby firm size and sub-sector, the relationship between training and technology,and the most important sources of training and skills upgrading for employees.With this as background, the DDIT and HRDF schemes are analyzed, focusing on thetakeup of schemes by firm size and sub-sector, and several recommendations madeto improve their implementation.

Incidence of EnterDrise Training

4.28 There is little data on employer training in Malaysia, exceptionsbeing the 1988 Malaysia Labor Market Flexibility Survey and scattered surveys of

employers fielded by various government agencies. The 1988 survey is a large,broad-based survey of over 3, 000 manufacturing establishments containing detailedinformation on their wages, labor practices, and training. While dated, thissurvey nonetheless provides a snap-short of firm based training at the time theDDIT scheme was first being implemented. Data from this survey are used tocharacterize the incidence of enterprise-based training by firm size and byindustrial sub-sectors.-L

ui Data used are tabulations from Guy Standing, Adiustment and Labor Flexibilityin Malaysian Manufacturing, Malaysian Human Resource Development Plan Project,1990.

- 104 -

4.29 The 1988 survey indicated that while entry-level training is quitecommon, formal structured training to upgrade worker skills is not, except inlarge, typically multinational manufacturing firms. In over two-thirds ofmanufacturing establishments that train, the main type of training is informalon-the-job training whose quality and durability may be questioned. In manyevaluations of the returns to the different types of training, the impact ofinformal on-the-job training is invariably small if not non-existent; on theother hand, there is strong empirical evidence that formal structured companytraining has the largest impact on earnings, followed by other institutionalizedtraining. 12/

4.30 Figure 4.3a shows, separately by firm size, five measures of training:(a) entry-level training, (b) retraining at the same level of skill, (c)retraining to upgrade skills, (d) the proportion of firms providing training tobetween 0.1 and 5 percent of employees, and (e) the proportion training over 5percent of employees. Entry-level training is relatively common, even in smallfirms, because firms need to familiarize new hires with the specific equipmentand work practices in use in the enterprise. Retraining and skills upgrading, onthe other hand, is highly dependent on the technology of the company--whether newproducts, processes, and equipment (especially computer-aided) are beingintroduced--and on competition in product markets, both domestically andinternationally. The evidence from micro studies of employers' trainingdecisions suggests that when the pace of technological change is rapid and firmsare actively involved in exporting, the demand for new skills and retrainingincreases. 13

4.31 Figure 4.4a provides insights into this hypothesis. It shows,separately by firm size, the percent of firms expanding the range of productsoffered and introducing new, more technologically sophisticated equipment. Italso shows the percent of employers responding that these efforts had the effectof increasing the skill content of jobs. On average, small and medium size firmsare less likely than larger firms to have introduced new products or installedtechnologically sophisticated equipment, or to report an increase in skillcontent of work. Not surprisingly, smaller firms are less likely than largerfirms to retrain and upgrade the skills of employees; when they did, smallerfirms provided training to a smaller fraction of their workforce. Another factornot shown in these figures is export orientation, which is positively correlatedwith the propensity of companies to train, and negatively correlated with firmsize.

IV For evidence from developing countries, see references cited in World Bank(1993), Skills for Productivity, chapter 2; for evidence from industrializedcountries, see Tan et al, Youth Training in the United States, Great Britain, andAustralia, Research in Labor Economics, 1993.

12' This evidence is based on an ongoing cross-national study of EnterDriseTraininc Strategies by the World Bank, and a study by Aw and Tan (1993),Training. Technologv and Productivity on Taiwan.

- 105 -

Fig.4.3a: Proportion of Firms Tralning

70 -

so

40

30

20-

'1-20 21-50 54-100 '10-1-250 254-SO 501.

vI oyntent Size of COiminIeoo Entry lIeel + 5am Iwol o Lauad. lI.*l A 0.1-V1 Ir,er

x 5.1.U workers

Source: Guy Standing (1990), op. cit.

FTg.4.3b:Percent Training by Sub-sector

90

70

so

40

30

20

Food&h bv wood fLn chwm'ici "c'm.tea i.iriconice

o 11Fty Iev*I + So.* I..wI 0 Ligr-ade l11 A 0. 1-916 wkers

Source: Source: Guy Standing (1990), op. cit.

- 106 -

Ftg.4.4a: Product Pange, New Technologyond Job Ski Il Content

70

SD -

40

30

20

X ;~ ~~~~20 21-SO 5-10 1a 01_250 25'%-500 501+

; rployment Size

0 Producte + Now Tech o ScIIl I content

Source: Guy Standing (1990), op. cit.

FIg.4.4b: By Sub-sector

80

70 -

so t>ut Tc o Ai otn

40 -

20

20

Text. ape. Pprot Nnaue. Pw...L. . OtChR*r emnuf.

a R'oducta + Mr*-Tech o silli content

Source: Guy Standing (1990), op. cit.

- 107 -

4.32 Figures 4.3b and 4.4b explores this hypothesis at the sub-sectorallevel. They show wide variations in enterprise training and technology acrossindustrial sub-sectors. Firms in the wood products and non-metals sub-sectorsrank lowest in all five measures of training; on the other end of the trainingscale are firms in the electrical machinery sub-sector, which is dominated bylarge, mostly multinational electronics companies. This same ranking of sub-sectors is found in terms of the proportion of firms introducing new products andnew technologically sophisticated equipment. These figures suggest that firmsin the most technologically progressive sub-sectors, such as electric andelectronics, are also the most prolific trainers; conversely, firms in sub-sectors with low levels of technology provide, on average, relatively littletraining.

Do Malaysian companies under-invest in traininQ?

4.33 Policymakers clearly believe that Malaysian companies under-invest intraining, especially in relation to the current and projected skill requirementsof rapidly changing technology and growing international competition. A case canbe made to support this view, drawing upon the above discussion. Three argumentsmay be made: (a) technology-related externalities from training; (b) marketimperfections, in worker retention and imperfect information; and (c) weaktraining capacity of domestic firms, especially smaller enterprises.

4.34 The first argument--technological externalities related to training--rests upon the view that a great deal of technology is embodied in worker skills.New technology usually requires extensive modification and adaptation before itcan be effectively used, and productivity gains realized, a process that involvescontinuous learning and training on the part of all workers, from engineers downto production workers. Just as firms do not spend socially optimal amounts inR&D (research and development), because they are unable to fully internalize thebenefits of their investments (technology spillovers also benefit other firms),so a similar argument can be made that firms under-invest in training related totechnological innovation. These positive technological externalities justifygovernment involvement in mobilizing increased enterprise training throughtraining subsidies or tax incentive schemes such as DDIT.

4.35 The second argument is that firms underinvest in training because ofmarket imperfections in worker retention and information. One argument commonlyheard in Malaysia is that 'poaching' of trained workers by other firms preventsemployers from recouping training costs, and results in under-investment intraining. Many economists dismiss this view, arguing that firms only poachworkers with general (and transferable) skills, but this would not impose costson firms that train since they will shift the costs of general training toworkers through lower wages. These objections are diluted, however, if mostskills are industry-specific or specific to particular technologies-, in whichcase there can be under-investment in skills from high levels of job mobility.

1' See Tan, Human Capital and Technological Change, 1980.

- 108 -

The appropriate policy response is to provide incentives for non-training firms(mpoachers) to train, or to share the costs of training provided by firms orother training institutions. A number of countries have use payroll levies,either with public provision of training--the Latin American model--or withrebates for approved training expenses, the form preferred by other countries.Malaysia's HRDF scheme falls into this latter category.

4.36 Imperfect information, especially about new technologies and training(both the value of training, training needs, and training pedagogy), can alsolead to under-investment in training. Arguably, both technology and training areexperiential forms of knowledge, requiring learning-by-doing. To the extent thatthese forms of knowhow are often not codified, and furthermore have value in themarket place, there will be incentives for the private sector to monopolize thisinformation. This results in less than socially optimal diffusion of bestpractices, both in technology and in training knowhow, and consequently, under-investment in training and technology. The appropriate policy response is toimprove the dissemination of best practices in technology and training knowhow,through industrial extension services, through employer associations and industrygroups, and through matching grants for firms or groups of firms to seek out bestpractices. Many of these policy instruments are already in place in Malaysia,though their takeup by the private sector has not been encouraging.5L'

4.37 The third, arument is that relatively weak management and trainingcapabilities of domestic companies, small firms in particular, have lead tounder-investment in training. Certainly, there is evidence that many otherwisesimilar domestic companies are less likely to train as compared to multi-nationalfirms. This, however, may simply reflect the appropriate amount of traininggiven their level of technology, and not weak management or trainingcapabilities. A stronger case can be made for small firms. Small firms areespecially vulnerable to several market imperfection in training--lack of accessto credit to finance training, poorly developed management and trainingcapabilities, lack of information on appropriate technology and training andtraining pedagogy, and high fixed costs (no scale economies) in developingtraining programs for a few employees. The appropriate policy response here isproviding an integrated package of financial services, technical assistance,education (through outreach and extension services), and facilitating low-costgroup training through industry associations, consortia of small firms, or incollaboration with larger enterprises.LW'

4.38 In summary, there appears to be some support for the view thatMalaysian industry generally under-invests in training. In 1987, the Governmentintroduced the first of two incentive schemes to increase training of employees.The DDIT was the principal policy for training between 1987 and 1993, and itpermitted firms to deduct double the amount of allowable training expenses on

2 See Ministry of International Trade and Industry, 1993 International Tradeand Industry Report.

U MITI is currently developing a SME (small and medium enterprises) census andstudy to better understand the problems of SMEs and to develop programs toaddress them.

- 109 -

their income tax returns.217 When HRDF was established in 1993, the DDITincentive scheme was retained for manufacturing firms with less than 50employees, and HRDF became the principal policy instrument for larger firms. Inthe following sections, the two training policy instruments are described, andtheir implementation, coverage, impact, and output of trainees assessed. Itconcludes with policy implications and recommendations.

The DDIT Scheme

4.39 There are two ways in which the DDIT scheme can be used: first, bysending employees for training in approved training institutions, second, byapplying to MIDA (Malaysian Industrial Development Authority) for approval ofplanned training programs. Firms sending employees for training in approvedtraining institutions are automatically qualified to claim the double deductionincentive directly from the Department of Inland Revenue.1!' This facilitatesuse of the incentive scheme, but because there are no reporting requirements,little direct information is available about the use of, and number of employeestrained through, DDIT approved training providers. Information about DDIT usethrough the second route is much better developed. Between 1987 and 1993, MIDAapproved a total of 591 inhouse training programs, involving 3,253 trainees andcosting a total of just under RM 32.5 million. Over this period, just over 35percent of applications for inhouse training were rejected for being incompleteor inadequate.

4.40 The DDI scheme has evolved over time, with an expansion in the numberof approved training providers, and the addition in 1991 of two additional typesof training that would qualify for the DDIT scheme. These changes were made inresponse to criticisms about the DDIT approval process, specifically that thetypes of training that qualified for DDIT were excessively restrictive.Originally, training programs had to be directed at either (1) development ofcraft, supervisory and technical skills for the manufacture of new products orprocesses, or (2) upgrading of craft, supervisory and technical skills inexisting products and processes. In 1991, two broader categories were added:(3) production-related training for productivity improvements, and (4) trainingfor quality improvements in production. MIDA reportedly has also simplified theapplication process and reduced reporting requirements.'9'

22' Employers already deduct training expenditures as a business expense, but theDDIT scheme allows them to deduct an additional amount equal to eligible trainingexpenditures.

o'/ There are currently 12 approved training institutions: the NationalProductivity Corporation, SIRIM, Mara Institute of Technology, MalaysianAgricultural Research and Development Institute, Forest Research Institute ofMalaysia, Centre for Instruction in Advanced Skill Training, Penang SkillDevelopment Centre, IKM, Industrial Training Institutes, German-MalaysianInstitute, Malaysian Timber Industry Board, and Perak Entrepreneur and SkillDevelopment Centre.

L9' Based on interviews with MIDA staff.

- 110 -

4.41 These changes--in the scope of permissible training, in the number ofapproved training providers, and in the application process--were associated witha sharp rise over time in the number of DDIT applications and a decline in therate of their rejection by MIDA. See Figure 4.5a. The number of applicationsrose from 37 in 1991 to 214 in 1992, and to 392 in 1993. The rejection rate oftraining applications declined over time, from a high of over two-thirds (69percent) in 1988 to the 22-25 percent range in the early 1990s. Expansion in thescope of eligible training programs also showed up in changes in the kinds ofworkers getting trained. Especially striking is the growth in training of'other' categories of workers (typically production workers), the group mostlikely to benefit from addition of training criteria (3) and (4).

Fig.4.5a: DOIT Program App[ications

3220

30O

2800

250-

240-

220-

200-

& 150

Soure: nne tale B.1

120

Bso

55

20

o 1558 *9893 1950 '99i 1992 1993

Source: Annex table 4B.I.

- III -

Fig.4.5b:DOIT Trainees by Training Type

7Ds

$DO-

500-

100 =

1906 19g9 1990 1991 1992 1993

Clraft. i smar 0 engIn A tneh X oth-r

Source: Annex table 4B.1.

Assessment of DODT

4.42 Several questions arise in assessing the efficacy of DDIT as atraining policy. How effective was DDIT in encouraging employer provision oftraining? Were many firms induced to begin training, or to increase training,by public subsidization of training costs? Or was the incentive simply awindfall for employers who would have trained anyway, even without DDIT?Furthermore, now that DDIT is the only training policy for companies with lessthan 50 employees, will DDIT be an effective policy instrument for small firms?These questions are addressed below.

4.43 First, recognizing that data are not available on training takenthrough approved institutions, it is still evident that the takeup of DDITthrough MIDA has been extremely limited, notwithstanding the dramatic rise in thenumber of training programs approved since 1991. Statistics on approved programsoverstate the number of firms that utilize DDIT since firms can, and do, submitmultiple applications. For example, the 317 training programs approved by MIDAbetween October 1988 and March 1993 were filed by only 159 companies. Thecumulative number trained through MIDA approved DDIT programs up the end of 1993only totaled 3,253 workers, over half of this in 1993.

- 112 -

4.44 Second, the takeup of the DDIT incentive has been very uneven acrosssubsectors, with firms in electric and electronics being the primarybeneficiaries of DDIT. Between 1988 and March 1993, the electric and electronicssector accounted for 181 out of the 317 training programs (or 57 percent)approved by MIDA. The chemicals, non-metallic products, and transport equipmentsubsectors were the other principal users of DDIT, but they had significantlyfewer programs--26, 22, and 21 programs, respectively. On the other end of thescale, the beverage and food industry had no programs approved. In terms ofnumber of trainees, the electric and electronics subsector accounted for 898 outof the 1,735 workers (52 percent) trained through these programs.

4.45 Third, DDIT use has been dominated by multi-national companies,primarily in the electric and electronics subsector.

52' Out of the 68 firms that

filed applications in 1992, 33 (or 48 percent) were wholly foreign-owned, 8 (12percent) were majority foreign-owned, and 1 (2 percent) had equal foreign-Malaysian ownership. Of the remaining companies, 21 (32 percent) were majorityMalaysian-owned, and 5 (7 percent) were wholly Malaysian owned. These ownershippatterns, and the uneven takeup of DDIT across subsectors, raise questions aboutthe design of the DDIT incentive scheme, and whether it has been effective inencouraging new training among domestic, and less training-intensive firms.Arguably, as suggested by the 1988 survey of labor market flexibility, mostmulti-nationals and majority foreign owned firms would train even without theDDIT incentive, given the high-tech subsectors in which they operate and theirproduction for export markets. In the other domestic-oriented subsectors and inthe larger population of Malaysian-owned companies, where skill levels aregenerally lower, the small takeup of DDIT suggests that this incentive scheme hasgenerally been ineffective in encouraging training.

4.46 Fourth, the takeup of DDIT by small companies has reportedly been verylow.3' This pattern of use by firm size is important since, effective June1993, only companies with less than 50 employees will be eligible for DDIT. Acrude attempt to characterize the size distribution was made by matching listsof company names of DDIT applicants with a master list of companies in operationin December 1992 that contained information on employment size. Table 4.6 showsthe size distribution of DDIT applicants for the sample where name matches weremade.w The data suggests, first, that over the 1988 to 1994 period, only asmall proportion of DDIT applicants (9 firms or about 6.8 percent) were smallcompanies with less than 50 employees. Companies with 50-99, 100-499, and 500or more employees accounted for 22, 30 and 41 percent of the matched sample offirms, respectively.

L' MIDA 1992 Annual Recort, p. 102.

a' This perspective is based on MIDA' s experience in processing DDITapplications. It did not collect information on firm size prior to 1993, but isnow eliciting this information in DDIT applications.

W Only 133 companies out of 189 DDIT applicants (about 70 percent) could bematched perfectly by company name, possibly because of company name changes,entry and exit of firms, or reorganizations.

113 -

Tabb 4.0: Employment Sln Dltributsn of DDIT Appikants

DDIr Aalicaw Comoanieserof Emakvees<50 50-99 100-499 500+

Number of companies 9 29 40 55Distribution(percent) 6.5 21.8 30.1 41.3

Source: MIDA, sample of DDIT applicaot. 1988-1994.

4.47 These variations in DDIT takeup across subsector, ownership, and firmsize may be attributable, in large part, to economic factors.U' However, thelow levels of takeup, and their changes over time with program modifications,suggest that the application process itself is playing a role. Specifically,many companies may not find the incentive attractive because the incremental costof applying far exceeds the additional benefits of applying for DDIT. On thecost side, companies must (1) commit time and other resources to meetingapplication requirements,2' including the stipulation that submissions be madeto MIDA within 3 months of training completion, and (2) pay for an externalauditor to certify expenditures each time an application is made. On the benefitside, the company is able to claim an additional write off of less than 100percent (because of limits on certain cost categories) if the apolication isaunroved. In 1993, MIDA rejected 22 percent of DDIT applications, so theexpected benefits of applying should on average be discounted by this probabilityof rejection.

4.48 For small firms--the new target population for DDIT--this cost-benefitcalculation may be even less attractive. Four factors may be important. First,many small firms may operate close to the break-even point, and having no taxableincome to shelter, would not find DDIT attractive. Second, when only a fewemployees are being trained, as is usually the case with small firms, auditingfees for DDIT applications can eat up the entire amount to be claimed.&' Third,high fixed costs of training, coupled with weak training capabilities, may notmake training cost-effective for small firms. Finally, many small firms operatein the informal sector, and judge the foregone DDIT benefits to be small ascompared to the potential costs of applying to MIDA, namely, inviting closergovernment scrutiny of their activities and regulation on matters such aslocation, adherence to environmental regulations, and labor issues.

E3 See the discussion of the economic determinants of company-based training inSection C.

Y' Companies must include details of the training undertaken (including syllabiand course content) , training providers, training contract. list of employeesreceiving training, type of training, training duration, and a detailed costbreakdown by allowable categories.

B' This aspect is reportedly one of the major complaints about the DDITapplication procedure.

- 114 -

4.49 Malaysia's experiences with DOIT are not unique. Many countries haveused training subsidies or tax write-offs of training expenses to encourage firmsto train, including Argentina, Brazil, Chile, Fiji, Pakistan, and thePhilippines. The limited evidence suggests that they often needlessly subsidizewell run firms that already train, while poorly managed firms either do notrespond or respond by establishing training designed more to maximize financialgains than to develop needed skills. Evaluations of these programs in Chile andBrazil indicate that the main beneficiaries are large firms in the most dynamicsectors of the economy.Z&'

Policy Implications for DDIT Scheme

4.S0 The analysis suggests the following implications for policymakers:

1) Large multi-national firms appear to have received sizeable windfallgains from DDIT. Given the technology-intensive nature of theirproduction, coupled with their export orientation, most would havetrained their workforce even without the benefit of this incentivescheme.

2' The issue is moot since larger firms with 50 or more

employees are now covered under the Human Resource Development Fund.

2) Unlike DDIT applications through MIDA, no data are available ontraining through the 12 DDIT approved training providers. Thisknowledge gap--about levels and types of training and about the firmsthat use it--precludes a more definitive assessment of the incentivescheme. An effort should be made to develop such a data base.

3) Given past trends, the data suggest that MIDA will get no more thana handful of DDIT applications each year from small firms with lessthan 50 employees. Unless small firms make extensive use of approvedtraining providers, and it is unclear that they do, it must beconcluded that the DDIT incentive scheme is an ineffective policyinstrument for this group of companies. Policymakers have severaloptions.

4) The first option ift to streamline the apolication orocess for DDIT.This might involve automatic approval of applications, with therequirement that all DDIT users submit annual statements to MIDAreporting trainmng tarough approved training institutions and throughad-hoc traininc procrams. Firms would be required to maintaindetailed records suteCct to unannounced, periodic spot-checks forcompliance. This wquld reduce reporting requirements, costs, and

L' World Bank, Vocational EducatIon on the Threshold of the 1990s, commissionedstudy by CINTERFOR and ILO, volumies I and II, 1991.

' Enterprise surveys in many countries, including Indonesia, Mexico, Colombia,and Taiwan, have found that larger firms and firms with foreign ownership aremore likely to train their workers, presumably even without tax credits fortraining.

- 115 -

uncertainty for users, free MIDA from the administrative burden ofapproving every application, and provide policymakers with data neededto monitor trends in the use of DDIT.9'

5) A second option is to eliminate the DDIT incentive entirely, on thegrounds that few small firms are likely to use DDIT, even with astreamlined application process. Firms with less than 50 employeescould be brought under the HRDF and registered; however, the issueof payroll contributions for these firms needs to be resolved. Thegovernment might consider a waiver of the payroll levy for smallfirms, and a block grant to the HRDF from general revenues to coverthe costs of their use of training services.

2' Bringing all firms

under the HRDF would eliminate duplication by two agencies, andsimplify administration since the inevitable growth and shrinkage offirms above or below the 50 employee cutoff would be seamlesslyaccommodated by universal coverage of all manufacturing firms.

(The Cabinet has already decided to contribute R.M.2,000 for everyR.M.1.00 to be paid to firms that opt to join the HRDF.Government's contribution will be reduced to 0.5 percent ofthe monthly basic wages and fixed allowances. This subsidyis to be given for five years after which it will bereviewed.)

The HRDF Scheme

4.51 The HRDF was established in 1993, with a matching grant from theGovernment.X' The Act created a council (HRDC), with representatives from theprivate sector and from responsible government agencies, and a Secretariat toadminister the HRDF schemes. Unlike DDIT, the HRDF is not a subsidy scheme.Employers who have contributed a minimum of six months are eligible to claim aportion of allowable training expenditures up to the limit of their total levy(1 percent of payroll) for any given year. HRDF then reimburses them for suchexpenses. For that purpose, the HRDC has set rates of reimbursement, varying bytype of training and generally being lower for the companies with 200 or more

Le This option is predicated on the assumption that onerous reportingrequirements are the principal cause of the low DDIT takeup by small firms. Morelikely, the problem is that small firms do not find DDIT attractive because theyhave no income to shelter, they do not see the benefits of training, and theywish to remain unregulated.

L' This could be justified on the same grounds used originally to exclude firmswith less than 50 employees from the HRDF, namely, ability to pay and lacking thecapacity for training, their levies used to subsidize training in larger, moretraining-intensive companies.

' The Government contributed R48.9 million to match projected company leviesin the first year; in each of the following three years, it will add anadditional R16.3 million to the HRDF.

- 116 -

employees (larger firms') as compared to those with less than 200 employees('smaller firms) : (a) technical, craft, and computer training at 60 and 70percent for larger and smaller firms, respectively; (b) quality-related trainingat 60 and 70 percent; (c) supervisory training at 60 and 70 percent; (d) otherretraining at 40 and 50 percent; and (e) overseas training at 30 percent.

4.52 Three training schemes were introduced in July 1993--the ATP (ApprovedTraining Program) scheme for approved training in registered traininginstitutions, the SBL (Skim Bantuan Latihan) scheme for ad hoc inplant orexternal training from non-approved institutions, and the PLT (Pelan LatihanTahunan) scheme for firms desiring training on an annual basis. In the ATPscheme, employers can send their employees for training without the priorapproval of the HRDC and submit claims on completion of the course. They wouldselect ATP approved training programs offered by training providers in the PROLUSsystem. In the SBL scheme, which is intended to be the main funding mechanism,prior approval of training programs must first be obtained from the HRDC.Employers submit structured training plans with specific objectives, areas oftraining, duration, number of trainees, instructors, and means of assessment.In the PLT scheme, which is designed to minimize the burden of multiple filings,employers submit detailed annual training plans covering at least 10 percent ofthe company' s workforce and 15 percent of junior level employees

4.53 Table 4.7 shows the numbers of firms registered, claims filed, andworkers trained under each of the three schemes between June 1993 and March 1994.To date, a total of over 3,300 companies have registered with the HRDF. The SBLscheme had the largest number of training programs (2,010), followed by the PLTscheme (923) and the ATP scheme (615). However, in terms of numbers of workerstrained, the PLT scheme was the largest, with over 56,000 trainees, followed bythe SBL scheme with 52,000 trainees. Interestingly, only about 2,000 employeeshave been trained in ATP approved programs. This finding is consistent withevidence presented in Section B on employers' preferences for inplant trainingover training offered by external private training institutions, since firms cantailor training to their specific skill and technology requirements.

Table 4.7: Summary Data on Operadon of the HRDF Schemes

Schemes 1993 1994 0L1. Number of Companies Registered 3,273 3t 3,3042. ATP Schemr (approved programs)

Training Programs 446 169 615Number of trainees 1,308 761 2.069

3. SBL Scheme (ad-hoc programs)Training Programs 1.129 881 2.010Number of tainees 23,780 28,269 52,049

4. PLT Scheme (annual plan)Training Programs - 923 923Number of urinem - 56,206 56,206

Nte: 1993 refers to second half of 1993, and 19941 othe frst quarter of 1994.Sorce: HRDP (unpublished dtaL).

- 117 -

An Assessment of the HRDF

4.54 Several issues arise in evaluating the HRDF scheme. First, is theHRDF having the desired effect of encouraging companies to begin providing, orincreasing provision of, more structured training for their employees? Second,are the differentiated rates of reimbursement by type of training elicitingbroadly the right kinds of training? Finally, as currently structured, is theHIRDF well organized to administer and intervene in inducing increased trainingby employers?

4.55 The first issue, whether HRDF is encouraging more structured trainingfor employees from companies, can only be answered with data on the incidence andlevel of training, and its rate of change over time. Given the relative newnessof HRDF, this will not be feasible; instead, the analysis focuses on the rate oftakeup of different HRDF schemes. This takeup rate can be used as a benchmarkagainst which outcomes in future years can be compared to evaluate the impact ofHRDF on increasing training. The analysis also focuses on takeup rates by firmsize and sub-sectors, to identify the broad attributes of non-training firms thatmight be targeted for closer attention by the HRDF. The data for this analysiswere created by linking files on firms using the SBL and ATP schemes, with fileson all firms registered with the HRDF.L''

4.56 On the broadest level, the data indicate that initial use of HRDFschemes has been relatively low, especially among smaller firms. Figure 4.6ashows the takeup rate of the SBL and ATP schemes by firm size as a percentage offirms registered with the HRDF. For all firms combined, the takeup rate of SBLscheme was over 12 percent, that of the ATP scheme about 14 percent. About 6percent of companies used both schemes while about 80 of companies used neitherscheme. The rate of takeup in each scheme rises dramatically with firm size, asdoes the takeup of both schemes. In small firms with less than 100 employees, thetakeup rate for SBL and ATP is 4.3 and 6.3 percent, respectively. In the largestfirm size category with over 1,000 employees, the corresponding takeup rates aremuch higher, about 52 and 40 percent respectively. It is important to note thateven among large firms, the takeup of these HRDF schemes is not universal. Over38 percent of large companies did not file training claims under either scheme.This firnding would be essentially unchanged even if use of the PLT scheme wasconsidered, since no more than 24 companies have approved annual training plans.

4.57 In terms of trainees, the data (see Annex 4C) indicate that smallcompanies are training a lower proportion of their workforce as compared to largefirms. This finding is consistent with evidence presented from the 1988 survey.Companies with less than 100, 100-199, 200-1000, and 1,000 plus employeesaccounted for about 11, 3, 26, and 60 percent of all SBL trainees. Their shareof all employees in companies registered with the HRDF was approximately 15. 16,52, and 17 percent, respectively. Thus, relative to their share of all employeesin registered firms, large firms are providing more employees with SBL trainingthan smaller employers. A similar firm size pattern is found in the case of ATPtraining, though the differences by firm size are less marked. Thus, compared tolarger firms, small firms are more likely not to use StRDF schemes and when they

21' The files for the PLT scheme were not available for this analysis.

- 118 -

do, to use them less intensively.

4.58 Like the 1988 survey, these data revealed wide variations across sub-sectors in the rate of takeup of the HRDF schemes. See Figure 4.6b. By sub-sector, the highest takeup rates of either scheme by employers are found inprofessional & scientific instruments, general machinery, electric machinery, andceramics and glass; sub-sectors with low takeup rates are food, beverages &tobacco, textiles and apparel, and wood products & furniture. In terms oftrainees, with 44 percent of all employees in registered companies, the electricmachinery sub-sector accounted for over 80 nercent of all SBL trainees and 39percent of all ATP trainees. In contrast, the wood products & furniture sub-sector had less than 1 percent of trainees in either scheme, even though itsshare of all employees aas over 7 percent. Similarly, the textile, apparel andfootwear sub-sector had less than 2 percent of trainees in either scheme and ashare of employment of over 4 percent. Thus, the cross-sectoral patterns oftraining under the SBL appears little different from that reported in the 1988survey.

Fig<.4.6a: Percent Takeup of SBL and ATP

*0

40 -30

20-

.100 100- 199 200- 1000 1000.

I oyfl_t Sir t

SBL 4 *TP o gOph

Source: Annex table 4C.3.

- 119 -

Fig. 4.6b: Takeup of SEL and ATPby S,ub . PtO

35

32-

35

1 2 3 4 5 5 7 9 9 10 11 12 13

S -ee -I e .tcrl I -o b. I -1

0 SL + ATP o BEth

Source; Annex table 4C.3.

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

4.59 The second issue concerns the types of training provided by employers,and whether differential rates of reimbursement are broadly effective in shapingthe mix of training. Implicitly, the current rate structure values technical,craft, computer, quality, and supervisory-related training most highly (60 or70 percent), followed by 'other training' (40 or 50 percent), and finallyoverseas training (30 percent). With one year of data, the impact of the ratestructure on training mix cannot be assessed; all chat can be done is to compare

- 120 -

the composition of training and the rate structure. Perhaps the more criticalquestion at this point is whether the composition of the Human ResourceDevelopment Council that administers the fund and influences the trainingprograms correctly reflects private sector preferences for training needs,especially since the firms, skill needs are so heterogeneous.

4.60 Is the distribution of training by type consistent with thereimbursement rate structure? Table 4.8 shows the numbers of ATP and SBLtrainees by types of training. It distinguishes between 6 types of training--computer, quality, supervisory, technical and craft, overseas, and 'other'training categories In both schemes, the 'other training' category is theoredominant tvoe of training done -- 56 percent of ATP trainees and 38 percentof SBL trainees--even though this training category has the lowest rate ofreimbursement next to overseas training. It will be recalled that employers alsoplaced the same emphasis on 'other' training under DDIT. This may be explainedby the fact that the 'other' category is primarily for retraining and skillsupgrading of production workers, who typically make up the largest occupationalgroup in industry. The two other largest groups of ATP trainees are concentratedin supervisory (12 percent) and computer (11 percent) training. In the case ofSBL trainees, the other large groups are technical & craft (28 percent) andquality-related (22 percent) training.

4.61 Are patterns of SBL training by type different across firm sizes? Inthe smallest firm size category under 100 employees, the overwhelming number oftrainees are in technical & craft-related training. This is encouraging sincesmaller firms have traditionally been weakest in technical kinds of training.In contrast, companies with over 100 employees are most likely to train in the'other' training category. Furthermore, the proportion of trainees gettingcomputer and quality-related training rises with firm size, which is also to beexpected given the greater degree of capital-intensive, computer-aided productionand export-orientation of larger companies.

4.62 There are bound to be differences in skill requirements amongindustries as confirmed in the data on SBL takeup. This happens because of thekinds of labor hired and the types of technology and production processes used(see Annex 4C) . Compared to the sample mean, quality-related training isemphasized by fabricated metals; computer training by food and beverages;technical training by scientific instruments, and the 'other training by thetransport equipment sub-sector. For SBL trainees, the technical/craft categorycan be further broken down into technical training--25 percent--and craft-relatedtraining--3 percent. Craft-related training under the SBL scheme is importantin only 3 sub-sectors--textiles, apparel & footwear (21 percent), machinery (5percent) , and electric machinery (3 percent) --in the other sub-sectors, virtuallyno SBL training is craft-related. These large differences in skill requirementsby sub-sector call into question the likelihood of success, and merit, of policyintervention to shape the socially desired mix of training.

- 121 -

Table 4.8: Distributdon of ATP and SBL Trainees by Type of Training

A7P SBL - Firm Sizerrsininf 7'vveTotal Total <. <20 0 < 10 I S 00Number Trainees 2069 54644 5923 1579 14410 32732P^ercent

Computer 10.6 6.5 1.6 3.9 5.3 8.0Quality 2.2 21.7 6.5 9.6 13.3 28.7Ochers 55.6 37.7 6.5 57.4 36.4 43.0Foreign 0.0 1.0 0.5 1.9 1.2 0.9Supervisory 12.3 5.2 2.2 16.2 8.3 3.9Technical/craft 19.2 27.9 82.7 11.0 35.4 15.6

Note: ATP esdmates from urnpublished HRDF data; SBL estimates are taken from Annex Table 4C.4.

4.63 The final issue is whether the HRDF is well organized to administerand intervene in encouraging employers to train. Several questions ariseregarding the organization and implementation of the HRDF to date. Is the HRDFSecretariat adequately staffed? Does it have analytic capabilities and abilityto develop new and innovative training schemes? Can the existing schemes beimplemented more effectively to minimize administrative burden and elicit greaterresponsiveness from the private sector? Are the three existing HRDF schemesadequate, and if not, what kinds of new programs should be developed and whichgroups of firms should be targeted? These questions are addressed in turn.

4.64 First, the HRDF Secretariat is under-staffed. With the exception ofseveral senior personnel, most of the existing staff are preoccupied with eitherdata entry or the processing of application forms for the three schemes. Thereis, as yet, no large capacity computer system (one is on order) and personalcomputers are extensively used. Several higher level professional positions areneeded, especially in planning and new product development. It is critical thatthese positions be sanctioned and filled quickly so that new training programscan be developed, and the HRDF' s dissemination and outreach efforts expanded.In this regard, the slow pace of the public service department and low civilservice salary scales are constraints on the speed with which the Secretariat isable to meet its staffing plans.

4.65 Second, there are tensions between the objectives of, on one hand,regulating abuse of the scheme and on the other, encouraging private sectorparticipation in the HRDF schemes through a simplified application procedure.Companies and training providers have complained, individually and throughindustry associations, about the administrative burden of filling in applicationforms and of gaining approval for training programs. Transparency in theregulatory procedure must be ensured in order to prevent abuse. A morestreamlined application procedure--with the minimum reporting needed for HRDF'Rsadministration, monitoring, and planning, and with appropriate incentives for notcheating--would eliminate these transactions costs.

4.66 Finally, the low takeup of HRDF suggests that an expanded program ofoutreach and dissemination is required. In this regard, planned and ongoinginitiatives of the HRDF in the following areas are critical: ia) the proposal tosend companies periodic statements of their levy payments and training claiims;this should serve to inform top management about training activities in the

- 122 -

company, and the 'costs' of their not training. Such statements are alreadybeing sent and would be sent on a half-yearly basis; (b) the proposal to conductgroup seminars on training needs analyses (TNA) at low, and fully reimbursable,costs; by targeting smaller enterprises, these workshops should provide moretraining in smaller firms;W (c) a proposal to develop an on-line informationsystem about training providers and courses; and (d) HRDF financing of thetraining components in integrated packages of services targeting SMEs. Such anexpanded program of outreach and dissemination will be required if accumulatedsurpluses are to be disbursed. To date, the HRDF has accumulated surpluses ofabout R 60 million, of which only RM25.2 million has been granted to employersfor re-training and skills upgrading involving a total of 222,330employees/workers.

Some Recommendations

4.67 It is too early to make judgements about the efficacy of the HRDF inpromoting training and skill upgrading. Additional years of accumulatedinformation and experience with the different schemes will be needed to do that.The above description was intended to provide a crude benchmark against whichfuture training outcomes can be compared. In the short-term, several measuresmay be taken quickly to improve the effectiveness of the HRDC Secretariat and theadministration of the HRDF.'3

1) The reimbursement rate could be simulified further. The ratestructure has been simplified recently and now range from 50 percent(overseas training) to 80 percent (technical and craft skills) . This

needs to be simplified further to give employers greater incentivesto train in critical skills and in smaller companies. However, as theanalyses indicated, these differential in rates are still large andare unlikely to have much influence on training mix; employers will

Z'Such workshops have begun since August 25, 1994. A total of thirty workshopswere planned through the end of 1994.

LI' It is critical that the HRDF be perceived early on by the private sector asa partner in skills training and not just another tax on companies. Accumulatedsurpluses exceeding RM60 million reinforces this latter view but also suggeststhe magnitude of the training challenge that faces the HRDF.

- 123 -

train wherever their skill needs dictate.21' One single reimbursementrate, perhaps 80 percent, would allow companies to make trainingchoices and skills mix appropriate to their specific circumstances>

2;

to the extent that the reimbursement is partial, they have anincentive not to spend on 'frivolous' training. This rate structurewould also simplify the application process for both employers and theHRDC, and eliminate uncertainty on the part of firms aboutreimbursement rates

2) tt is recommended that the HRDF be corooratized, and given greaterautonomy over personnel and policy matters. The Secretariat shouldmove quickly to fill higher level professional positions, andestablish a training development unit to develop and promote new andinnovative schemes for training delivery.

3) The aonlication and aonroval procedure should be streamlined whereverfeasible. Recognizing that government has legitimate administrativedata needs, the approval procedures could be streamlined in twoareas.)' First, the current procedure of approving specific ATPcourses is cumbersome and time-consuming: instead, the HRDC couldfocus on certifying providers under the PROLUS scheme. The operationof the market (employers and providers) would determine what trainingcourses are demanded and who should supply them. A mechanism shouldalso be instituted for eliciting trainee complaints and for periodicreview of training providers. A second area is to grant exemptionsfrom the payroll levy for companies with a demonstrated track recordof extensive employee training,'7 which would reduce administrativecosts for these companies and for the HRDC. However, there shouldstill be reporting requirements and periodic review of companiesrecords to monitor compliance.

2" In discussions, a training officer of a large electronics firm in Penangnoted that while the ranking of critical skills implied by the reimbursementrates was generally valid, firms can vary greatly in their skill requirements andwill train irrespective of the rate of reimbursement. Furthermore, the 50percent reimbursement rate for overseas training (although an improvement overthe 30 percent that existed until recently) is still low, given the importanceof overseas training in technology transfer.

L" The HRDC is already considering a proposal to simplify the rate structureinto two levels--a lower rate for administrative-related tiaining, and a higherrate for all other training.

6/ Some minimal data are required for the HRDC to monitor trends in training,establish a benchmark against which future programs and outcomes can beevaluated, and ensure that training providers meet specific performancestandards.

3" This may be phased in over several years. One criterion for levy exemptionmight be consistent expenditures on training in excess of 1 percent of payroll.

- 124 -

4) An arrangement in which the HRDF uses certified training oroviders as

'aaents' should be given serious consideration.' This proposal has

tangible benefits for all parties. In essence, training providerswould charge trainees the portion of costs that is reimbursable (say30 percent), and submit a request to the HRDF for the balance of costs

(70 percent). This arrangement should appeal to both employers (no

paperwork and low upfront costs) and training providers (scaleeconomies in billing the HRDF and a marketing tool for attracting

trainees). It also has several administrative benefits for the HRDC,reducing paperwork and simplifying oversight of the ATP scheme.

I This proposal was well received In discussions with the HRDC and industry

associations.

- 125 -

APPENDIX 4AEstimating the Labor Market Outcomes of Public Training

4.68 An important part of any evaluation of training providers should beanalysis of the effects of training on subsequent labor market performance ofgraduates. In Malaysia, where there is a multiplicity of public and privatetraining providers, this evaluation should include comparisons of the performanceof graduates from the different training institutions, taking into account theirunit costs of providing this training, the types of courses provided, and otherfactors influencing the outcomes of training that are not related to the quantityor quality of training provided.

4.69 Data useful for such an evaluation were collected by the NationalVocational Training Center (NVTC) as part of its evaluation of graduates oftraining programs that took the trade tests administered by NVTC in 1991 .2' Thesample included test-takers from several public institutions including ITIs(Human Resources) , IKM (MARA), IKBM (Youth and Sports), IKK (Defense), PLK Johor,SMV (Education) , private sector training institutions, employers, and others.The survey elicited broad information on work status between six months to oneyear after taking the trade test, time taken to find employment, starting pay,and relevance of training to current employment. A sample of 4,091 persons withrelatively complete data on key variables was used for the following analysis..

4.70 A variety of non-linear regression models (probit and ordered probit)were used because of the categorical and ordered nature of the four labor marketoutcome variables: (A) probability of working (probit of working or not working),(6) time to first job (ordered probit of finding a job in less than six months,6-12 months, or longer than 12 months) , (C) starting monthly pay (ordered probitof getting less than RM 400, RM 400-600, and more than RM 600), and (D) relevanceof training (probit of training used in job or not used) . Simple linearregression models are not well suited to estimating these kinds of outcomes,since they can generate predictions outside the probability bounds.

4.71 The objective of this analysis is to compare the relative performanceof graduates from different training providers in each of these outcomes, whilecontrolling for the effects of sex of trainee; skill level attained (basic,intermediate, or advanced); trade area (automotive, building, mechanical,electric and electronic, tailoring, and draughting); and state of residence.This is important since labor market outcomes are affected not only by thecharacteristics of the trainees themselves (e.g., sex) , but also by factors suchas their trade area (e.g., demand for technicians with mechanical, electric, orelectronic skills) , or local labor market factors (e.g., states vary in stage of

2V In this tracer study, over 8,000 questionnaires were mailed out and 4,901responses were received for a response rate of about 91 percent. The results ofthis survey are reported in a 1993 NVTC document, 'Laroran Kaiian MenaesanKedudukan Bekes-Bekas Pelatih Institusi Latihan Kemahiran Awam dan SwastaKeluaran Tahun 1991 Di Dalam Pasaran Buruh.

- 126 -

industrialization, pay scales). The regressions yield estimates of the effectof each variable on outcomes of interest, holding constant the effects of allother included variables.

4.72 Tables 4A.l and 4A.2 report the results of these analyses. Table 4A.lconsiders two outcomes: (1) the probability of working, and (2) the probabilityof receiving one of three starting pay categories. In these regressions, theparameter estimates are compared to the following omitted groups--males, thosewith basic skill level, test-takers from the SMV (vocational secondary schools),those with training in the electrical and electronics trade, and those residingin Perak state. Table 4A.2 deals with two other outcome measures: (3) time tofind job, and (4) relevance of training to work. These regressions do notinclude controls for state of residence since an expanded model specificationfound no statistically significant effects of state of residence on these twooutcomes.

Table 4A.I: ProbabDlty of Workilag & Mosthly Starting Pay

Probih Ordered ProbhWorking (n=4091) Starring Pay(n=2309)

X-variables Coef z-score Coef z-scorefemale .145 1.18 -.400 -2.89inter. skill .163 2.51 .360 5.27advan. skil .215 1.18 .911 4.42ITI .782 7.77 .687 7.69IKM .294 4.12 .683 8.63IKBN .434 2.66 .668 3.78Priv. Instil. .740 5.06 1.094 9.25IKK -.248 -1.18 .767 3.05

PLK lohor .314 1.85 -.095 -0.54Other Inslit. .489 3.43 .658 4.34Automotive .042 0.65 .013 0.18Building -.161 -1.95 -.401 -3.61Carpentry -.102 -1.28 -.607 -5.78Mechaniical -.049 -0.88 .057 0.89Tailoring -.237 -1.54 -.397 -2.04Draughting .252 0.82 .756 3.17Johor .451 5.03 .301 2.85Kedah -.067 -0.63 -.181 -1.27KelanLan -.603 -5.83 -.391 -2.34

.L. .447 3.97 .232 1.88Labuan .288 0.64 -1.183 -1.70Melaka .253 1.93 -.023 -0.16N Sembilan .063 0.53 .038 0.24Pahang -.076 -0.73 -.028 -0.20Perlis -.242 -1.27 -.413 -1.35Penang .625 5.47 .052 0.42Sahah -.522 -4.01 .036 0.16Sarawak -.268 -2.58 -.138 -0.96Selangor .656 6.98 .247 2.39Trenganu -.444 -4.12 -.175 -1.16

cult .329 na-cut2 1.524 na

Constat .053 0.68

- 127 -

Table 4A.2: Time to Find Job and Training Relevance To Job

Ordered Probsi ProbilTime to Find Job Relevance to Work

X-vaniables Coef z-score Coef z-scorefemale -.330 -1.91 .431 2.90inler. skill 013 0.15 .236 3.15advan. skil .128 0.51 .477 2.10ITI -.233 -1 98 .527 5.37IKM - 099 -1 02 .855 1000IKBN -.078 -0 35 .776 3.84Pnv. Instil. .447 3.37 794 5.90IKK .321 1.14 -.334 -1.24PLK Johor 039 0.19 .746 4.19Other Instil. .287 1 64 .808 4.88Automotive Ho 1 25 -.076 -0.96Building 260 2 20 -.545 -5.01Carpentry 042 0.36 - 550 -5.31Mecharnical - 096 -I 23 - 061 -0 90Tadoring -014 -0.06 -.381 -1.99Draughting - 813 -1.73ciltl 826

_ci12 1.710Coastant -.094 -1.96

- 128 -

APPENDIX 4B

Summary Statistics on the DDIT Scheme

Table 4B.1: Summarv Statistics on DDIT Approved Programs - 1988-1993

Charactenslics 1988 1989 1990 1991 1992 1993 88-93Prograins approved 10 57 29 29 160 306 591Programs rejected 22 78 74 8 54 86 322Rejection rate (%) 68.7 57.8 71.8 21.6 25.2 21.9 35.3

Number of trainees 34 387 125 153 970 1,584 3.253craftsmen 0 0 6 0 5 20 31supervisory 5 82 25 30 95 128 365engineer 2 120 42 16 292 316 788technical 18 85 31 49 187 481 851others 9 100 21 58 391 639 1,218

Cost (RI,OOOs) 298 1,916 1,241 1,714 7,442 19,856 32,466

Source: MIDA

- 129 -

APPENDIX 4C

A Preliminary Analysis of the HRDF

4.73 The objective of this analysis is to determine the takeup of two HRDF

schemes (the SBL and ATP schemes) as of March 1994, to describe the firm size and

industry characteristics of companies filing claims and the principal types oftraining that firms are providing their employees. Data on use of annualtraining plans under the PLT scheme are incomplete and are not considered here.

The estimates reported here are therefore necessarily incomplete. Nonetheless,

since the HRDP is relatively new and experience with it limited, these analyses

may be useful in identifying some early trends.

4.74 Table 4C.2 provides summary information on companies that have

registered with the HRDF as of March 1994, by firm size categories and by broad

sub-sectors. The first two columns show the number of companies and theirpercentage distributions; the third column shows their distribution in terms ofnumbers of employees. In the following analyses, these distributions are used

as a benchmark for comparing the takeup of the two schemes, and the amounts andtypes of training being done by companies of different sizes and by broad sub-

sectors.

4.75 Table 4C.3 shows the percent of registered companies that have filed

claims under the SBL and ATP schemes, by firm size and by sub-sector. According

to this table, the takeup of the SBL scheme is over 12 percent, that of the ATPscheme about 14 percent. However, almost 80 percent of registered companies have

to date not filed a claim under either scheme. The takeup of both schemes risesdramatically with firm size. Among small firms with less than 100 employees, the

takeup rate for SBL and ATP is 4.3 and 6.3 percent, respectively. In the largest

firm size category with over 1,000 employees, the corresponding takeup rates aremuch higher, about 52 and 40 percent respectively, but by no means universal.By sub-sector, the highest takeup rates of both schemes are found in professional

& scientific instruments, general machinery, electric machinery, and ceramics andglass; sub-sectors with low takeup rates are food, beverages & tobacco, textilesand apparel, and wood products & furniture. The third column shows the proportion

of firms that train under both schemes. Larger firms, and companies in theelectrical machinery and professional/scientific instruments sub-sectors, are

more likely to use both schemes.

- 130 -

Table 4C.2: Number and DIstribution of Companies and WorkersRegistered with HRDF by Company Size and Industry

Anribules of Conpanies Reeisiered Fimrs WorkersNumber % %

TOTAL 3371 100.0 100.0Comeany Size

Less than 100 employees 1342 39.8 15.2100 - 199 employees 950 28.1 16.4200- 1300 employees 921 27.3 51.71000 or more employees 158 4.6 16.7

Sub-sectorFood beverage tobacco 311 9.2 4.4Textile apparel foorwear 421 12.4 11.8Wood products & furniture 385 11.4 7.4Paper & pubOshing 210 6.2 2.2Chemicals petrol & rubber 701 20.8 24.7Ceramics glass and minerals 162 4.8 1.5Ferrous & metal products 97 2.8 0.4Fabricated metals 221 6.5 2.3Machinery 72 2.1 0.3Electrical machinery 603 17.8 44.0Tramportation equipment 114 3.4 0.8Prof/scientific equipment 21 0.6 0.1Other manufacturing 53 1.5 0A1

Source: HRDC, unpublished data.

Table 4C.3: Percent of Companies Training Under SBL and ATP Schemesby Company Size and Industry

.4nributes of Companies iBL ATp Both NoneCompany Size loUa! 12.5 14.4 6.1 79.4

Less than 100 employees 4.3 6.3 1.6 91.0100 - 199 employees 9.6 12.6 3.8 81.6200- 1000 employees 20.7 23.4 11.3 67.11000 or more employees 51.9 40.5 31.0 38.6

Sub-sectortoLal 12.7 14.9 6.1 79.0Food beverage tobacco 7.0 14.0 2.9 81.9Texide appar:l footwear 5.6 5.4 1.6 90.6Wood products & furnirtre 3.5 3.6 1.3 94.6Paper&publishing 13.7 11.4 3.3 78.7Chemicals prlrol & rubber 13.4 18.3 7.7 76.6Ceramics glass and minerals 18.0 20.6 8.4 71.2Ferrous & metal products 13.1 1S.1 5.1 76.7Fabricated metals 12.4 17.9 7.1 77.8Machinery 20.0 25.3 9.3 64.0Electrical machinery 22.1 21.4 11.1 68.2Transport equipment 16.5 20.9 9.6 72.1Prof/scientific equipment 23.8 33.3 19.0 61.9Other manufacturing 8.9 12.7 3.6 83.9

Source: HRDC. unpublished data.

- 131 -

4.76 Table 4C.4 shows the distributions of SBL and ATP trainees acrosscompanies of different employment size and across sub-sectors. The purpose isto compare the distribution of trainees with the distribution of employees incompanies registered with the HRDF. Companies with less than 100, 100-199, 200-1000, and 1,000 plus employees accounted for about 11, 3, 26, and 60 percent ofall SBL trainee; this may be compared to their share of all employees (see Table4C.1), namely, roughly 15, 16, 52, and 17 percent, respectively. Clearly, SBLtraining is being provided to a higher proportion of employees in large firms ascompared to small firms. A similar pattern is found in the case of ATP training,though the relative proportions by firm size are less marked. Differences in theshares of SBL and ATP trainees by sub-sector are even more striking. With 44percent of employees in registered companies, the electric machinery sub-sectoraccounts for over 80 percent of all SBL trainees, and for 39 percent of ATPtrainees. In the case of chemicals, petroleum and rubber sub-sector, with 25percent of employees, their shares of SBL and ATP trainees are 6 and 22 percent,respectively

Table 4C4: Number and Distribution of Trainees - SBL and ATP Schemesby Company Size and Industry

Aurnrlbutes of Comasmes SBt Scheme .ITP SchemeMNuber % mber I

Company Size toal 54644 100.0 2252 100.0Less than 100 employees 5923 10.8 202 9.0

100 - 199 employees 1579 2.9 317 14.1200- 1000 employees 14410 26.4 1083 48.11000 or more employees 32732 59.9 650 28.8

Sub-sector totl 54644 100.0 2252 100.0Food beverage tobacco 598 1.1 205 9.1Textie apparel footwcar 764 1.4 44 1.9Wood products & fsrniture 245 0.4 25 1.1Paper & pubishing 1276 2.3 93 4.1Chemicals petrol & robber 3324 6.1 497 22.0Ceramics glass and miscrals 1031 1.9 100 4.4Ferrous & mcul products 563 1.0 74 3.3Fabricated metal 924 1.7 115 5.1Machinery 637 1.2 64 2 8Electrical machinery 43787 80.1 884 39.2Transport equipment 923 1.7 105 4.7Prof/scientific equipment 426 0.8 18 0.8Other manufacmruag 146 0.3 28 1.2

Source: HRDC. unpublished data.

- 132 -

4.77 Table 4C.5 provides information on SBL trainees by type of training(PLT and ATP data were not available for this analysis) . The types of traininginclude computer, quality, supervisory, technical, overseas, crafts, and othercategories Most of the training done under the SBL scheme is concentrated in'other' training (38 percent), in technical training (25 percent), and inquality-related training (22 percent); the training types that have the lowestshares of S3L trainees are overseas training (1 percent) and craft training (3percent) . By employment size, small companies with less than 100 employees tendto concentrate on technical training (83 percent), while large companies withover 1,000 workers place the greatest emphasis on 'other' training followed byquality training.

4.78 Table 4C.6 shows the corresponding distributions of training types bysub-sector. Considerable variation in the types of training emphasized isobserved across the different sub-sectors. Compared to the distribution for thewhole sample, quality-related training is most emphasized by fabricated metals;craft training by textiles, apparel, and footwear; computer training by food andbeverage; technical training by scientific instruments, and other training bytransport equipment.

Table 4C.5: Number of Workers Trained in SBL Scheme by Type of Training

Finn SizeTrainiianeTyse Total <100 <200 <1000 1000+

54644 5923 1579 14410 32732Number Trainees

Computer 3532 96 62 762 2612Crafts 1449 5 0 1424 20QuaGly 11849 388 151 1915 9395Others 20606 383 907 5251 14065Foreign 526 31 30 180 285Supervisory 2869 128 256 1199 1286Technical 13813 4892 173 3679 5069

PerceatComputer 6.5 1.6 3.9 5.3 8.0Crafts 2.6 0.1 0.0 9.9 0.1Quahlty 21.7 6.5 9.6 13.3 28.7Others 37.7 6.5 57.4 36.4 43.0Foreign 1.0 0.5 1.9 1.2 0.9Supervisory 5.2 2.2 16.2 8.3 3;9Technical 25.3 82.6 11.0 25.5 15.5

Nore: Coluums sum to 100 percent.

- 133 -

Table 4C.6: Distribution of Types of SBL Training By Industry

Sub-seclor CosD. Crau fil- Ohr Foreign Suoen Tech)Toual (100) 6.4 .26 21.7 37.7 1 0 5.3 25.3Pood bev. & tobac. 17.9 0.0 8.0 58.9 0.3 5.2 9.7Text & apparel 3.0 21.1 29.6 41.9 2.9 1.4 0.1Wood & furniture 2.9 0.0 0.0 69.3 0.0 20.2 7.6Paper & publishing 3.7 0.0 2.4 65.1 0.9 8.l 19.7Chem. & rubber 5.2 0.1 7.1 57.7 0.8 10.5 18.5Ceramics & glaas 3.7 0.0 24.1 46.2 1.1 20.3 4.6Ferrous metal prod. 1.1 0.0 6.6 69.6 1.9 13.3 7.5Fabricated metals 1.4 0.4 45.4 31.7 0.3 12.5 8.2Macbinery 0.9 5.2 22.1 44.0 0.0 24.8 3.0Blec. machinery 7.0 2.9 23.7 33.5 0.9 4.0 28.0Transp. equipment 1.8 0.0 1.8 82.2 2.9 0.1 11.0Scien. instruments 1.9 0.0 13.1 5.4 4.2 0.0 75.3Other manufacmres 2.7 0.0 34.7 61.2 0.7 0.0 0.6

Nore: rows sum to 100 percent.

- 134 -

REFERFNCZS - CHAPTUR I:

Asher, Mukul G., 1994. "Social Security in Malaysia and Singapore: Practices,Issues, and Reform Directions," Institute of Strategic and InternationalStudies (ISIS) Malaysia, Kuala Lumpur.

Economic Planning Unit (EPU), 1993. "Mid-term Review of the Sixth MalaysiaPlan: 1991-95, "Prime Minister's Department, Kuala Lumpur.

Employees Provident Fund (EPF), 1992. "1991 Annual Report," Kuala Lumpur.

Employees Provident Fund, 1993. "Statistical Bulletin: 1992," Kuala Lumpur.

Federation of Malaysian Manufacturers (FMM), 1992. "Non-Executive Salary andBenefits in the Malaysian Electrical/Electronic Industry," FMM Survey Report,Kuala Lumpur.

Kanapathy, Vijayakumari, 1994. "Industrial Restructuring and the IndustrialLabour Market: Issues and Responses", Forthcoming, ISIS, Kuala Lumpur.

Legal Research Board, 1991. "Employees Provident Fund Act, 1991 (Act 452),and Regulations and Rules," International Law Book Services, Kuala Lumpur.

Malaysian Employers Federation (MEF), 1992a. "Annual Report 1992," KualaLumpur.

Malaysian Employers Federation, 1992b. "Salary Survey for Non-Executives:1991," Kuala Lumpur.

Malaysian Employers Federation, 1992C. "Salary Survey for Executives: 1991,"Kuala Lumpur.

Malaysian Employers Federation, 1994a. "Fringe Benefits Survey forExecutives: 1993," Kuala Lumpur.

MEF/FMM/MICCI, 1991. "Manpower Survey: 1990-91," Joint Survey in Associationwith Economic Planning Unit and Universiti Kebangsan Malaysia.

Malaysian Trades Union Congress, 1992. "Biennial General Council Report:1991-92,". 31st Biennial Delegates Conference, December 19th and 20th,Petaling Jaya.

Malaysian Trades Union Congress. 1994. "Comprehensive programme for LabourReform and Progress," Petaling Jaya.

Ministry of Finance, 1993. "Economic Report: 1993/94", Kuala Lumpur.

Ministry of Human Resources, 1991. "Information on Wages, Wage Rates, andAllowances Payable in Selected Establishments in the Manufacturing Sector,"Research and Planning Division, Kuala Lumpur.

Nabi, Ijaz. 1991. "Lessons from Experience with Wage Flexibility in Asia".

- 13 5 -

Report No.IDP 101, Asia Regional Series, The World Bank, Washington, DC.

Samuelson, Robert J., 1994. 'The Useless Jobs Summit," Newsweek, March 14,1994.

United Planting Association of Malaysia, 1993. "91st Annual Report. 1992,"Kuala Lampur.

World bank, 1994. "Income Security for Old Age," Policy Research Report,Washington, DC.

World Bank, 1989. "Malaysia: Matching Risks and Rewards in a Mixed Economy,"Country Operations Division, Asia Region Country Department II, ReportNo.7208-MA.

REFERENCES - CHAPTER III

Abella, Manolo. 1991. 'Recent Trends in Asian labour Migration A Review ofMajor Issues.' mimeo.

Abella, Manolo. 1994.'Structural Change and Labour Migration within the AsianRegion,' pp. 25-44 in Goonerate, Wilbert, Philip Martin and Hidehiko Sazanami(eds). Regional Develooment Imoacts of Labour Migration in Asia. UnitedNations Centre for Regional Development, Japan. UNCRD Research Report SeriesNo. 2.

Abowd, John M., and Richard B. Freeman (eds). 1991. Immi3ration. Trade andthe Labor Market. Chicago: University of Chicago Press for the NationalBureau of Economic Research.

Amjad, R. (ed.). 1989. To the Gulf and Back Studies on the Economic ImDact ofAsian Labour Migration. New Delhi: ILO ARTEP.

Aznam, Suhaini. 1990. "Unwelcome Guests: Migrant Workers Spark Resentmentin Malaysia,' Far Eastern Economic Review. 147(2):22.

Appleyard, Reginald. 1988. "International Migration in Asia and the Pacific'in Appleyard, R.T. (ed.) International Migration Today Volume I, Trends andProsoecus. Paris: UNESCO.

Appleyard, Reginald. 1989. The Imoact of International Micration on DeveloningCountries. Paris: OECD.

Azizah Kassim. 1991. "Recruitment and Employment of Indonesian Workers:Problems and Major Policy Issues,' Kuala Lumpur: ILO Inter-Country Workshopon Migrant Labour In The Plantation Industry, mimeo.

Azizah Kassim. 1988. 'Immigrant Workers and the Informal Sector in WestMalaysia: A Case Study of the Indonesians in Kuala Lumpur' in National Unionof Plantation Workers and Population Studies Unit University of Malaya,Current Issues in Labour Migration in Malaysia. Kuala Lumpur.

- 136 -

Azizah Kassim. 1994. *Foreign Labour in Malaysia,' pp. 95-114 in Goonerate,Wilbert, Philip Martin and Hidehiko Sazanami (eds). Regional DevelopmentImpacts of Labour Migration in Asia, United Nations Centre for RegionalDevelopment, Japan. UNCRD Research Report Series No. 2.

Battistella, Graziano. 1993. 'Working in the Promised Land: Migrant Laborin Asia.' Asia Currents. August.

Bauer, John. 1990. 'Demographic Change and Asian Labor Markets in the 1990s,'Population and Develooment Review, 16(4):615-645.

B_hning, W. R. 1984. Studies in International Labor Migration. . London:Macmillan.

Cha Bo Ching. 1991. *The Dynamics of the Current Labour Market and ItsImplications For Workers,' National Tripartite Seminar on Labour MarketInformation, mimeo.

Cho, George. 1990. The Malaysian Economy: Spatial Perspectives. London andNew York: Routledge.

Cornelius, Wayne. 1992. 'From Sojourners to Settlers: The Changing Profileof Mexican Immigration to the United States' in Jorge Bustamante, ClarkReynolds, and Raul Hinojosa-Ojeda (eds.) U.S. Mexican Relations; Labor MarketInterdependence. Stanford, CA: Stanford University Press.

Economic Planning Unit. 1993. 'Mid-Term Review of the Sixth Malaysia Plan1991-1995.' Kuala Lumpur.

Federation Of Malaysian Manufacturers (FMM). 1994. Survey of Manufacturers.

Fong, Chan Onn. 1986. New Economic Dynamo: Structures and Investmentponortunities in the Malaysian Economy. Sydney and Boston: Allen & Unwin.

Gunasekaran, S and Sullivan Gerard. 1990. 'Cross Border Labour Flows inSouth East Asia: Patterns and Prospects,' SouthEast-Asian Affairs, Instituteof South-East-Asian Studies, Singapore.

Hiemenz, U., and K. W. Schatz. 1979. Trade in Place of Migration: AnEmployment-Oriented Study with Special References to the Federal Republic ofthe Federal Republic of Germany, Spain and Turkev. Geneva, InternationalLabour Office.

Hock, Lee Kiong and Shyamala Nagaraj (eds). 1991. The Malaysian EconomyBeyond 1990: International and Domestic Perspectives. Kuala Lumpur:Persatuan, Ekonomi Malaysia.

Hock, Lee Kiong. 1993. 'Structural Adjustment, Labour Market Performance andWage Trends in the Plantation Sector in Malaysia,' in Structural ChanQes andPolicy Options for the Malaysian Plantation Industry. Report of the ILO-NUPWSeminar, October 27-30, 1993, Kuala Lumpur.

- 137 -

Hugo, Graeme. 1993. *Indonesian Labor Migration to Malaysia: Trends andPolicy implications,' Southeast Asian Journal of Social Science (forthcoming).

Interna:ional Labour Organization. 1990. Statistical Reoort 1989Internaeional Labour Mioration from Asian Labour-Sending Countries. Bangkok:ILM Asian Regional Programme on International Labour Migration.

Jesudason, James V. 1989. Ethnicity and the Economy, The State, ChineseBusiness, and Multinationals in Malaysia. Singapore and New York: OxfordUniversity Press.

Jomo K. S. 1990. Growth and Structural Change in the Malaysian Economy.Houndmills, Basingstoke, Hampshire : Macmillan.

Kindleberger, Charles P. 1967. Eurore's Postwar Growth, The Role of LaborSUpply. Cambridge, MA: Harvard University Press.

Lim, David. 1973. Economic Growth and Develooment In West Malaysia,1947-1970. Oxford University Press.

Lim, Lin Lean. 1984. 'The Consequences of International Migration for SocialChange: The Case of Malaysia,' mimeo. Presented at the IUSSP Workshop,Canberra, Australia.

Lim, Lin Lean 1988. *International labour migration in the ASEAN Region,'in Current Issues in Migration in Malaysia, National Union of PlantationWorkers and Population Studies Unit University of Malaya. Kuala Lumpur.

Lim, Lin Lean. 1988. *Labour Markets, Labour Flows, and Structural Change InPeninsular Malaysia,' in Pang Eng Fong (ed), Labour Market Develooment andStructural Change: The Exoerience of Asean and Australia. SingaporeUniversity Press.

Lim, Lin Lean. 1991. 'The Demographic Situation and Migratory Movements inAsian Countries.' Background Document for the Organisation for EconomicCooperation and Development International Conference on Migration. Rome.

Martin, Philip, Elmar H nekopp and Hans Ulmann. 1990. 'Europe 1992: Effectson Labor Migration,' International Migration Review, 24(91):591-603.

Martin, Philip. 1993. Trade and Migration, NAFTA and Agriculture.Washington, DC: Institute for International Economics.

Martin, Philip. 1991. The Unfinished Story: Turkish Labor Migration toWestern Europe. Geneva: ILO

Massey, Douglas S, Joaquin Arango, Grame Hugo, Ali.Xouaouci, Adela Pelligrino,and J. Edward Taylor. 1994. 'Theories of International Migration: A Reviewend Appraisal,' Population and Develooment Review.

Mehmet, Ozay. 1988. Develooment In Malaysia: Poverty, Wealth, andTrusteeshio Kuala Lumpur: Insan.

- 138 -

Ministry of Human Resources, Manpower Department. Employment Trends, Labourand Manpower Report, and Labor Market Indicators, various issues.

Ministry of Human Resources. 1991. Guidelines for the Employment of ForeignWorkers. Kuala Lumpur.

Narayanan, Suresh. 1992. *Impact of International Migration on on Malaysia:The Positive and Negative Aspects,' Asian Regional Conference on IndustrialRelations, Japan Institute of Labour Japan Industrial Relations ResearchAssociation, Tokyo, mimeo.

Navamukundan, A. 1993. 'Structural Changes and Policy Options for thePlantation Industry in Malaysia,' in Structural Changes and Policy Options forthe Malaysian Plantation Industry. Report of the ILO-NUPW Seminar, October27-30, 1993, Kuala Lumpur.

Nayagam, James. 1991. 'Labour Issues in the Plantation Sector.' mimeo.

Nayagam, James, and Abdullah Sepien. 1979. 'Trends in Labour Utilization inEstates,'

Nayagam, James. 1992. 'Migrant Labor Absorption in Malaysia,' Asian andPacific Migration Journal. 1(34):477-494.

Nayagam, James. 1993. 'The Impact of Structural Changes on Labour in thePlantation Industry,' in Structural Changes and Policy Options for theMalaysian Plantation Industry. Report of the ILO-NUPW Seminar, October27-30, 1993, Kuala Lumpur.

North, David and Marion Houstoun. 1976. The Characteristics and Role ofIllegal Aliens in the U.S. Labor Market, An Exoloratory Study. Washington,New Transcentury.

Ong, Paul.M., L. Cheng and L Evans. 1992. ' Migration of Highly EducatedAsians and Global Dynamics,' Asian and Pacific Migration Journal, 1(3-4).

Parsonage, James. 1992. 'Southeast Asia's 'Growth Triangle': a SubregionalRsponse to Global Transformation, * International Journal of Urban andRegional Research. 16(2) :307.

Papademetriou, Demetrios and Philip Martin (eds). 1991. The UnsettledRelationshio* Labor Migration and Economic Develooment. Westport, CT:Greenwood Press.

Pillai, Patrick. 1992. 'People on the Move: An Overview of RecentImmigration and Emigration in Malaysia' Institute of Strategic andInternational Studies (ISIS), Malaysia. ISIS Issue Paper.

Pletcher, James. 1991. 'Regulation with Growth: The Political Economy ofPalm Oil in Malaysia.' World Develooment, 19(6):623.

- 139 -

Quibria, M. G. 1993. *International Migration in Asia: Facts, Issues andPolicies,' Asian Development Bank, mimeo.

Russell, Sharon Stanton and Michael Teitelbaum. 1992. InternationalMigration and International Trade. Washington DC: The World Bank,International Economics Department Discussion Paper 160.

Shimada, Haruo. 1991. 'The Employment of Foreign Labor in Japan," TheAnnals of the American Academy of Political and Social Sciences. 513:117-129.

Shimada, Haruo. 1994. Jaoans Guestworkers. New York: Columbia UniversityPress.

Skeldon, R. 1992. "International migration within and from the East andSoutheast Asian Region: A Review Essay,' Asian and Pacific Migration Journal,1(1).

Stahl, Charles. 1992. Asian International Labor Migration: A ResearchAgenda. mimeo.

Structural Chanoes and Policy Options for the Malaysian Plantation Industry.1993. Report of a workshop organized by the ILO and NUPW, Kuala Lumpur,October 27-30.

Sullivan, G. and S. Guansekaran. 1989. 'South-east Asian Migration toAustralia: A Flow Analysis, 1983-1988." Singapore: Institute of SoutheastAsian Studies, mimeo.

Tsay, C. 1992. "Clandestine Labor Migration to Taiwan,' Asian and PacificMigration Journal. 1(3-4).

U.S. Commission for the Study of International Migration and CooperativeEconomic Development. 1990. Unauthorized Migration: An Economic DevelopmentResponse. Washington, D.C.

U.S. Council of Economic Advisors. 1986. "The Economic Effects ofImmigration," Economic Report of the President." Washington: Council ofEconomic Advisors. pp. 213-234.

U.S. Dept. of Labor, International Labor Affairs Bureau. 1989. The Effectsof Immigration on the UT.S. Economy.

Vatikiotis, Michael. 1992. "Worrisome Influx (Foreign Workers in Malaysia),'Far Eastern Economic Review 155(31):21.

Warren, Robert. 1994. Estimates of the Unauthorized Immigrant PopulationResiding in the United States. by Country of Origin and State of Residence.October 1992.

World Bank. 1989. Malaysia: Matching Risks and Rewards in a Mixed Economy.Washington, D.C.

I,

4