Tuesday, May 5, 2015

The Impact of Foreign Labour

It’s no secret that Malaysia plays host to a lot of foreign labour; a lot of cheap foreign labour. Among the criticisms of this happenstance is that it takes away jobs from locals, reduces the wages locals can command, and stunts productivity growth.

Underlying these concerns is a false view of the economy, that labour competition between foreigners and locals are a zero-sum game. The first concern isn’t true – given our ridiculously low unemployment rate, there’s not a lot of evidence that foreigners have taken jobs away from locals. Culling foreign labour from Malaysia would only reduce output, and remove industries that would only exist (or exist as cheaply) from the availability of that foreign labour.

The second concern has a bit more validity, and the third even more still. But most studies on this issue find evidence that the net impact of foreign labour on an economy is positive. Here’s the latest (abstract):

Are Immigrants a Shot in the Arm for the Local Economy?
Gihoon Hong, John McLaren

Most research on the effects of immigration focuses on the effects of immigrants as adding to the supply of labor. By contrast, this paper studies the effects of immigrants on local labor demand, due to the increase in consumer demand for local services created by immigrants. This effect can attenuate downward pressure from immigrants on non-immigrants' wages, and also benefit non-immigrants by increasing the variety of local services available. For this reason, immigrants can raise native workers' real wages, and each immigrant could create more than one job. Using US Census data from 1980 to 2000, we find considerable evidence for these effects: Each immigrant creates 1.2 local jobs for local workers, most of them going to native workers, and 62% of these jobs are in non-traded services. Immigrants appear to raise local non-tradables sector wages and to attract native-born workers from elsewhere in the country. Overall, it appears that local workers benefit from the arrival of more immigrants.

As I said once before, the best way to get rid of the cheap foreign labour problem is to accelerate the economic development of Bangladesh, Myanmar and Cambodia.

[H/T Mark Thoma]

Technical Notes:

Hong, Gihoon and John McLaren, "Are Immigrants a Shot in the Arm for the Local Economy?", NBER Working Paper No. 21123, April 2015


  1. I am not sure whether these conclusions apply to our local situation. We have too many immigrant labour (could be 4 to 5 millions). Our very exploitative employers pay little taxes and do not help in easing the additional burden on public infrastructure imposed by the immigrants. Add with social, health and security cost to the country, is it worthy it.

  2. We have a shortage of foreign workers actually, at least in my one of my field of work related to manufacturing. The foreign workers know that Malaysia is facing a shortage of cheap labour and they would demand higher wage while at the same time would dilly dally on their job (moral hazard). There are too many job openings for hard labour in factories that our people would not normally apply (except in rural area) due to the working environment.

    The implementation of minimum wage in Malaysia made it worse, because it applies to foreign workers too. Many factory owners would want for this law to be applied only to local workers only as it would not benefit them in long term as foreign workers would have to be shipped back to their home after certain period of time, hence wasting all the investment put into them plus the increased wages cost.

  3. Foreign labour no doubt contribute to our economy but at the same time it stops our employers from value adding their product and services. It also discourage our employers from investing in skill training and R&D.

  4. Taking Malaysia for an example, aren't we shot in the arm? Correct me if I am wrong, Australia for example, they have been taking only the elite to fill up desire sectors. This is what the expert emphasize -an value added impact to the local economy. Should we continue import the lower runk labour, for short term - a fine solution to the local labour shortage, for long run - a not so brainy solution to the economy transformation. As we may loose out our competitiveness in terms of production output as well as advancement in higher technology.

    1. @anon 11.25

      My inner grammar nazi wants to note that a "shot in the arm" means something positive, not negative.

      I don't know that just focussing on high skilled labour has that much of an impact, unless you manage it on a big enough scale, such as in the US.

  5. Hi Hisham, what about 'expensive' foreign labour. The PMETS as they call it in Singapore. That is what the general populace is up in arms about here. What is their effect on economy and what is your stance on them. As Malaysia develops further, you will start to see a lot more of them there as well?

    1. @The Slug

      We're seeing it happen here already. I don't know if its all to the good - the economic impact will be limited, but you'll be driving up wages at the high end and increase income inequality.