Friday, May 27, 2011

Labour Markets and the Distribution of Income

People are starting to see one of the weaknesses in the ETP:

A lesson from brain drain’s gain and pain

SUPPLY and demand is the foundation of any market economy. If people want more of a certain goods or service than what is available, then prices will rise.

The opposite happens when there is too much supply, as that will lead to a fall in price.

The same thing is also happening in the labour market. Supply and demand mechanics work the same in that market and like how prices fluctuate according to the pull and push of demand and supply, wages react in the same way.

The thing with brain drain is that people say it is hurting the economy. Yes, it is, but the migration of labour is also a good thing that has happened for workers in the country.

Without it, the supply of skilled workers will be more than it is now. And when there is a lot of something, prices remain sticky to the upside...

...If you are good enough and have the necessary foundation from a good university and display an ability to use your brain instead of reciting something you have read, then the pay you stand to make in Malaysia is on the way up...

...But that is not the case for a large number of workers...

...The reason why wages for the low skilled workers remain depressed is that supply of similar capable workers has not been interrupted at all. The number of foreign workers in the country is a large percentage of Malaysia's population and the constant beeline of such workers means that employers see no need to push salaries up.

More effort should also be poured into upskilling workers as a means to break away from the poverty trap.

Setting a decent minimum wage should reflect also the growing cost pressure of earning a living for the workers in the country and if nothing changes than the discrepancy between knowledge workers and low skilled workers will continue to swell.

And that makes achieving a high-income nation a lot more difficult than it should be.

Honest opinion? A minimum wage won’t be enough. There’s some evidence that raising the floor of wages pushes up compensation across the board – but the effect is weak. And the effect would be even weaker if the minimum wage is close to the market-clearing wage, where the indications are it is likely to set at. If you don’t stop there and raise the minimum wage high enough to make a difference to worker compensation above the low wage levels, then you’re flirting with a trade off between wages and unemployment.

But getting back to the main point, the ETP’s main focus is to raise private sector involvement in the economy, and raising private investment. The projects under the ETP are projected to create something like 3.3 million jobs by 2020.

That sounds great until you check the numbers and realise that the increase in the available workforce will be…

…3.3 million workers by 2020. Not counting of course, potential inward immigrants.

Now assuming that the non-ETP driven parts of the private sector actually make some sort of contribution to job-creation, there should be some driving up of wages. Whether that translates into higher household income across the income spectrum is another thing entirely.

The problem here is that by creating high value-added jobs, we’re going to exacerbate the demand for skilled workers, which are already in short supply. Our current graduation rate is below 30% of each age cohort, which is hardly sufficient for a high income, high-value added economy. The Americans for instance are wringing their hands because their college graduation rate is “just” in the mid-70 percentile.

So unless we come up with some means to address the skill shortage, we’re going to come up against the very scenario depicted in the article – and which I’ve been worried about since the NEM came out. We’re simply not paying enough attention to income inequality and distributional issues.

To be fair, there are a few initiatives going on that hope to address the skilled labour problem; boosting vocational education and the measures under the Education NKEA for example. But these won’t really address those who don’t have the capabilities or resources to access these opportunities. And so while the enlargement of the skilled class might eventually be sufficient, we’re going to leave some people behind.


  1. Misguided focus on FDI value.
    Big Capex may not equate to high Employee Compensation(CE).Big GNI is not good for employees if ratio of EBITDA and CE remains at 2009 levels of 30%.It just increases the disparity.
    ETP projects that by 2020 ,70% of employees will earn RM 3K and less.Thats in 2020 inflated ringgit mind you.
    Review KPIs to CE value creation and development mindsets will change accordingly.
    The type of industries that will be the focus will also be different.
    As Idris Jala says >>"make it easy for business to make money..they will come in droves."

  2. Only one weakness in ETP?You are too kind.Most have dismissed it as a hollow piece of Public Relations crap.
    Its similar to the nonsense that Jala did in MAS i.e all talk and no substance.In 2005 he did a massive kitchen sinking exercise in MAS and left with a few hundred million of accum profits.He created a perfect war chest of provisions.However,his silliness n absolute failure have now bleed MAS. Currently cum loss is 5.6 billion.Its downright simple>his turnaround hv incurred more than 5.6 bil loss>real money down the drain.
    So is he going to do same for Msia.So far yes i.e direct nego PDPs,the myemail farce,concentration of govt funding in KL,reliance on FDIs and asset plays.
    Will it work?Or will the smart guys position themselves for a quick hit and run?
    Hope the smart guys such as your good self will provide the proper perspective and give our country a second chance.

  3. There's some advantages in going for FDI (empirically, higher growth and tech transfers). I've been reviewing the literature on it lately. But the problem is that Malaysia's current structure is better for services FDI, not manufacturing. We lack the market size, and our labour costs are too high, as a manufacturing base.

    So we have to be a picky about what we choose to attract - and modify our expectations accordingly.

    Still doesn't resolve the issue of income distribution, sadly.

  4. Tuan
    Skills need to be at the centre of wages and income distribution analysis. About 20% of SPM school leavers go to tertiary level education. While at school, these academically inclined students must master university level learning skills. For a very good definition of this, please visit and search for a brief on In-depth Learning.

    Fro the remaining 80%, strong vocational education is a must. This will create a legion of workers that can be hired for technical jobs. Their existence will attract FDI like bees to pollen. Over time, these technical workers will become skilled, via in-house training and job experience.

    Once skilled, these workers (having studied and passed only SPM vocational subjects) would be in demand in international markets. If they speak English all the better.

    Their employers in Malaysia (local and FDI companies) will have to out-bid the foreign employers. This will create the high income outcome. This will also be sustainable, because the wages is based on real and comparatively high productivity.

    Their cohort that went to universities and colleges will do much better than today with the "deeper learning skills". Excellent graduates will attract services industry FDI. Subsequent in-house training and work experience would create a large pool of executives of all levels that could be employed in the region and elsewhere.

    Local companies must be able to out-bid their foreign rivals for this good and highly productive executives. This process will create the the high income outcomes.

    Labour market starts at the school level. Sadly the teaching and learning method is mainly teach-to-the-test, and our good students are good at rote learning. Vocational subjects are not offered at all to our students. Irrespective of the market needs, our school system are too academic to be of any use to the SPM leavers who want or have to join the work force.

    Economist Kampong