Explanations of common economic indicators for grassroots

activists

&

The economic impact of foreign workers in Malaysia

Author: Jonah Belitz

Date: 08.04.2016
 CONTENTS

Introduction………………………………………………………………………………………………………….. 1

Explanation of relevant data sources…………………………………………………………………….. 1

Explanation of common economic indicators

GDP…………………………………………………………………………………………………............ 3
GDP per capita…………………………………………………………………………………………… 4
Inflation/Deflation……………………………………………………………………………………… 5
Real Wages………………………………………………………………………………………........... 6
Income distribution…………………………………………………………………………….….…. 6
Poverty line……………………………………………………………………………………………….. 8

The 11th Malaysia Plan and foreign workers………………………………………………………..... 11

The economic impact of foreign workers in Malaysia

Descriptive statistics………………………………………………………………………………….. 14
Literature summary

Source I: Del Carpio et al. (2013) …………………………………………………… 19

Source II: Moreno et al. (2015) ………………………………………………........ 25
Source III: Ashan et al. (2014) ……………………………………………………….. 27
Source IV: Özden & Wagner (2014) ………………………………………………. 30
Source V: Yean & Siang (2010) ………………………………………………………. 34
Source VI: Del Carpio et al. (2014) ………………………………………………… 36

Ending words…………………………………………………………………………………………………………. 38

Reference List………………………………………………………………………………………………………… 39
 Introduction

The purpose of this paper is twofold. On the one hand, it tries to familiarize laymen to some key
economic indicators that are used frequently in media coverage and everyday life. On the other
hand, it will provide general information on migrant workers in Malaysia as well as findings of the
latest research on their economic contribution to the Malaysian economy. This seems to be
pertinent as more than 60% of Malaysians believe that migrant workers have a neutral or
negative impact on the Malaysian economy1 and anecdotal evidence appears to be used
frequently to justify generalizations.

Explanation of relevant data sources2

Labour Force Survey

The Labour Force Survey (LFS) is conducted every month by the Department of Statistics (DOS)
to obtain data regarding employment, unemployment, the structure and the distribution of
labour force at the national and state level as well as urban and rural areas.
The labour force consists of the economically active population between the age of 15 and 64;
Economically active here refers to either being employed or unemployed. People outside the
labour force include housewives, students, retired or disabled persons, and those not interested
in looking for a job.
Trained interviewers visit households in selected living quarters3 and collect demographic
information on all household members as well as labor force related information from all
household members aged 15 and over, using a set of questionnaires. Since 2015 the LFS also
makes use of Computer-Assisted Telephone Interviewing (CATI).

Salaries and Wages Survey

The Salaries and Wages Survey is part of the Labour Force Survey since 2007 and provides
statistics regarding the salaries and wages at the national and state levels in urban and rural
areas. As part of the Labour Force Survey, it captures the wages and salaries of employees in the
private and public sector between the ages of 15 and 64.
The survey includes employees who are working full-time (and equivalent), as well as contract
workers in the government sector, individuals who receive regular and periodic allowances every
month as well as volunteers who receive a fixed allowance. Not included are employers, own
account workers, unpaid family workers, domestic personnel whose employer is a household

1
ILO (2011). Public attitudes to migrant workers.
2
More (detailed) information can be found in the “technical notes” section of each report.
3
The survey only covers persons living in private living quarters and excludes those who live in institutional living
quarters such as hotels, hospitals prisons and construction work site, and generally all communal or group housing.

1
(that is: maids, gardeners, drivers, nurses of private households) and several others.

Household Income and Basic Amenities Survey

The Household Income and Basic Survey (HIS & BA) is conducted by the Department of Statistics
(DOS) twice in five years to obtain data regarding the income distribution, poverty and access to
basic amenities of Malaysian citizen only. It covers both urban and rural areas with the exception
of residences of Orang Asli in Peninsular Malaysia and Eastern Sabah Security Command
(ESSCOM).
A household here is referred to as a person or a group of related or unrelated persons who
usually live together and make common provisions for food and other living essentials.
Household income refers to the total income received by the members of a household.
The components of basic amenities covered are education, health, housing, and household
appliances and amenities.
Trained interviewers visit households in selected living quarters4 and collect demographic
information, and information regarding income and basic amenities, using a set of
questionnaires.

Household Expenditure Survey

The Household Expenditure Survey (HES) is conducted by the Department of Statistics (DOS)
once in five years and provides data on the expenditures of households in Malaysia on various
goods and services. The survey covers both urban and rural areas, excluding some rural areas in
Sabah and Sarawak as well as Orang Asli in Peninsular Malaysia and Eastern Sabah Security
Command (ESSCOM). As part of this survey data on savings, investments and (repayment of)
loans is also collected.
Trained interviewers visit households in selected living quarters5 and collect demographic
information, and information regarding income and consumption expenditure of households.
Household consumption is divided into consumption expenditure and non-consumption
expenditure. Household consumption expenditure is a household’s expenditure on goods and
services for personal use. Household non-consumption expenditure includes things like income
tax, charity donations, club membership fees, and gifts.

4
See reference 3
5
See reference 3

2
 Explanation of common economic indicators

I. What is GDP?
GDP stands for Gross Domestic Product and it is widely used as a measurement of the economic
performance of a country. One possible definition is the following:

“GDP measures the monetary value of final goods and services—that is, those that are bought by
the final user—produced in a country in a given period of time (say a quarter or a year). It counts
all of the output generated within the borders of a country.” (Tim Callen, 2012).6

(http://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm#author)

GDP does include some goods and services that are not traded in open markets, such as the
government's expenditure on public healthcare, infrastructure or defense, for example, but
some other nonmarket productions are left out. Examples of the latter are cleaning or childcare
at home, unpaid work, such as volunteering, and generally all informal market activity (barter,
street vendor business etc.).

1,000

900

800

700

600

500

400

300

200

100

0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Indonesia Malaysia Philippines Thailand Vietnam

Figure 1. GDP in billions of current USD

Source: IMF, World Economic Outlook 2016

While GDP has historically been used as a key driver for governmental decision-making, the
consensus in recent years has been growing that it is neither a good measure of economic

6
http://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm

3
performance nor well-being. This criticism is based on the fact that GDP does not take into
account whether economic growth is inclusive and environmentally sustainable or if it improves
the health and happiness of citizen.

When calculating the GDP growth rate (GDP level comparisons across years for a country) one
needs to take into account changes in the price level (see III.), otherwise the actual growth rates
would be distorted. The price changes-adjusted (constant price) GDP value is called real GDP; the
unadjusted GDP value is called nominal (current price) GDP.

A similar concept is Gross National Income (GNI). The GNI measures the value of output
produced by the citizens of a country, no matter if they work in that country or abroad. In other
words, it captures the economic output produced by a country’s citizen domestically and
overseas.

II. WHAT IS GDP PER CAPITA?

GDP per capita is simply the result of dividing the GDP of a country in a particular year by the
average population of the country in the same year. It is frequently used as a measure of
standard of living, however, not because of its accuracy but rather because of the availability of
relevant data and its simplicity of interpretation. One important technicality to consider when
dealing with this measure is the difference between nominal GDP per capita and GDP per capita
at purchasing power parity (PPP).
Nominal GDP per capita is the GDP of a country at the current market price divided by
the average population in the same year. Conclusions about the average standard of living in the
population derived from nominal GDP simply converted into US dollars at the current market
exchange rate are highly limited since the cost of living varies across countries.
GDP per capita at purchasing power parity (PPP) tries to adjust for the differences
between countries in terms of their price levels and cost of living. For example, a Big Mac might
cost you 4 US Dollar in New York but only 2 US Dollar in Kuala Lumpur. This difference in
“purchasing power” is usually reflected in a wider variety of goods and services and is captured
by PPP; hence GDP per capita (PPP) allows for more meaningful comparisons across countries.

4
 30,000

25,000

20,000

15,000

10,000

5,000

0
1980198219841986198819901992199419961998200020022004200620082010201220142016

Indonesia Malaysia Philippines Thailand Vietnam

Figure 2. GDP per capita (PPP) in current international dollars (2011)

Source: IMF, World Economic Outlook 2016

III. What is Inflation/Deflation?

Inflation is the rate at which the prices of goods and services increase in an economy. It
decreases the value of a given amount of money (the purchasing power), which also affects
savings negatively.
Inflation is measured by the percentage change of a general price index from one year to the
other; usually the Consumer Price Index (CPI) is used for inflation calculations. The CPI estimates
the weighted average price of a selected “basket” of consumer goods and services (food,
apparel, medical care, education etc.) every year. If the price of this basket (price level) increases
from one year to the other, it is called inflation. Conversely, if the price of the basket (price level)
decreases it is called deflation.

Imagine the following basket of goods and services (all have the same weight for the
calculations) and the respective prices in the two given years:

I) toothpaste II) haircut III) bus ride IV) pants

2010: I) 5RM II) 12RM III) 5RM IV) 30RM total basket: 52RM
2011: I) 7RM II) 11RM III) 6RM IV) 32RM total basket: 56RM

The difference between the value of the 2010 basket and the 2011 basket is 4RM which
represents an increase of 7.7%. In this case inflation from 2010 to 2011 would be reported as

5
7.7%. The Department of Statistics measures tens of thousands of goods and services from
different (sub-) categories for their calculations.
Inflation and deflation can affect an economy positively and negatively over different periods of
time.

IV. What are real wages?

The nominal wages and salaries are simply the monetary value of the compensation of an
employee; the amount of money he/she makes in a given time period. However, this value does
not provide sufficient information on the purchasing power of an individual, that is, the level of
consumption that can be achieved with this amount of money. When nominal wages and
salaries are adjusted for inflation (price changes) one obtains the measure of real income (real
wages); that is, the actual purchasing power of the money one earns. For example, if income
increases by 2% from one year to the other but in the same time period inflation increases by
3%, the real income decreases by 1%.

20%

15%

10%

5%

0%
2011-2012 2012-2013 2013-2014 2014-2015
-5%

Managers
Technicians and associate professionals
Service and sales workers
Craft and related trades workers
Elementary occupations
Professionals
Clerical support workers
Skilled agricultural, forestry and fishery workers
Plant and machine-operators and assemblers

Figure 3. Real wage growth rates of workers in Malaysia by occupation. Calculations use CPI values from the
Economic Planning Unit.
Source: Salaries and Wages Survey Report 2015. DOS (2015).

V. How is income distribution reported?

Average income statistics do not provide any information on the distribution of income within a
population. To illustrate what this means, consider the following example:

6
The entire population of a country consists of three people (person A, B, and C) and the average
income per year is 36,000 MYR. This could be the case if:

1. A earns: 36,000 MYR B earns: 36,000 MYR C earns: 36,000 MYR

but it could also be the case if:
2. A earns: 14,000 MYR B earns: 14,000 MYR C earns: 80,000 MYR

The most commonly used metric to capture the inequality of income is called the Gini coefficient
or Gini Index. A coefficient of 0 expresses perfect equality (every person in the country has the
same income), a coefficient of 1 expresses maximal inequality (one person earns all the income
in the country).
It is important to keep in mind that the Gini coefficient is a relative measure. This means that
even if the income of every citizen were to rise by the same amount and consequently everyone
would be better off (under certain conditions), the Gini coefficient would remain the same.
Additionally, taxation and government transfers are factors that influence the Gini Index.

0.6

0.55

0.5

0.45

0.4

0.35

Figure 4. Gini coefficient, Malaysia

Source: Economic Planning Unit (2016).

Another measure of income inequality is the Income Quintile Ratio (IQR, also known as 20/20),
used by the United National Development Programme. The IQR is the ratio of the average
income of the richest 20% of the population to the average income of the poorest 20% of the
population.

A similar measure is the Palma Ratio, the ratio of the richest 10% of the population's share of
gross national income (GNI) divided by the poorest 40%'s share.

7
 VI. What is the poverty line income?
The poverty line income (PLI, also: poverty threshold) is the minimum level of income (of an
individual or household) deemed necessary for an adequate life. Naturally, it varies from country
to country, with developed countries displaying higher national PLIs than developing countries.
The international poverty line currently is 1.90$ per day.7
The PLI can be based either on absolute poverty or relative poverty. Earning below the absolute
poverty line results in being unable to fulfill one’s basic needs such as food, shelter, and clothing.
In contrast to this, the relative poverty line is defined in relation to the overall distribution of
income in a country (usually at 40% to 60% of a country’s median income) and captures the
ability to keep up with a certain standard of living in society. It is used more frequently in middle
to high income countries.

In Malaysia, household income is used to measure the incidence of poverty. That is, poverty is
defined at the household level, using the household’s PLI.
Malaysia’s PLI is based on the cost of basic needs (CBN) method and represents absolute
poverty. This method identifies a bundle of products and services that is deemed sufficient to
meet basic consumption needs (food and non-food) and then estimates the cost of such a
bundle. A person is considered poor when it fails to earn enough income to afford said bundle.
The food PLI is based on nutritional requirements of Malaysians (by sex and age), as
recommended by experts from the government and academia. Additionally, the household’s
size, composition, state and stratum (urban or rural) are taken into account.
The non-food PLI entails clothing, rent and fuel, furniture and household equipment, transport
and communication and others. It is based on the expenditure of those households whose total
expenditure is just above the food PLI. The rationale is that the households earning slightly more
than they need to cover their nutritional needs will focus on the non-food items that are
essential to them. Age and sex of a person, and state and strata of the household are taken into
account.
Regarding the poverty line, Datuk Seri Idris Jala, the current8 chief executive officer of the
Performance Management and Delivery Unit (better known as PEMANDU) published a
statement in May 20159. In this statement he defines extreme poverty as “fail[ing] to earn
enough to fulfil basic survival needs such as food, clothing, and shelter” and the poor as people
“fall[…]ing short of certain standards of consumption which are deemed necessary to maintain
“decency” in society, for example, those who cannot afford healthcare and education.”

7
This figure has been revised from 1.25$ per day in 2005. This is the result of comparing the national poverty lines
of some of the least developed countries in the world and is published by the World Bank.
8
Date: 08.02.2017
9
http://etp.pemandu.gov.my/Transformation_Unplugged-@-The_measure_of_poverty.aspx

8
Specifically, the following numbers are mentioned:

per household Peninsular Sabah Sarawak

Extreme poverty 460RM 630RM 590RM
Poor 760RM 1,050RM 910RM
Table 1. National poverty line income per month (gross)
Source: PEMANDU (2015)

Based on the numbers above and the average household sizes from 2010, the following average
incomes per household member can be calculated:

per household
Peninsular Sabah Sarawak
member
Extreme poverty 110RM 107RM 132RM
Poor 182RM 179RM 204RM
Table 2. National poverty line income (PLI) per month (gross)
Source: Calculations based on Population and Housing Census of
Malaysia 2010 data. DOS (2010).

The PLIs in the Household Income and Basic Amenities Survey Report 2014 (HIS &BA Report
2014), however, differ:

per household Total Urban Rural

Peninsular 930RM 940RM 870RM
Sabah 1,170RM 1,160RM 1,180RM
Sarawak 990RM 1,040RM 920RM
Table 3. National PLI per month (gross)
Source. Household Income & Basic Amenities Survey Report 2014.
DOS (2015).

According to the latter only 0.6% of Malaysian households (0.3% of urban households and 1.6%
of rural households) were considered poor10, which lead the government to shift its focus from
poverty alleviation towards bringing the Malaysian B4011 households to the middle class.

10
This data only considers Malaysian citizen, non-citizen are not taken into account.
11
The B40 (also: the Bottom40) are the households in the lowest 40% of the Malaysian income distribution, which is
equivalent to households earning up to 3,855RM per month, according to the HIS & BA 2014.

9
60%

50%

40%

30%

20%

10%

0%
< 2,000 2000-4999 5000-7999 8000-10999 11000-14999 >15000

total urban rural

Figure 5. Percentage of households by monthly gross income class in RM.

Source: Household Income and Basic Amenities Survey Report 2014. DOS (2015).

10
 The 11th Malaysia Plan and foreign workers

Chapter 4: Improving well-being for all

- Focus area C – Creating safer living environments for thriving communities

o “Strategy C2: Tightening regulations and strengthening enforcement to stem crime. This
includes initiatives to strengthen legislation, increase the use of crime prevention
measures, improve the management of foreign workers, and stem cross-border crime;”
(p. 4-18)

 “The management of foreign workers will be improved by enhancing the role of

one-stop centre and through greater collaboration between the Immigration
Department of Malaysia and local authorities to ensure effective enforcement.”
(p. 4-19)

Chapter 5: Accelerating human capital development for an advanced nation

- “The economic agenda outlined in the Eleventh Plan is expected to create 1.5 million jobs by
2020, with targeted improvements in labour productivity and reduced dependency on low-skilled
foreign workers, both of which are a result of the continuous shift from labour-intensive to
knowledge- and innovation-based economic activities.” (p. 5-2)

- Focus area A – Improving labour market efficiency to accelerate economic growth

o “Strategy A3: Improving management of foreign workers by reducing the nation’s

reliance on low-skilled foreign workers and streamlining recruitment as well as
immigration processes.” (p. 5-16)

 “Reducing reliance on low-skilled foreign workers:

A comprehensive immigration and employment policy for foreign workers will be
formulated, taking into account the requirements of industry and the welfare of
foreign workers. Heavy reliance on low-skilled foreign workers, particularly in
labour-intensive activities will be addressed holistically. The proportion of foreign
workers in the workforce is capped at 15% of total workforce in 2020. Greater
automation especially in labour-intensive activities, as well as migration to
knowledge-intensive activities will be encouraged in all sectors of the economy,
particularly in the agriculture, manufacturing, and construction
sectors, which currently employ more than 30% of foreign workers.” (p. 5-18)

“The levy system will also be improved to better regulate the entry of low-skilled
foreign workers. This levy will be borne by employers and based on the ratio of
foreign workers to total workers in a firm and the duration of employment. The
levy will be increased gradually over time to increase its effectiveness.” (p. 5-18)

11
  “Streamlining the recruitment process for foreign workers:
The Government will streamline the recruitment of foreign workers by placing it
under a single administration. The MoHR will assume the lead role in policy-
making for foreign worker management. The Government will streamline
recruitment processes at the One-stop Centre (OSC). The OSC will be responsible
for determining the requirement of foreign workers by sector; verifying and
approving applications for recruitment of foreign workers; monitoring and
responding to all matters related to the welfare of foreign workers; and ensuring
that foreign workers are employed in the approved sectors and firms. With the
streamlining of OSC operations, the role of outsourcing companies and
intermediaries will be eliminated.

The Government will introduce the strict liability concept whereby

employers of foreign workers are fully responsible for their recruitment
process and welfare. In addition, the Government will address the issue
of illegal foreign workers through better management and effective
enforcement initiatives.” (p. 5-18)

Chapter 8: Re-engineering economic growth for greater prosperity

- Focus area A – Transforming services

o “Strategy A1: Fostering a dynamic environment for knowledge-intensive services” (p. 8-

17)

 “Enhancing access to technology and R&D:

The utilisation of technology, particularly ICT, will be enhanced among services
firms through the Embed ICT programme to reduce dependence on low-skilled
foreign workers and to boost productivity.” (p. 8-17)

- Focus area B – Energising manufacturing

o “Strategy B2: Enhancing productivity through automation” (p. 8-22)

 “Measures to increase productivity will be undertaken by increasing automation

and enhancing workforce skills development. Greater automation and
technology utilisation will be encouraged through developmental and
performance-based financial assistance to reduce the high dependence on
unskilled foreign workers. The current levy system will be expanded and a cap on
employment of unskilled foreign workers will also be introduced. The emphasis
on skills development will be driven by enhancing industry-led training through
greater collaboration between industry experts and training institutes to ensure
workforce readiness.” (p. 8-22)

12
- Focus area D – Transforming construction

o “Strategy D1: Enhancing knowledge content” (p. 8-27)

 “Regular manpower planning will be undertaken to reduce the mismatch

between labour demand and supply. The proportion of skilled foreign labour will
be increased by streamlining entry requirements and introducing a new levy
system.” (p. 8-27)

13
 The economic impact of foreign workers in Malaysia –
Descriptive statistics12

2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2010 2011 2012 2013 2014 2015 2016

total male female

Figure 5. number of foreign workers in the labour force in thousands (‘000s)

Source: Labour Force Survey 2015, Department of Statistics. Numbers for 2016 were last updated in the
end of August 2016.

12
Throughout this paper the terms “foreign worker”, “immigrant worker”, and „migrant worker“ are used
interchangeably.

14
 estimate of documented +
Name Organization
undocumented undocumented (2015)
Rani Rasiah Parti Sosialis Malaysia > 50% 1 > 4.3 million
Adam Minter Bloomberg > 1 million1 > 3.1 million
Ben Shane Lim The Edge > 2 million1 > 4.1 million
Chinese Chamber of
Low Kian Chuan 1:2 (docu. : undocu.)1 6.5 million
Commerce & Industry
Benjamin Harkins ILO 50%1 4.3 million
Datuk Shamsuddin
Executive Director MEF 2.8-2.9 million1 5.1 million - 5.2 million
Bardan
Nurul Izzah Anwar Lembah Pantai 3.7 million1 5.8 million
Ministry of Human
Datuk Seri Richard Riot 10:7 (docu. : undocu.)1 3.7 million
Resources

Table 4. Estimations of undocumented foreign workers in Malaysia and resulting total number of foreign workers in
Malaysia (Author’s calculations).

Moreno et al. (2015). Malaysia Economic Monitor.

15
 45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
15-24 25-34 35-44 45-54 55-64
Malaysian workers Foreign workers

Figure 6. Percentage of total labor force by age group.

Source: Labour Force Survey Report (2015). DOS (2016).

60%

50%

40%

30%

20%

10%

0%
No formal Primary Secondary Tertiary

Malaysian workers Foreign workers

Figure 7. Percentage of total labour force by educational attainment.

Source: Labour Force Survey Report 2015. DOS (2016).

16
 Agriculture, forestry and fishing
12%

Manufacturing
5% 30%
Construction
8%
Wholesale and retail trade; repair of motor
vehicles and motorcycles
9% Accommodation and food and beverage service
activities
Activities of households as employers

15% 21%
Other

Figure 8. Foreign worker’s employment by industry as percentage of total foreign worker

employment (Malaysia Standard Industrial Classification (MSIC) 2008 version 1.0 is used)
Source: Labour Force Survey Report 2015. DOS (2016)

Elementary occupations

Plant and machine-operators and assemblers

Craft and related trades workers

Skilled agricultural, forestry and fishery workers

Service and sales workers

Clerical support workers

Technicians and associate professionals

Professionals

Managers

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Malaysian workers Foreign workers

Figure 9. Malaysian and foreign workers by occupation (Malaysia Standard Classification of Occupations (MASCO)
2008 is used)
Source: Labour Force Survey Report 2015. DOS (2016).

17
 Figure 10. Labour force participation rate13: immigrants and
Malaysians by sex
Source: World Bank (2013).

Figure 11. Unemployment rate14: immigrants and

Malaysians by sex
Source: World Bank (2013)

13
The labour force participation rate is calculated as follows: ((number of persons in the labour force/number of
persons in the working age (15-64)) X 100
14
The unemployment rate is calculated as follows: (number of unemployed persons/ number of persons in the
labour force) X 100

18
 The economic impact of foreign workers in Malaysia –
Literature summary

Source I
Author/Publisher:
Del Carpio et al./World Bank (in collaboration with ILMIA – Ministry of Human Resources Malaysia)

Title:
Immigration in Malaysia: Assessment of its Economic Effects, and a Review of the Policy and System

Year of publication:
2013

Data sources:
- surveys, censuses, national accounts, national sources from other countries, and international
organizations
- Labor Force Surveys
- Royal Police of Malaysia

Time period analyzed:

1990 -2010

Main findings/conclusions:

- “Access to foreign workers made possible the coexistence of export-led growth and continual
educational improvements of the local labor force.” (p. 8)

- “Skilled and semi-skilled Malaysians benefit greatly from the presence of foreign workers; however,
unskilled Malaysians experience negative impacts on their labor market outcomes.” (p.168)

- “(…) the presence of foreign unskilled workers allows Malaysians to invest in their own education and
enables them to work in higher skill occupations identified by the Government as critical to reaching its
goal of becoming a high-income economy by the year 2020.” (p. 168)

- “On the enterprise side, the presence of foreign workers has been (and continues to be) a key factor in
Malaysia’s competitiveness and economic success, especially among export-oriented companies in the
manufacturing sector. Foreign labor continues to translate into increased productivity in key economic
sectors such as manufacturing and construction; however, the same is not true in all segments of the
agricultural sector. Firm size seems to matter when it comes to benefiting from foreign labor in terms of
increased productivity. Further analysis (and access to data) is needed to understand the effect on key
service sub-sectors.” (p. 168)

- “Several traditional sub-sectors have not been able to (or cannot) mechanize and are still dependent on
low cost labor to operate and stay competitive. At the same time, Malaysian workers have been

19
increasing their skill and human capital levels and there is currently a low supply of unskilled Malaysians
willing (or able) to work in certain sub-sectors and occupations. These labor-intensive traditional sub-
sectors (food services, construction, export-oriented manufacturing of wood and textiles, and agriculture)
are still critical to the Malaysian economy. The analysis indicates that a large number of these firms, and
possibly their whole sub-sector, would simply cease to exist without the cost advantages provided by low-
skilled foreign labor.” (p. 169)

- “(…) immigration in Malaysia helps increase women’s labor force participation full-time (and less so for
part-time) work. But impacts vary broadly by economic sector; for instance, the impacts are very positive
and significant for women working in the services sector (especially in finance, business and real estate,
insurance, health, and other high value-added services). (…) The impact is negative for women working in
the manufacturing sector.” (p. 171)

- “Given the results from this report, we recommend that going forward, it will be critical for all
stakeholders to recognize that the economic benefits from immigration to Malaysia continue to exceed
the economic costs.” (p. 168)

- “Based on the analysis in this report and the evidence studied from other countries, the authors
conclude that it is critical for all to recognize that immigration still presents Malaysia with more economic
benefits than economic costs.” (p. 178)

Statistics:

Comment: The findings show that for every 1000 new foreign workers that enter a given sector in
a given state in a given year 836 new full-time jobs and 169 part-time jobs are created for
Malaysians. The mechanism is that foreign workers reduce the production cost of Malaysian
firms, making them more competitive in the global market, which allows them to expand
production and consequently their demand for Malaysian workers.

20
Comment: The findings show that hiring 1000 foreign workers in a given state and year, 671 jobs are
created in the agriculture and mining industry and 741 jobs are created in the service industry. Results for
the manufacturing industry are not statistically significant.

Comment: The findings show that employing 1000 new foreign workers in a given industry, state and year
is associated with 207 new jobs for the age group 20-29, 303 new jobs for the age group 30-44 and 340
new jobs for those 45 and older. The effect on the age group 15-19 is statistically insignificant.

21
Comment: The findings show that for every 1000 new migrant workers in a given industry, state, and year
604 full-time jobs are created for Malaysian males while only 235 full-time jobs are created for Malaysian
females. The respective numbers for part-time jobs are 91 for Malaysian males and 80 for Malaysian
females. Only Malaysian men experience a small decrease in the unemployment rate, the effect on
Malaysian females is not statistically significant.

Comment: For every 1000 new foreign workers in a given industry, state, and year, 114 workers with no
formal education lose their jobs. At the same time, there are 320 new jobs for workers with PMR, 182
new jobs for workers with SPM, 366 new jobs for workers with STPM and 35 new jobs for workers with
certificates or diplomas. There is no statistically significant effect on workers which hold a university
degree.

22
Comment: The wage changes above are associated with a ten percent increase of immigrant workers in a
given industry, state, and year. Overall, Malaysian wages increase by roughly 0.15 percent. Wage
differences across states and regions caused by immigration tend to equalize quickly as Malaysian
workers are highly mobile across industries (and possibly also regions). The lowest-skilled Malaysian are
hurt the most because they display the highest degree of substitutability compared to foreign workers,
while secondary educated male Malaysians seem to be the most complimentary and therefore benefit
the most.

23
Comment: (50+), (5+) refers to companies with more than 50 employees and more than five employees,
respectively. For (50+) manufacturing companies, a ten percent increase in the amount of foreign
workers they employ is associated with a TFP15 increase of 6.19%. For (50+) construction companies the
corresponding increase is 1.8%. The results for (50+) plantation companies, ICT companies, and
accommodation companies is found to be statistically insignificant.16 Moreover, for plantation companies
with 20 to 50 employees, a ten percent increase in employment levels of foreign workers leads to a TFP
decrease of 18.3% (not in the graph).

Comment: Impact of a ten percent increase in foreign worker employment for companies with more than
50 employees in the various manufacturing sub-sectors.

15
TFP refers to Total Factor Productivity. TFP tries to measure the residual growth in output (here the output of a
company) that cannot be explained by variations in traditional inputs: labor and capital. In a sense, TFP measures
the efficiency with which inputs are used and therefore can be considered an adequate estimator for a firm’s
competitiveness.
16
Industries here are based on the 5-digit NAICS classifications.

24
 Source II
Author/Publisher:
Moreno et al./World Bank

Title:
Malaysia Economic Monitor – Immigrant Labour (December 2015)

Year of publication:
2015

Data sources:
- several

Time period analyzed:

1990-2014

Main findings/conclusions:

with reference to Ahsan et al., 2014: “(…) a 10 percent net increase in low-skilled immigrant workers
increases real GDP 1.1 percent. This positive impact on GDP occurs even after taking into account impacts
from remittance outflows. Low-skilled workers keep unskilled salaries low, reducing domestic prices and
production costs and increasing export growth. As a result, unskilled employment increases and profits
rise which increases investment and the demand for skilled employment (mainly Malaysian), which is
complementary with low-skilled immigrants. This translates into salary increases for skilled workers and a
boost to domestic demand which increases public revenue collection, improving the public fiscal position.
This positive effect in Malaysia is reinforced by two key factors. First, the Malaysian labour market is very
tight with low unemployment rates. Therefore, low-skilled immigrant labour expands employment
opportunities more than it substitutes for unskilled Malaysian workers. Second, immigrants and domestic
workers have complementary skills, and therefore immigration increases the demand for more-educated
Malaysians.” (p.39)

- “Immigrant workers seem to have also relaxed key constraints to support Malaysia’s economic
diversification. As Malaysia expanded rapidly through the second half of the twentieth century, Malaysia’s
relatively open immigration policy reassured investors that they could benefit from Malaysia’s
infrastructure and business environment while also having access to lower-cost labour. This made
Malaysia a very attractive investment destination. Migrants have allowed manufacturing to remain
relatively competitive even as the commodity boom put pressure on the real effective exchange rate of
many commodity exporters. Future growth will likely demand a similar combination of effective
institutions and lower cost labour in addition to a highly educated local workforce.” (p. 39)

- “Low-skilled immigrant labour has facilitated the skill upgrading of large segments of Malaysians, and
has contributed to the growth of some high value-added sectors” (p.40)

25
Statistics:

Comment: For every ten new foreign workers in a given sector and state, there are 5.2 additional jobs
(4.4 full-time, 0.8 part-time) created for Malaysians out of which 2 are taken up by women. It is important
to keep in mind that these jobs are created not on a national-level but on a state-level, which means that
Malaysian workers migrate from states with low foreign worker presence to states with high foreign
worker presence. On a national-level between 0.3 and 0.5 new jobs are created.

Comment: There is no statistically significant impact of hiring 10 additional foreign workers on workers
with primary or no formal education on the sector-state-level.

26
 Source III
Author/Publisher:
Ashan et al./World Bank

Title:
International Migration and Development in East Asia and Pacific

Year of publication:
2014

Data sources:
- several

Time period analyzed:

1990-2014

Main findings/conclusion

- “In Malaysia, migrants are filling the demand for unskilled labor in the economy as they take up dirty,
dangerous, and difficult jobs that citizens do not want.” (p. 98)

- “A counter-thesis to the stalling hypothesis17 is that migration enables the skill and technological
upgrading of native workers by allowing them to move from low-productivity to high-productivity
industries. Unskilled migrant workers can then be used to take up less-skilled, labor-intensive positions in
the agriculture and services sectors. The data on the composition of native workers and migrant workers
in the two decades between 1986 and 2006 […] suggest that such a restructuring of the labor force has
taken place in Malaysia.”

- “a 10 percent increase in low-skilled foreign workers causes an increase in real GDP at factor cost by 1.1
percent” (p. 104)

- “The output of import-competing industries such as plastic products, paper, printing, and transportation
equipment also expands as consumers and investors substitute local goods for imported products […]. In
contrast, the services sectors register marginal growth or decline, and release resources to the other
expanding sectors.” (p. 108)

Statistics:

17
According to the technology-stalling hypothesis, an economy “fails to adopt more productive technology and
produce new technology-intensive products because the presence of unskilled migrant workers lowers wages and
reduces the incentives to adopt technology.” (p. 120, Ashan et al., 2014)

27
Comment: Education levels of migrant workers and native workers between 1980 and 2010.

28
Comment:

Distribution of native and migrant workers in Malaysia in 1986, 1996, and 2006 by industry.

29
 Source IV
Author/Publisher:
Özden & Wagner/World Bank

Title:
Immigrant versus Natives? – Displacement and Job Creation

Year of publication:
2014

Data sources:
Labour Force Surveys

Time period analyzed:

1990-2010, main analysis for 2007-2010

Main findings/conclusions:

- “[…] the scale effect outweighs the substitution effect in Malaysia.”18 (p. 5)

- “Our results suggest that immigration to Malaysia resulted in substantial changes in skill premiums and
hence inequality.” (p. 6)

- “Sufficient Malaysian workers seem to be highly mobile across industry-regions and, consequently, the
positive demand shock induced by immigration results in relative changes in employment, but not
relative wages, of natives.” (p. 31)

- “[It is suggested] that immigrants are not systematically hired by industries experiencing positive
demand shocks, but rather in particular by industries in difficulties, likely in an attempt to cut costs and
survive.” (p. 33)

- “Moreover, we can unambiguously conclude that immigrants, given their composition, decrease the
demand for native workers with at most primary education, and increase the demand for all other types
of workers.” (p. 42)

- “[…] immigration results in a substantial reallocation of native workers across industries (and regions),
but has only very modest effects on average native wages (immigrant wages fall substantially).” (p. 46)

- “The impact of immigration is highly heterogeneous for natives with different levels of education and
follows an inverted u-shape. The bulk of immigrants have at most primary education and, on net, displace
natives in that education category, with a significant negative impact on wages. Those natives with a little
more education, lower secondary or completed secondary education, experience the greatest benefits;
while the gains for those Malaysians with a vocational diploma or university degree are smaller.” (p. 46)

18
The inflow of immigrant workers reduces the cost of immigrant labour which has two effects.
1. Substitution effect: for a given level of output, firms will substitute immigrant workers for native workers
2. Scale effect: the decline in production cost results in output expansion and hence, for a given relative wage, firms
will employ more native workers

30
Statistics:
4
3
2
1
0
-1
-2
-3
-4

Comment: effects of 10 new foreign workers in a given industry, state and year on employment levels of
Malaysians by education level. -3 for no formal or primary education; creation of 1.6 jobs for natives with
lower secondary education, creation of 3.1 jobs for natives with completed secondary education, and 0.4
created jobs for natives with some form of vocational training. No statistically significant impact on
natives with a university degree or higher.
Source of graphic: Author

Comment: Changes in wages at the national level in a given year due to a ten percent increase in foreign
worker employment.
Source of graphic: Economic Monitor Malaysia – World Bank (2015)

31
Comment: Changes in wages by education level at the national level in a given year due to a ten percent
increase in foreign worker employment.
Source of graphic: Economic Monitor Malaysia – World Bank (2015)

Comment: The full line shows actual wages of native workers between 2007-2010 (in relative terms). The
dotted line, on the other hand, shows the (relative) wage of native workers as they would be in 2007-
2010 if there had been no immigration since 1990.
For example, a worker with lower secondary education (three years of education past primary) had 18
percent higher wages than a worker with at most primary education, during the period 2007-2010. In the
absence of any immigration since 1990 this gap would only be six percent. Similarly, for those with

32
completed secondary school education the skill gap would be only 38 percent (at the 1990 immigration
levels), compared with the actual 49 percent.

33
 Source V
Author/Publisher:

Yean & Siang/World Bank

Title:

The Impact of Foreign Labor on Labor Productivity and Wages in Malaysian Manufacturing, 2000-2006

(Chapter 6 of Managing International Migration for Development in East Asia. Edtrs. Adams & Ahsan.
World Bank)

Year of Publication:

2011

Data sources:

- Annual survey of manufacturing industry

- Census of manufacturing industry

Time period analyzed:

2000-2006

Main findings/conclusions:

- “On the basis of the above, it would appear that local establishments have used foreign labor to
enhance their competitiveness (as proxied by the unit labor costs), and profits compared to local
establishments without foreign workers.” (p. 154)

- “the use of foreign workers has a negative impact on labor productivity19 and total wages and salaries
for all workers (both native and foreign). However, the negative impact of foreign workers on labor
productivity and total wages and salaries is small and not very robust across different occupational
workers. Moreover, the negative impact on labor productivity is smaller than the negative impact on
total wages and salaries for all workers. This suggests that the use of foreign workers has helped
improve the competitiveness and profitability of manufacturing firms in Malaysia by reducing unit
labor costs20.” (p. 155)

19
Labour productivity is equal to value added per worker (= output/number of workers)
20
“Unit labor cost is defined as the ratio of real total wages & salaries for all workers to real value added.” (p.143)

34
Statistics:

0.00%

labour productivity

unit labour cost

salaries & wages of all

-0.10%

workers
-0.20%

-0.30%

-0.40%

-0.50%

-0.60%

-0.70%

-0.80%

Comment: impact of a one percentage point increase of the share of foreign workers among employees
in Malaysian manufacturing firms 2000-2006
Source of graphic: Author

35
 Source VI
Author/Publisher:

Del Carpio et al./Scandinavian Journal of Economics

Title:

Local Labor Supply Responses to Immigration

Year of Publication:

2014

Data sources:

Labour Force Surveys

Time period analyzed:

1990-2010

Main findings/conclusions:

- “Our results are consistent with immigration causing an increase in the demand for native labor, which
induces both employed individuals and their families to migrate across states.” (p. 495)

- “Our findings imply that immigration not only changes the distribution of employment and output
across states, but has much larger social ramifications because entire families are induced to move. We
find that these effects are concentrated among middle- and lower-skilled Malaysians.” (p. 495)

- “[…] while immigration results in substantial reallocation of people across states, it is unlikely to have
substantial effects on employment at the national level.” (p. 507)

- “Immigration results in an increase in the demand for Malaysian workers because the reduction in the
cost of production as a result of immigration allows firms to increase output. This more than offsets their
incentive to substitute natives workers with cheaper immigrants. Immigration generates a positive shock
to demand for native workers; in response, workers migrate to that state and they are accompanied by
their spouses and children.” (p. 508)

- “[…] even very low-skilled natives have benefited economically from low-skilled immigration in these
two decades [1990-2010]” (p. 515)
- “Because Malaysians and immigrants have improved their educational attainment over time, the lowest
Malaysian education groups have increasingly had to compete with immigrants, something that was not
yet true during the 1990s.” (p. 515)

- “We find that immigration causes substantial internal movement of natives. Immigration increases the
demand for Malaysian workers in a state, and many of these workers bring their spouses – three-quarters
of married female migrants are occupied as housewives – and school-age children.” (p. 516)

36
Statistics:

0
overall full-time part-time overall student housewife
Malaysian employment Malaysians out of labour force

total male female

Comment: the impact of ten new foreign workers in a given state by gender. No statistically significant
effect on unemployment.
Source of graphic: Author

0
overall full-time part-time overall student housewife
Malaysian employment Malaysians out of labour force

total 15-19 20-29 30-49

Comment: the impact of ten new foreign workers in a given state by age group. No statistically significant
effect on the group 50 years and older (except small positive effect on part-time employment).
Source of graphic: Author

37
 4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1

overall full-time part-time

Comment: the impact of ten new foreign workers in a given state on Malaysian employment in the same
state by education category.
Source of graphic: Author

ENDING WORDS
This paper presented data and literature findings on foreign workers in Malaysia and their
contribution to the local economy. It is important to keep two things in mind.
One, the data used for the econometric models and computations is far from perfect and is likely
to not capture the effect of undocumented foreign workers very well, simply because the
respective data is incomplete or missing altogether.
Two, and most importantly: there are things in life (and arguably it is the most important ones)
that are not quantifiable, that cannot be expressed in numbers and statistics, things like
compassion, respect, gratitude and meaningful relationships. While the literature summary
shows that foreign workers had a positive impact on the Malaysian economy as a whole (and still
do), this group of people should not be regarded as inputs in some production function, for they
are first and foremost the same as everyone else – they are human.

38
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40