Labour Shortage Issues Forum

By Daniel Lee

The Labour Shortage Issues Forum was held at the Caring Society Complex on the 23^rd of September 2010. It was chaired by SERI Senior Research Fellow and Penang Economic Monthly economics columnist Dr. Chan Huan Chiang, and the keynote speech was presented by Mr. Yoon Chon Leong of Business Wise Consulting. The discussants were Prof. Lim Koon Ong (Deputy Vice-Chancellor of USM), Mr. Horst Rosenmueller (Managing Director of OSRAM cum President of the Free Industrial Zone, Penang, Companies’ Association (FREPENCA)), Mr. Ajit Singh Jessy (Advocates & Solicitors of Jessy & Associates), and Mr. M.K. Veeriah (Secretary of Malaysian Trade Union Congress – Penang Division (MTUC)).

Penang’s efforts in moving towards a high-income economy, concentrating on higher value-added, knowledge and technology based economic activities are experiencing a host of deep rooted problems. Among the main issues noted at the forum are: the high turnover rate of local workers, the difficulties faced in recruiting/retaining skilled and talented local human capital, the pressing need to hire foreign workers and a dearth of skilled talent across fields.

In many high-wage societies, redundancies are cut down, labour uses streamlined and fewer workers are hired in multi-task positions. The uses of labour could be a primary depressant of wages, as overuse or redundantly used labour resources abound in the local working context.

In the local context, there seems to be a “fear” of shaking up the established pay structure, and this makes input for changes quite difficult. Some local SMEs take in the cheapest labour, and are structured to benefit the employer/owner only; such establishments contribute little to the positive restructuring of the labour profile and should be phased out.

Malaysian employers appear to like foreign workers because domestically, the employment situation is inherently and structurally “foreign-worker” orientated (geared towards low-cost/low-pay, low productivity and redundancies). In essence, we are recreating third world conditions in our own backyard.

Recently, Japan’s ambassador to Malaysia Masahiko Horie mentioned that Japanese companies in Malaysia were concerned over the shortage of labour and knowledge-based skilled workers. If the situation persists, they may relocate operations to some other countries such as China, whose rise in the manufacturing sector will potentially be the cause of Penang manufacturing’s disappearance from the map within the next five years.

Though the manufacturing sector is Penang’s largest economic contributor, the needs and shortages faced by other sectors merit concern, particularly in services with core contributions to the Penang economy such as tourism, hotel and hospitality industry, culture and arts.

Low skilled foreign labour  
Almost two million unskilled foreign workers have flooded in to the country from 2002-2006. This does not include an estimated two million that are working in the country illegally, primarily in agriculture, construction and manufacturing.

Many employers claim that their business activities will come to a standstill if they are not allowed to use foreign labour because the jobs in those fields are perceived to be dirty, difficult and demeaning to the average Malaysian. Therefore, employers argue that they have no choice but to utilize foreign labour and sing praises of hiring such workers, supposedly of a labour category that is easy to utilise, simple to manage and that does not make demands for wage increases. Some local employers have voiced out strongly in support for the hiring of foreign workers that many among them have threatened to uproot and relocate if their demands for “low-cost” foreign workers are unmet.

As such, foreign workers fill up the vacuum as they are not opposed to working in dirtier, more hazardous conditions and longer hours for equal or lesser pay thereby keeping labour costs relatively low and helping to keep Malaysia competitive against other low-cost producing countries. They also serve as a buffer during times of recession as they help maintain a relatively low level of unemployment, and contribute to domestic demand through their expenditure on necessities and other items of consumption.

Conversely, there are adverse effects. They have been attributed with an increase in health, social and safety problems. Their huge remittances to their home countries have negatively affected balance of payments and furthermore, many will bring their skills back to their respective countries. They have also slowed down growth in productivity, displaced local workers in some industries, depressed wages and released the pressure for upgrading skill and technology, thus impeding human capital development and delaying Penang’s economic transformation.

As a result, the economy is mired in a middle-income state. However, if Penang were to reduce its dependence on foreign workers, who then will fill up the vacuum, given the average Malaysian’s aversion to the aforementioned adjectives?

It must be noted that these foreign labourers are, more often than not, exploited by their employers and live in deplorable conditions, and the fact remains that foreign labour is still needed in certain jobs, sectors and niches. The call to halt all importation of foreign labour should be treated with caution; should this be implemented, the local manufacturing industry would not be able to cope with the financial cost of hiring mostly local labour as replacement.

According to Datuk O.K. Lee, many companies cannot afford to pay increased wages to attract the type of workers they need, and nothing can be done to prevent companies from pressing to utilize the lowest-cost options

However, the role and contributions of unskilled foreign workers should be seriously re-assessed, despite all the apparent short-term benefits of utilising such labour.

The challenge lies in the ability to come up with an efficiently comprehensive long-term policy on foreign labour, the use of labour-substituting technologies in industries and an efficient management system of foreign labour. 

Income

Source: Derived from EPU, DOS and NAPIC

Source: Derived from EPU, DOS and NAPIC

While household income levels have increased by 3.13% over the last decade, the cost of food and shelter have increased at a higher rate, thus purchasing power for essentials and consumption items have dropped in relation to real wages. This should be a point of concern for Penang as rentals and property prices have soared beyond the range of affordability for many.

As such most workers who receive a basic pay of a mere RM500 (which is lower than the national poverty line indicator of RM720) would be much inclined to leave their jobs, especially if living costs and working conditions are not justified and worth the effort.

According to Mr. Ajit Singh Jessy from the Penang Human Resources committee, salary remains as one of, or the most, important factor in the retention of workers.  As such, the complaints of local workers regarding wage levels are not baseless, especially when it comes to menial forms of labour. What may be baseless is the argument that locals shun these jobs which then have to be farmed out to foreign labourers.  This is seen in the thousands of Malaysians who travel from Johor Bahru to Singapore daily to work on jobs across the spectrum as they are relatively well paid for what they do.

As locals veer away from low paying jobs, foreign labourers fill the void and as such, local employers are relieved of paying sustainable wages and free from the burden of skill development training and other value-added obligations. As a result, wages are depressed and real wages have gone into decline.

“For a very long time,” said Mr. Ajit. “The approach has also been to ‘pretend’ that wage levels are not really connected to the issue of labour shortages facing the economy today. But the connection cannot be denied, and the question is how wage structures can be realigned for wages to be used as a dynamic ‘pull factor’ to bring in skilled labour, from Malaysian’s overseas of foreign talent.”

However, according to a representative from Bosch, dissatisfaction with salaries may not be the main cause of local employee turnover because Bosch pays well over RM500 which also includes skills development training, employment packages and other fringe benefits, and as such they have to employ foreign workers to stabilise the high turn-over rate of local employees.

Minimum wage 
Proponents of minimum wage advocate that it is necessary to increase the standard of living of workers. However, opponents conclude that there will be unintended negative consequences, even though the original intention is noble. They argue that minimum wage only serves to increase unemployment especially among the very workers the minimum wage was set up to protect, the poorer lower skilled workers. This happens because the imposed increase in wages will hike up cost and cut profit margins. As a result, Malaysia will then lose its comparative advantage, leading to the nightmarish thought of attracting lower FDI and fleeing MNCs to the cheaper pastures of China or Vietnam they claim.

Proponents of minimum wage claim that such a capitalist thinking fail to realise that the minimum wage acts as a lifeline, as the fairest pay is often not the pay agreed by the employer and employee involved, with no outside intervention. Minimum wages are about protecting the rights of employees, empowering them and making sure they are able, at a minimum, to make ends meet and to reduce Malaysia’s wealth disparity. However, the presence of a large pool of “cost-effective” foreign workers and a weak workers union act as the main factors of disincentive for local employers to accept a minimum wage ruling.

Brain drain 
The premise is simple: Malaysia is unable to attract skilled workers, local or otherwise, and more importantly, retain the services of talented Malaysians from leaving its shores to greener pastures overseas due to lower pay and unequal opportunities.

There are essentially two reasons for Malaysians migrating. The first is the push factor such as the lack of fair and just treatment irrespective of race and religion, diminishing quality of education, the increasing lack of creative, common and human liberties, and the overall quality of life. The second is a lack of attractive and enticing pull factors.

Brain “gain” can be achieved by drawing an inflow of skilled talent through immigration-friendly policies, attractive rewards and open environments. For Penang, simply increasing wages as lure to capture the necessary skills and talent is no longer valid as it is now more about what Penang can offer in terms of a higher quality of life. The lack of brain gain inflow can be attributed to immigration rules that make it difficult and arbitrary for foreign spouses of Malaysians, and the children of such unions, to obtain permanent residency (PR), citizenship and employment.

Education 
Penang’s shortage of skilled workers is a serious matter and it is related to the question of brain drain. Investments and companies may gradually leave the state if we lose what makes Penang attractive in the first place: its skilled and talented human capital.

There has been much discussion about the role of universities in bridging education with real practice. Theories are conventionally taught with a certain degree of syllabus and instructional uniformity in all, or most, institutions of higher learning throughout the world. Thus, it may be assumed that all, or most, graduates will graduate with a similar minimum of theoretical knowledge in their fields. However, studies conclude that formal university curriculum only provide 30% of expertise needed for effective job performance. With a post-graduate degree which further supports and complements the skills transformation process, the percentage increases to about 50%. The rest come from job experience and exposure to the applied and practical areas of the field.

Local companies complain that universities train workers poorly, but most of their complaints stem from their own unreasonable expectations of looking to conveniently recruit “plug & play” employees freshly graduated from universities due to their incapability or failings to train their new employees.

To facilitate the transformation process local universities have to create and nurture people who are application and practice orientated. The university curriculum has to be improved upon and modified to emphasise training and hands-on approaches, as our graduates lack exposure to practical areas. Adequate and comfortable levels of communication, innovation, execution, technical understanding, creativity and critical thinking are areas where local graduates perform dismally in. These are the areas of deficit that need to be addressed, through revamps in curriculum and teaching methodology.

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The labour shortage issue cannot be addressed without understanding some of its root causes, and these problems are deep rooted. The establishment of a body to gather data and research on the causes of the current labour shortage among its various sectors and to analyse different root causes may be needed to better understand the problem at hand.

By Daniel Lee and Richard Ho