Malaysia: Benchmarking Income and Productivity (Part 2)

This is an extract of a BNM article on “Are Malaysian workers paid fairly?” In Part 2, we take a look at Benchmarking Incomes against Equity: Workers vs Capital Owners.

In the production process, labour is only one of the factor inputs, in addition to factor inputs provided by the employer (i.e. capital, land) in producing goods and services. From this perspective, one way of measuring equity is to analyse the labour share of income as it represents the share of national income accrued to labour rather than capital owners (i.e. 

firms). The labour share of income has been on the rise in Malaysia, from 31.7% in 2010 to 35.2% of GDP in 2017 (Chart 1). This bucks the global trend where the labour income share has trended lower in recent years. However, Malaysia’s labour share of income still lags behind most advanced economies (Chart 2). This implies that a larger fraction of national income in Malaysia goes to capital owners rather than workers, that is capital owners benefit more than workers in Malaysia.

Intuitively, the lower share of income accrued to labour may suggest that capital is playing a bigger role in the production process. Accordingly, a lower share of labour income should be associated with a relatively higher level of capital intensity. For example, in a highly capital-intensive industry, capital inputs such as machinery and equipment play a bigger role in the production process and capital owners (rather than workers) should receive a larger share of income generated. However, this relationship does not hold true for Malaysia. Malaysia’s capital intensity is significantly lower than the benchmark economies (Chart 3) signalling that workers play a relatively larger role in the production process in the Malaysian economy compared to benchmark economies. Yet, the labour income share in Malaysia is relatively lower.

A similar trend is observed at the industry level (Chart 4). Most Malaysian industries fall in the bottom-left quadrant characterised by lower capital intensity and lower labour share of income relative to benchmark economies. Notably, labour income shares in the wholesale and retail trade, food and beverage as well as accommodation industries were only about half of benchmark economies despite capital intensity being far lower at only about 40%. Only two industries fall outside this quadrant. First, the mining sector has a relatively higher capital-intensity. Hence, the lower labour share of income of 7% is to be expected. In contrast, the construction sector is characterised by higher labour-intensity, and thus correspondingly exhibits a higher labour share of income (73%).

The disquieting trends observed by the researchers were:

(i) though labour’s share of income increased, it was not due to higher wages but due to creation of more labour-intensive jobs

(ii) supply of graduates (diploma and degree holders) was nearly twice that of available vacant spots. This resulted in depressed starting salaries and/or mismatch of skill sets and job requirements.

This is disturbing for Malaysian parents and students who work towards a degree or diploma. We don’t have sufficient jobs for them. That’s not the case with those with SPM!

Reference:

Are Malaysian Workers Paid Fairly? An Assessment of Productivity and Equity

By Athreya Murugasu, Mohamad Ishaq Hakim and Yeam Shin Yau