Foreign Workers in : Assessment of their Economic Effects and Review of the Policy The World Bank, EASHS KNOMAD Seminar Series June 13th, 2013

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Objective

This study aims to help MOHR to better…

• Manage existing human resources in the country. • Plan for the development of future human capital needs. Two Interlinked Components

I. Human Resource Management

1. Identify skills mismatches/gaps, and suboptimal amount of training. 2. Evaluate three key policies in the skills domain: soft skills and English language. 3. Assess skill forming policies, benchmarking and learning from international practices. 4. Future human resource requirements: Micro-simulation results. 5. Way forward to better manage human resources.

II. Management

1. Characterize labor migration in Malaysia over time, sectors and states. 2. Identify economic and social impact of foreign workers in the economy. 3. Assess current policy compared to international systems. 4. Way forward to better manage immigration.

3 The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Road map

1. What are the potential concerns over the employment of foreign workers? 2. Foreign workers and Malaysia: • Determinants of employment of foreign workers in Malaysia • Profile of foreign workers in Malaysia

3. Economic Impact of Foreign Workers on:

• Labor markets

• Firm-sub-sector productivity

4. Potential effects of policy changes:

• Macroeconomic Impacts

• Sub-sector growth and employment

5. Foreign Workers Management:

• Current Policies and comparable Systems

6. Conclusion:

• Key Messages 4 The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Potential Concerns over the Employment of Foreign Workers

1. Do foreign workers hurt Malaysian workers in terms of employment and wages? • Wage and employment impact on local workers • Impact on skill acquisition and education incentives • Impact on female labor force participation 2. Do foreign workers hamper productivity increase and technological advances? • Substitution of unskilled labor for technology • Sectoral diversification of the economy 3. How will further restrictions on employment of foreign workers impact the economy? • Macroeconomic effects - growth, investment, unemployment • Growth across sectors • Wage and employment effect across educational categories 4. What are the social costs and benefits of employing foreign workers? • Crime and social costs • Impact on demographic patterns and fertility

5 The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Value added of this report

This report adds to the foreign management Lab and previous analyses in four ways:

1. It uses economic tools to measure the impact of the employment of foreign workers on Malaysian workers and on productivity of firms in key economic sectors. 2. It uses simulation analysis to estimate potential changes to key policies, i.e. “levy regime.” 3. It undertakes an in-depth view of the Malaysian foreign workers management system and benchmarks it against a group of relevant countries, including Australia, Canada, Korea, , , , and the . 4. It brings together the lessons from the economic analysis, simulations, and the institutional analysis to make evidence-based recommendations.

6 The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit FOREIGN WORKERS AND MALAYSIA

MAIN DETERMINANTS

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Education levels in Malaysia improved drastically over the last 20 years

Education distribution of Malaysian One of the most remarkable features workers of the Malaysian experience has been 100% the advances achieved in education

levels of the labor force over a very 80% short period.

60% The share of Malaysians with (at most) primary school education declined 40% from 61% in 1990 to 26% in 2010

20% The share of secondary educated (at most) increased from 34% to 56%. 0%

The share of college educated increased from 5% to 18% in the same Not applicable No formal/Primary Lower Secondary Upper Secondary Post secondary Diploma/Certificate period. Degree

Note: The analysis is focuses on the working age population (15 to 64 years of age)

8 Education levels of younger workers improved even faster

The increase in the education levels of Education distribution of Malaysian workers the new entrants to the labor market - (25-35) 25-35 age group - has been even more 100% remarkable. 80%

In 1990, over 50% of young workers had primary education (at most), 40% 60% had secondary education and less than 10% had tertiary education. 40%

In 2010, around 10% had primary, over 20% 60% had secondary and close to 30% had tertiary education. 0%

The remarkable expansion of formal Not applicable No formal/Primary Lower Secondary education and human capital levels Upper Secondary Post secondary Diploma/Certificate Degree led to changes in job preferences of many Malaysians.

9 Labor Market conditions have been quite tight

Unemployment rates have always been quite low. This is partly due to rapid growth as well as relatively low labor force participation levels by women.

The inflow of foreign workers is largely attributable to demand factors in the domestic labor market.

Labor Force Participation 14,000 Labor Market Composition 100% 12,000

80% 10,000

8,000 60%

6,000 40% 4,000

20% 2,000

0

0%

2010 1990 1995 2000 2005 2011

1990 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Male Natives Female natives Total employed Total Unemployed

10 The economy heavily relies on export-oriented manufacturing and domestic service sectors

Agriculture Mining Distribution of labor force by economic sector Mfg food-bev-tob Mfg textile Mfg wood Mfg paper-furn 2010 Mfg chem-rub Metal-machinery-equ Mfg meas-med-com Mfg transp equip Utilities Construction Wholesale-retail Accommodation and resturant Logistics Post and telecom Finance 1990 Real estate Business services Education Health Other services Public administration 0% 20% 40% 60% 80% 100% The employment of foreign workers is a demand driven phenomenon

Over the last two decades, Malaysian labor markets experienced …

* Rapid increases in human capital and education levels * Low unemployment and labor force participation * Increased diversification across sectors * Continued importance of several export and domestic service sectors

The large inflow of foreign workers is largely attributable to …

* Demand factors in the domestic labor market in labor intensive sectors * Relative shortage of unskilled workers * Remarkable economic success of Malaysia relative to neighboring countries

12 FOREIGN WORKERS AND MALAYSIA

PROFILE OF FOREIGN WORKERS

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Labor Force data account for about 2+ million foreign workers in Malaysia

Foreign Workers in Malaysia, 1990-2010 2,500,000

Inflows of foreign workers 2,000,000 have steadily increased since the early 1990s, when the government introduced 1,500,000 formal guidelines on foreign workforce management. 1,000,000

Due to large number of unregistered undocumented 500,000 workers, it is difficult to get a more precise estimate.

0

1993 2007 1990 1992 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2009 2010

Total (adj.) Female (adj.) Male (adj.)

14 Foreign workers compose around 10% of the labor force

Estates/group housing are excluded from labor force survey. Other estimates show the total at 18% (NER,2009) and 20% (MOF, 2009).

Foreign Workers as share of the Labor Force 12.00

10.00

8.00

6.00 % labor force (adj.) 4.00 % 15+ (adj.)

2.00

0.00

15 is the main sending country and Sabah the main recipient state

Nearly two-thirds of foreign

Rest workers in Malaysia are in three states – Sabah, Selangor Other SE and Johor. Asia Thailand

Johor Kedah Kelantan Melaka Negeri Indonesia Sabah Sembilan

Pahang

Singapore Pulau Pinang

Perak WP Labuan Almost two-thirds of the foreign Selangor Perlis workers come from Indonesia. The WP Kuala Lumpur Terenggan next largest group are from the u Philippines (13%). Foreign labor continues to be largely concentrated in physically demanding sectors of the economy such as agriculture and construction

201 0

200 0

199 0

0% 20% 40% 60% 80% 100% Agriculture Construction Other services Wholesale-retail Accommodation and resturant Mfg wood Mfg meas-med-com Business services Mfg food-bev-tob Metal-machinery-equ Mfg chem-rub Logistics Mfg transp equip Mfg paper-furn Mfg textile Health Education Public administration Mining Real estate Utilities Post and telecom Finance 17 Foreign workers make up the largest share of the labor force in wood products, other services and agriculture sectors

Finance Public administration Education Post and telecom 2010 2000 1990 Health Utilities Real estate Logistics Wholesale-retail Business services Mfg textile Mfg paper-furn Mining Mfg meas-med-com Metal-machinery-equ Accommodation and resturant Mfg chem-rub Mfg food-bev-tob Mfg transp equip Construction Agriculture Other services Mfg wood 0 5 10 15 20 25 30 35 40 45 50

18 Foreign workers are significantly less educated than Malaysians...

Their educational distributions that have been more stable over time. This pattern is simply due to demand factors in the Malaysian labor market.

Education distribution of Malaysian workers Education distribution of foreign workers 100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%

1990 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 1990 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010

Not applicable No formal/Primary Lower Secondary Not applicable No formal/Primary Lower Secondary Upper Secondary Post secondary Diploma/Certificate Upper Secondary Post secondary Diploma/Certificate Degree Degree

19 Labor intensive economic sectors rely on foreign rather than Malaysian labor

Even when employed in capital intensive sectors, foreign workers hold low skill occupations. Education Levels by Economic Sectors, 2010 Malaysian workers Foreign workers

Public administration Public administration Other services Other services Health Health Education Education Business services Business services Real estate Real estate Finance Finance Post and telecom Post and telecom Logistics Logistics Accommodation and resturant Accommodation and… Wholesale-retail Wholesale-retail Construction Construction Utilities Utilities Mfg transp equip Mfg transp equip Mfg meas-med-com Mfg meas-med-com Metal-machinery-equ Metal-machinery-equ Mfg chem-rub Mfg chem-rub Mfg paper-furn Mfg paper-furn Mfg wood Mfg wood Mfg textile Mfg textile Mfg food-bev-tob Mfg food-bev-tob Mining Mining Agriculture Agriculture 0% 50% 100% 0% 50% 100% Not applicable Primary/No formal Secondary Tertiary 20 ECONOMIC IMPACT

LABOR MARKETS

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Which way does the causality between economic performance and foreign labor go?

FACT: We tend to find higher numbers of foreign workers in rapidly growing industries and regions across the world.

QUESTION: Do foreign workers contribute to economic growth or are they simply attracted to booming areas?

ECONOMIC FOREIGN GROWTH WORKERS Pull vs. Push Factors

Pull factors in the destination countries and push factors in the origin countries jointly determine the inflows of foreign workers.

These two effects need to be separated to identify the effect of foreign labor on economic outcomes in destination countries.

Using demographic data from the main origin countries and historical migration patterns by sector and state, our econometric methodology is able to identify the causal effect of foreign labor on the labor market outcomes in Malaysia. Employment of foreign workers leads to job creation for Malaysian workers

601 new full-time jobs (of which 67 are part- time) are created for Malaysian workers in a 400 given sector in a state as a result of the 350 entry of 1000 new foreign workers. This is 300 mainly a reallocation effect 250

700 200 150 600 100 500 50

400 0 Male Female Male Female 300 Total Employment Part-Time Employment

200 The effect on men and women seems 100 to vary significantly, especially in terms of total employment. 0 Total Employment Part-Time Employment

24 Effects are heterogeneous across age groups and sectors

Small effect on young workers, while 600 much larger positive effect on other age groups. 500

300 400

300 250 200 200 100 150 0 Agriculture & Manufaturing Services 100 Mining

50 The employment of foreign workers leads to increased employment of 0 Malaysians in every major sector. 15-19 20-29 30-44 45+

25 Effects Also Differ Across Education Categories

Low educated/unskilled workers are hurt, while the impact on tertiary educated are much smaller. The main beneficiaries are Medium Skilled/Educated Workers.

Degree and above

Certificate/Diploma

Post-Secondaty (STPM)

Upper Secondary (SPM)

Lower Secondary (PMR)

No formal/Primary

-400 -300 -200 -100 0 100 200 300 400 26 Impact on Wages of Malaysian Workers

Changes in employment due to increases in employment of foreign workers (for a given region and sector) do not lead to significant changes in the wages of Malaysian workers, mainly due to tightness of labor markets Personal characteristics (age, gender, education) play a role on how much Malaysians can benefit in terms of higher wages.

Overall Female Male

45+ 30-44 20-29 15-19

Degree + Certificate / Diploma Post-Secondary (STPM) Upper Secondary (SPM) Lower Secondary (PMR) No Formal / Primary -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 0.08 0.10

27 When Additional Foreign Workers enter the Malaysian Labor Market…

• The main effect is re-allocation from other sectors and regions. Entry of foreign workers into a sector leads to further expansion by employment of additional Malaysian workers.

• There is no contraction in national employment levels of Malaysians workers

• Malaysian workers’ wages increase by a small amount.

• Existing foreign workers’ wages decline considerably.

28 ECONOMIC IMPACT

FIRMS & PRODUCTIVITY

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Establishment census data covers formally registered firms

% of Establishments

80.0% % of Labor force Manufacturing Agriculture 60.0% 80.0%

40.0% 60.0%

40.0% 20.0%

20.0% 0.0% Micro Small Medium Large 0.0% Micro Small Medium Large 80% Accommodation 60%

40%

20% ICT Construction 0% 80.0% 80.0% Micro Small Medium Large

60.0% 60.0%

40.0% 40.0%

20.0% 20.0%

0.0% 0.0% Micro Small Medium Large Micro Small Medium Large 30 It is the large firms that employ the largest share of foreign workers

Establishments With/Without Foreign Workers in Manufacturing

17,168 Without migrants

With migrants

11,632

4,767

2,435 1,883 1,006 415 363

Micro Small Medium Large

31 In all sectors (except agriculture) value added per workers is higher in establishments that employ foreign workers

Average Value added per worker by Workforce Composition and Sector, 2010 400000

300000

200000

100000

0 Agriculture Manufacturing Construction Accommodation ICT Without migrants With migrants

32 Again, the causality between productivity and foreign labor is critical

FACT: We tend to find foreign workers in large firms and in firms with higher value added .

QUESTION: Do foreign workers contribute to higher productivity or larger/more productive firms hire foreign workers?

FIRM FOREIGN PRODUCTIVITY LABOR The impact of foreign labor on productivity varies by sector…

Overall positive impacts on medium and large firms (50+ workers) in manufacturing and construction. For plantations, Accommodation and ICT services results are not conclusive. 8.0%

6.0% For ICT and 4.0% Accommodation the analysis is conducted for firms with 5+ workers due 2.0% to data availability

0.0%

-2.0% ICT ICT (5+)

-4.0%

Plantation (50+) Construction (50+)

-6.0% Manufacturing (50+) Accommodation (5+)

34 …and by firm size

For smaller firms (20 to 50 workers) the results are very different.

0% Manufacturing (20 to Plantation (20 to 50) Construction (20 to 50) -2% 50) -4%

-6%

-8%

-10%

-12%

-14%

-16%

-18%

-20%

35 Impact of foreign labor within manufacturing (50+ workers)

Within the manufacturing sector, the effect is significant in all subsectors except on Food-beverages-tobacco and Textile. The effect is negative in Chemicals/rubber, precision and communication instruments and transportation equipment. It is positive in wood, paper/furniture, metal/machinery equipment and transportation equipment. 8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

36 Effects are Heterogeneous Across Industries and Firms

• In general, the effect on productivity is positive, especially in manufacturing and construction.

• The main beneficiaries are large firms. Foreign workers impact productivity of small firms, especially in plantation and construction negatively ..

• Within manufacturing firms, capital intensive sectors are hurt but they do not employ large number of foreign workers anyway. SOCIAL IMPACT

CRIME

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Crime rates for immigrants are lower than for Malaysians (except murder)

Average Crime Rates of Malaysians and Foreigners, 2003-2010

0.7%

0.6%

0.5%

0.4%

0.3%

0.2%

0.0%

-0.1% Violent Property Murder Rape Robbery Body House Vehicles Other Injury breaking Thefts Property Total Malaysians Foreigners thefts

Source: Author’s calculations with Data from the Royal Malaysian Police

39 Does immigration lead to higher rates of crime?

FACT: Increasing sentiment that the presence of foreign workers is associated with higher rates of crime.

QUESTION: Do foreign workers increase the propensity to commit crime or do regions with high crime rates employ more migrants ?

FOREIGN CRIME WORKERS Figure 44. Crime Rates of Malaysians and Foreigners Does immigration lead to higher rates of crime?

Using the same econometric technique as in the previous sections, we find that changes in the supply of immigrants to a state result in a fall in the number of crimes committed in a state. Impact of Immigration on Crime (for every 100,000 immigrants)

0.0% Violent Property Murder Rape Robbery Body House Vehicles Other -0.5% Injury breaking Thefts Property thefts -1.0%

-1.5% -2.0% The effect on -2.5% crime rate is even more % of crime of % -3.0% pronounced. -3.5%

-4.0%

-4.5%

-5.0% Source: Author’s calculations with Data from the Royal Malaysian Police 41 Making sense of these results….

Potential channels of transmission from immigration to crime

• Economic activity (unemployment, wages, sectoral growth, etc…) • Different opportunity costs of crime for immigrants and locals • Social tensions

The report demonstrates that immigration increases economic activity from which Malaysian workers benefit. This in turn is likely to decrease criminal activity.

42 POTENTIAL EFFECTS OF POLICY CHANGES

MACROECONOMIC IMPACT

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Macroeconomic impacts

Goals of the Computable General Equilibrium (CGE) Model

•Detailed model of production with 23 sectors and 21 separate skill categories to capture a wide range of policy options. •Allows us to simulate different levy scenarios – as well as from whom they are collected. •Identify the effect on macroeconomic variables – growth, investment •Identify the effect on wages and unemployment of Malaysian workers in different sectors and different skill levels. •Identify the effect of minimum wage policies on these variables.

44 The Model Has 23 sectors

Sectoral Growth Rates 2005-2010 1 AGRICULTURE 2 MINIG MANUFACTURING 3 Mfg food-beverage-tobacco 0.8 4 Mfg textile 5 Mfg wood 0.7 6 Mfg paper-furniture 7 Mfg chemical-rub 0.6 8 Metal-machinery-equip 9 Mfg measurement-med-com 10 Mfg transport equip 0.5

11 UTILITIES 0.4 12 CONSTRUCTION SERVICES 0.3 13 Wholesale-retail 14 Accommodation and restaurants 0.2 15 Logistics 16 Post and telecom 0.1 17 Finance 18 Real estate 0 19 Business services 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 20 Education 21 Health -0.1 22 Other services 23 Public administration -0.2 Model Macro CGE

45 The Model Has 21 Educational Categories Tracked Over Time

Skill Levels Evolution of Labor Supply by Skill Level Lower Skill - Secondary or less 2 Simulated vs. Actual - 2005-2010 1 No schooling 2 UPSR/UPSA equivalent 3 PMR or equivalent 4 SPM or equivalent 5 STPM or equivalent 1.5 Medium Skill -Certificate/Diploma 6 Arts & Humanities 7 Social science, business, law 8 Science, math, IT 9 Engineering 1 10 Agriculture 11 Health 12 Services 13 Education 0.5 Higher Skill -University Degree 14 Arts & Humanities 15 Social science, business, law 16 Science, math, IT 17 Engineering 0 18 Agriculture 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 19 Health 20 Services 21 Education -0.5 LFS CGE

46 Once Levy Costs are Adjusted, Legal International Immigration is expected to fall

International Immigration International Immigration Employers Pay for the Levy Workers Pay for the Levy 1.3 1.3

1.2 1.2

1.1 1.1 Millions Millions 1 1

0.9 0.9

0.8 0.8

Reference 20% Levy Increase 50% Levy Increase 100% Levy Increase

47 The Impact on GDP Growth is Marginal in all the scenarios, irrespective of whom pays the levy

Evolution of GDP Growth Rate

5.30%

5.20%

5.10%

5.00% Reference 4.90%

4.80% Employer pays: 50% Levy Increase 4.70% Foreign worker pays: 50% Levy Increase 4.60%

4.50%

4.40%

48 The Impact of a Levy Increase is Marginal in Most Economic Sub-Sectors

a-Public administration a-Health a-Business services a-Finance a-Logistics a-Wholesale-retail a-Utilities a-Mfg meas-med-com a-Mfg chem-rub a-Mfg wood a-Mfg food-bev-tob a-Agriculture -0.001 -0.0005 0 0.0005 0.001 0.0015 0.002 Employee pays 50% Levy Employer pays 50% Levy

49 Wages of Medium-skill Workers are not affected by a levy increase

0.35%

0.30% Employer pays: 50% Levy Increase 0.25% Employee pays: 50% Workers with Levy Increase 0.20% no formal education or at 0.15% most primary 0.10% school see a marginal rise in 0.05% their wages. 0.00%

50 Wages of Foreign Workers are Affected by Levies

0.00%

-0.50%

-1.00% No schooling

This is

PMR or equivalent SPM Equivalentor -1.50% STPMequivalent or particularly true

for lower-skill UPSR/UPSA or equivalent -2.00% workers.

-2.50%

-3.00% Employer pays: 50% Levy Increase -3.50% Employee pays: 50% Levy Increase -4.00%

51 NEW LAWS AFTER THE REPORT WAS COMPLETED

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Minimum Wage and Levies

• Minimum Wage Deferral for Foreign Workers – March 2013: The Malaysian government has approved the delayed implementation by small and medium-sized enterprises (SMEs) of new minimum wage standard for their foreign workers. The National Wages Consultative Council, which is responsible for the implementation of the standard, said in a statement that the employers in SMEs are permitted to defer the implementation until Dec. 31.

• Levy to be Paid by Foreign Workers– January 2013: “The minimum wage, which came into force this year has raised the salary for all workers on an average of between 30 per cent and 50 per cent, or from RM600- RM700 per month to RM900 monthly.” “The Government’s move to impose a levy on foreign workers will not be a burden to them as the levy paid is between RM34.16 and RM154.16 per month as compared to a salary increase of between RM300 to RM500 per month” Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah FOREIGN WORKFORCE MANAGEMENT

POLICIES AND COMPARABLE SYSTEMS

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Designing Immigration Policies

Building an immigration system is a complex task with a repercussion on a multiplicity of spheres.

Learning from other countries is important, but a one-size-fits-all approaches do not exist.

Key factors to take into account are:

1. Age structure and dynamics of the population 2. Labor Market conditions (unemployment, labor force participation, wage growth, etc…) 3. Education levels of natives and migrants (supply, demand and skill gaps) 4. Geographic and cultural factors Flexibility of Policy Regime

Institutional bodies in charge of immigration need the flexibility to respond to sudden changes in the economic environment.

Basic levies, fees and taxes can be used to influence total number of foreign workers. Differential levies can be used to channel foreign workers to targeted sectors which face shortages and have national priorities.

South Korea has a very flexible approach with sector specific quotas revised regularly.

The Singaporean system is regularly adjusted based on market conditions by using the foreign workers levy system that differs by sector, skill and firm size.

Malaysia: annual levy system and quotas at the sectoral and sub-sectoral level. This system does not fully respond to underlying market conditions and their rapid evolution. Consultations with stakeholders

Policy decisions should be taken in consultations with key stakeholders, in particular the private firms in sectors that critically depend on foreign labor. Such consultations should take place on a regular basis and be clearly structured.

In Singapore, extension of the maximum employment period for foreign low skilled workers (from 6 to 10 years) to maximize productivity gains.

In Australia every a list of occupations in need is compiled in consultation with representatives of unions and industries.

In Canada, reports of consultations with unions, employers and experts are made public.

Malaysian stakeholders revealed that consultations are ad-hoc and do not effectively inform the government of market conditions on a regular basis. Preventing Undocumented Workers

When it comes to undocumented workers, a country should remove the economic incentives (high levies/visa fees, high minimum wages etc) for undocumented migration by: (1) having repercussions for employers hiring undocumented workers (2) imposing reasonable costs and fees for employing documented foreign workers so that incentives for undocumented migration stays low (3) having in place a clear legislation regulating the activities of migration agencies

In Malaysia, several measures to prevent illegal migration (Anti-Trafficking in Person Act, stricter conditions for private agencies to be licensed by MOHA, implementation of a new regularization (6P) program).

Only countries with natural barriers (e.g. Australia) can properly manage to limit undocumented migration.

In countries with large porous borders (United States and ) unskilled workers have relatively easy access through irregular channels. KEY POLICY INSTRUMENTS

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Towards a new system: Levies Vs. Quotas

QUOTAS

Almost every government in the world uses quantitative restrictions to control the number of migrants and foreign workers entering their jurisdictions.

Economics literature and policy discussions are full of examples showing why price mechanisms – taxes, tariffs, levies – can be more efficient and effective than quantity restrictions. Towards a new system: Levies Vs. Quotas

BENEFITS OF LEVIES

Levies provide flexibility to government agencies to respond to sudden changes in the economic environment.

Levies allow governments to raise revenues as a taxation mechanism. This revenue would otherwise accrue to the recruiting agencies and employers. They can be used training, enforcement and other objectives related to foreign worker policies.

Levies can act as wage stabilization mechanisms and provide balanced wage growth paths. Towards a new system: Critical features

An ideal mechanism for Malaysia would involve:

1) Maintaining more relaxed quotas with more strategically designed levies across sectors.

2) Levies that are not occupation-specific but sector-specific. The definition of sectors should be neither extremely broad or narrow.

3) Levies that are reviewed and adjusted periodically – possibly every 2-3 years – using signals from the labor market. The critical observation will be the sector-specific wage levels.

4) Effective enforcement, especially given the minimum wage laws are likely to encourage non-compliance and informality. CONCLUSION

KEY MESSAGES

The World Bank, East Asia Pacific Region, Human Development Dept. Social Protection & Labor Unit Key messages

Malaysia’s rapid economic growth accompanied with labor market shortages for unskilled workers continue to attract foreign workers from neighboring countries.

The differences in growth differentials and overall educational gaps between the labor forces of Malaysia and its more populous neighbors, such as Indonesia and the Philippines, are the key pull and push factors that fuel the current migration patterns.

Appropriate policies need to be designed with these economic fundamentals in mind. Key messages

An abrupt disruption of foreign unskilled labor supply could cause unpredictable effects in the economy.

Since unemployment levels are low and vast majority of the Malaysian workers do not compete with foreign workers, benefits to domestic workers from a decline in the inflow of foreign labor are limited.

Thus, the government is highly encouraged to review its foreign workers program and design nuanced policies to accommodate the economy’s particular needs by sector and human capital categories. Key messages

Large number of firms in labor intensive sectors would not exist without the cost advantages provided by low-skilled low-cost foreign labor.

Given the types of activities and markets that some of these companies operate in (low value added), they will continue to rely heavily on low skill (low cost) foreign labor in the foreseeable future.

Without foreign labor, these sectors would simply disappear and lead to unemployment of significant number of mid-skilled local workers in the short to medium term. Key messages

There are also skills gaps on the higher end of the labor market spectrum.

It takes a long period for the education and training systems to produce new core skills. It is possible that the country will have to rely on foreign talent to fill these occupational gaps to avoid having bottlenecks.

Government should consider more flexible entry regimes and promising long-term opportunities in order to attract and retain skilled foreign workers, including university students. Key messages

Another clear lessons to emerge is to invest in the collection of reliable, high quality, regular and detailed data on all workers— local and foreign— and firms to track the labor market conditions, properly understand the effects of foreign labor and evaluate future policy changes.

The data collection program has to be a joint effort of all relevant agencies that are responsible for labor markets, education, taxation and domestic security. Key messages

It is beneficial to maintain a list of occupations and sectors in short supply of skills, namely a “workforce dashboard.”

This tool requires periodically updated data to be shared by all relevant government agencies. The system prevents overuse of foreign workers and bring objectivity into the process, instead of the government relying on potentially subjective data provided by the employers. THANK YOU!!!

Ximena Del Carpio [email protected] Washington DC +(202) 458-1004

Çaglar Özden [email protected] Washington DC +(202) 473-5549

Mauro Testaverde [email protected] Washington DC +(202) 458-4354