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Research Societal Contracts

Beyond Boom And Bust, Part 2

Trade-Offs in Developing Better Migrant Worker Policies

How much are we willing to give up to reduce reliance and ensure welfare standards? In Part II of this research series we delve a little deeper to weigh the trade-offs of proposed solutions.

By Faisal Ariff14 August 2021

In Part 1 of this research series (accompanied by a primer on the migrant worker registration process) we broadly highlighted the main issues surrounding migrant workers in Malaysia. The current situation – significant gaps between official and unofficial numbers, unrealised aims of reducing reliance on unskilled labour and deplorable accounts of inhumane treatment – is in our view a result of short-termist policies driven by boom-and-bust cycles.

A longer term stance requires us to have policies that clearly reduce over-reliance, waves of hiring followed by deportation, as well as decent recruitment practices and working conditions. But these come with costs and repercussions that we must recognise. In Part 2 of this research series, we unpack the trade-offs involved.

I. Proposals to Reduce Over-Reliance

Can we do without migrant workers? The answer, at least in the medium term, is likely no. A better question is whether we can avoid utilising migrant workers as a go to for any and all labour shortages.

Malaysia has long depended on migrant workers to support its economy but the intention, at least as of the mid-1990s, was to keep the importation of low-skilled migrant labour temporary. The 1995/96 Budget announced “the import of foreign labour as an interim solution to meet excess demand for low-skilled labour, while it pursued a longer-term strategy to increase productivity and expand the supply of skilled labour”. A quarter of a century later, this transition has not fully materialised, if at all.

It does not help that the jury is still out on whether we should reduce migrant labour. On the one hand, the World Bank argues that migrant labour enables economic activity which  increases employment for Malaysians, generating 5.2 additional Malaysians employed for every 10 migrant workers. They also argue that migrant labour enables Malaysians to specialise and increase their wage premiums, a position somewhat supported by the Khazanah Research Institute which found limited impact on Malaysian employment from migrant workers.

Bank Negara on the other hand takes a more conservative stance, arguing that migrant workers distort the labour market, disincentivises investment in productivity-enhancing automation, and suppresses wage growth for Malaysians. Adding further nuance, A UKM study has shown a significant positive impact on output growth from employing skilled and semi-skilled migrant workers, but a negative impact on output growth from employing unskilled foreign labour.

Despite their differing conclusions, these findings may both hold true. The hiring of migrant workers in skilled, semi-skilled and unskilled jobs may benefit Malaysians’ wages, productivity and overall growth but only up to a point. Beyond that point, the structure of the job and the sector becomes frozen and heavily dependent on having a segment of workers willing to work at a particular price point, number of daily working hours and certain living conditions.

Hire Malaysians first?

One long-standing proposal towards reducing reliance on migrant workers, particularly in low- and semi-skilled jobs, is to mandate or compel employers to increase the hiring of Malaysians. And one widespread counter-argument to this proposal is that Malaysians will not take up 3D jobs – dangerous, dirty and demeaning – due to the nature of the job as well as the associated social stigma. The palm oil sector is a case in point: with borders shut due to the pandemic, the Malaysian Palm Oil Association say companies have been desperately trying to hire locals. Malaysian candidates, however, evidently prefer jobs as drivers or mechanics rather than as harvesters.

There is enough evidence though to indicate that the real issue here is low wages. A large proportion of labourers who work on Australia’s fruit picking farms are ironically exploited Malaysians working illegally who can earn multiples over Malaysia’s minimum wage.  40% of the approximately 200,000 Malaysians who commute between Johor and Singapore for work daily are in low- to mid-skilled jobs.

Figure 1: Wage range of ‘3D’ job, Malaysia vs. Singapore

Source: News; online job searches

Figure 1 illustrates the wage differential for a Malaysian in a 3D job in Malaysia vs. Singapore. A Malaysian stands to earn from RM900 to RM2,000 a month working as a palm oil harvester in Malaysia, for example, compared  to SGD1,000 per month in Singapore (equivalent to nearly RM3,100 at the time of writing) working a comparable 3D job. Malaysians are willing to work 3D jobs if the price is right. 

Mandating the hiring of more Malaysians would not achieve much unless it is accompanied by higher wages. If the returns to labour remain the same however, it is not likely that Malaysian companies could afford and be willing to pay wages at the levels required for Malaysians to take up 3D jobs. Even when confronted with the prospect of losing 25% of their crop due to labour shortages from the ongoing pandemic, the Malaysian Palm Oil Association was only willing to pay Malaysians workers RM2,000 per month with the caveat that they are ‘hardworking and productive’. The government would need to provide sufficient wage subsidies to incentivise the hiring of Malaysian workers (as attempted by the Hire Malaysia program) or the nature and productivity of these jobs would need to change.

Make migrant workers more expensive?

Another proposal to reduce reliance and appetite for migrant workers is to make them cost more than hiring a Malaysian, primarily by increasing the foreign worker levy. Singapore demonstrated this policy direction recently with some very decisive levy hikes:  in 2020, the levy for foreign workers in the construction sector was increased from SGD300 to SGD950 per month, the levy for foreign workers in manufacturing was increased from SGD250 to SGD 650 per month and the levy for foreign workers in services was increased from SGD300 to SGD800 per month. In comparison, Malaysia’s foreign worker levy is RM640 for the plantation sector and RM1,850 for other sectors annually.

Former Federation of Malaysian Manufacturers (FMM) President Tan Sri Yong Poh Kon recently proposed raising Malaysia’s foreign worker levy every year and, like Singapore, tiering the rate even higher on companies where foreign workers comprise large proportions of the workforce. He also suggested that the levy be reclaimable by employers, like the HRDF scheme, but for investment in initiatives that can boost productivity, like automation, or encourage the hiring of locals, such as building childcare centres at the workplace.

“Until we take this sort of drastic measure, we will not be able to address this foreign worker issue,” said Tan Sri Yong. He is right on one key point: raising the foreign worker levy would be a very potent measure in reducing reliance on migrant workers by hitting the policy target exactly where it hurts, namely employers’ pockets.

As evident in the response to this proposal though, it will have painful repercussions and meet much resistance. Production costs will increase in the short-term, leading to inflation. Malaysia’s position as a medium-cost manufacturing hub may erode in the near term until production processes change. There is also political and economic reality; given the economic fallout from COVID-19 pandemic, the likelihood of instituting a foreign worker levy hike will be extremely low for some time. 

Mitigating short-term pain for the achievement of long-term policy goals needs to be done however, and a clear policy statement indicating the future direction of foreign worker levies will be needed. With a clear policy on levies, planning and phasing can be carefully negotiated with industry stakeholders as businesses get back on their feet. Otherwise, there will be very little impetus to change.

Bring in the robots?

Will automation solve our migrant worker conundrum? From various speeches and pronouncements, many policymakers and industry observers appear to think so, though the World Bank has argued that the relationship between low-skilled migrant labour and technology adoption is limited and inconclusive.

On the face of it, there is great scope for increasing automation. Malaysia’s robot density is relatively low at 34 per 10,000 employees, compared to others such as Singapore (918), Korea (855), the Asian average (118) and the world average (133). And conceptually, the idea of replacing 20 migrant plantation workers with agrobots supervised by a single highly skilled Malaysian technician seems like a major step forward. Automation is inevitable, but it is not an immediate event – time is needed to apply the technologies and to train the accompanying talent needed.

We also need to bear in mind that a push towards automation will not only affect migrant workers but also local workers. According to the Khazanah Research Institute, 70% semi-skilled and 80% low-skilled jobs across multiple sectors can potentially be automated, leading to potentially heavy job losses for Malaysians. As with the foreign worker levy, any policy measures aimed at increasing automation needs to be phased in order to prepare local stakeholders for the effects.

II. Proposal to Improve Migrant Worker Welfare

From highly tied to a free worker model?

Poor working conditions and welfare is sadly synonymous with the migrant worker experience in Malaysia. Workers can get trapped in bad situations as their work visas are tied to the employer or the recruitment agency. Should they try to leave a poor workplace, their work visa or VP(TE) would be void and they would cease to have legal status in the country. Still, many do.

On top of that, the worker’s passport (and the VP(TE) inside) is often physically held by the recruitment agency or employer, even when this is clearly an offence under the Passport Act 1966 which provides for a maximum fine of RM10,000 and 10 years imprisonment. This practice is not unique to Malaysia, with similar cases in Japan, the UAE and Singapore to mention a few. From the employer’s perspective, holding passports is a way to reduce the risk of the migrant worker absconding thereby losing their upfront costs and investment but, as made clear from many reports, this practice of preventing passport access is very problematic. In response to charges of inhuman treatment, some employers have attempted to compromise by storing passports on the premises with the worker keeping the key, though it is unclear if this is a good solution.

One proposal is to move towards a free labourer model where the migrant worker is free to switch between employers on the same work visa. This was recently done as part of Qatari and Saudi Arabian labour reforms. If emulated in Malaysia, it could potentially reduce the incidents of abuse. It may also work as an additional incentive for employers to improve working conditions.

A switch to a free labourer model is a significant event in Malaysia’s pre-Independence history. In the early 1900s, the Tamil Immigration Fund Ordinance was passed which established a funding pool contributed by employers, the Federated Malay States government and the Johor government to convert indentured Tamil labourers  to ‘free’ labourers who could change employers after giving notice. The aim was to address the problem of labour shortages while reducing incidences of abscondment (‘crimping’). The joint fund financed the workers’ sea passage, quarantine, recruitment interviews, among others.

Nevertheless, in attempting to reduce the issues that come with indentured or tied labour, history shows that a free labourer model could cause serious issues if implemented without sufficient economic forecasting or a quick enough (and humane) repatriation system. As occurred in the 1930s, there is a risk of a labour glut, depressed wages and social issues if the influx quota is overly generous or if economic conditions turn sour, or both.

There are many more proposals to reduce reliance on migrant workers and to address deficiencies in migrant worker welfare but for the purpose of this piece, we have focused on aspects that, in our view, have a fundamental role in driving the development of migrant worker policies overall. As we have attempted to show in this piece, every proposal has significant trade-offs and downsides. Malaysia faces hard choices, but these choices must be made. In our third and final instalment, we propose a way forward for policymakers.

The Centre is a centrist think tank driven by research and advocacy of progressive and pragmatic policy ideas. We are a not-for-profit and a mostly remote working organisation.