Increasing Labour Income Share in MalaysiaHow, why, and is it good?

Allen Ng

20 November 2017

Fifth Annual Bank Negara Malaysia Economics Research Workshop

2

‘It was known for some time that the share of wages and share of profits in the national income has shown a remarkable constancy…’

Nicholas Kaldor, 1957

One picture+ Introduction

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Source: Economic Policy Institute

One picture+ Introduction

4

Source: Economic Policy Institute

1. Stagnant wages

Rise of the precariat

One picture+ Introduction

5

Source: Economic Policy Institute

2. Slowing productivity

Lower growth potential

One picture+ Introduction

6

Source: Economic Policy Institute

3. Growing inequality

Failing redistribution

Counter-trend+ Introduction

7

Against the grainUnlike the major economies of the world, Malaysia is experiencing increasing labour income share

Source: IMF (2017) – World Economic Outlook, April: Chapter 3 - Understanding the Downward Trend in Labour Income Shares

Yep, us

How has LIS increased?ContentsWhy has LIS increased?

Implications - is it good?

8

Overall trend+ How has LIS increased?

9

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005 2007 2009 2011 2013 2015

Labour income share, 2005 to 2016

Unadjusted Labour Income Share

Adjusted Labour Income Share

29.5%

35.4%

Source: DOSM (Various Years), Authors’ Calculations

42.9%

35.3%

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%

0.30

0.32

0.34

0.36

0.38

0.40

0.42

0.44

0.46

0.48

0.50

2005 2007 2009 2011 2013 2015

La

bo

ur

Inco

me

Sh

are

Gin

i C

oef

fici

ent

Gini Coefficient

Gini & labour income share, 2005 to 2016

Adjusted LabourIncome Share

Wage > productivity+ How has LIS increased?

10Source: DOSM (Various Years), Authors’ Calculations

Real wage per worker and labour productivity, 2005 to 2016

20

40

60

80

100

120

140

160

180

20

05

20

06

20

07

20

08

20

09

20

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11

20

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20

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20

14

20

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20

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Agriculture

20

40

60

80

100

120

140

160

180

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

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Manufacturing

20

40

60

80

100

120

140

160

180

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

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20

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20

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20

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Services

Labour ProductivityReal Wage

Ind

ex 2

00

5=

100

20

40

60

80

100

120

140

160

180

20

05

20

06

20

07

20

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20

09

20

10

20

11

20

12

20

13

20

14

20

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20

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Construction

20

40

60

80

100

120

140

160

180

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

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20

16

Mining & Quarrying

20

40

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100

120

140

160

180

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20

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Overall

144.2

119.1

Deeper look+ How has LIS increased?

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National LabourIncome Share

By workers at different skill levels

a

By major economic sectors

By sub-sectors in manufacturing & services

Between SMEs and large enterprises

b

b1

c

Shift-share analysis

Gain in the middle+ How has LIS increased?

12Source: DOSM (Various Years), Authors’ Calculations

Unadjusted labour income share by skill-level, 2010 to 2016

17.3% 18.0%

12.7%

14.9%

1.8%

2.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014 2015 2016

High-Skilled Semi-Skilled Low-Skilled

Biggest gain is due to labour income share of semi-skilled workers:

• Between 2010 and 2016, more than 60 per cent of the change is accounted for by the semi-skilled group

Broad-based increase

Source: DOSM (Various Years), Authors’ Calculations

Within effect contributes half of LIS increase from 2005 to 2016

• Between effect accounts for 30 per cent of the increase

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Shift-share by major economic sectors - overall, 2005 to 2016

+ How has LIS increased?

Own account workers

Unadjusted labour income

share

Change in own account workers

23.3%

Between effect29.4%

Within effect47.3%

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> 90% due to services+ How has LIS increased?

-0.34%

1.39%

0.08%

-1.90%

2.98%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2.24%

0.75%

0.30%0.16%0.08%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

14Source: DOSM (Various Years), Authors’ Calculations

Agriculture Construction Mining & Quarrying Manufacturing Services

Shift-share by major economic sectors – within and between effects, 2005 to 2016

Within effect Between effect

Traditional services High tech manufacturing

+ How has LIS increased?

15

Within & between effects by services sub-sectors, 2010 to 2016

0.12% 0.14%-0.02%

2.09%

0.61%

1.48%

-2.4%

-2.0%

-1.6%

-1.2%

-0.8%

-0.4%

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2.4%

Net Effect Within Effect Between Effect

Modern Services Other Services

Source: DOSM (Various Years), Authors’ Calculations

-1.11%

0.78%

-1.89%

-0.07%

0.00%

-0.07%

-0.25%

0.16%

-0.41%

-2.4%

-2.0%

-1.6%

-1.2%

-0.8%

-0.4%

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2.4%

Net Effect Within Effect Between Effect

High Tech Mid Tech Low Tech

Within & between effects by manufacturingsub-sectors, 2005 to 2016

Source: DOSM (Various Years), Authors’ Calculations

Since 2010, the increase in LIS is completely due to SMEs

• Primarily due to the growing share of SMEs in the economy

• Large enterprises contributed negatively to LIS

+ How has LIS increased?

16

Shift-share analysis by firm sizes, 2010 to 2015

7.5%

2.2%

5.3%

-3.8%

-0.1%

-3.6%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Net Effect Within Effect Between Effect

SMEs Large Enterprises

SMEs Large Enterprises

How? A recap+ How has LIS increased?

17

National LabourIncome Share

By workers at different skill levels

- Biggest gain in the semi-skilled

category

a

By major economic sectors- All sectors experienced increase in LIS

- More than 90% due to services

By sub-sectors in manufacturing & services- Dominated by increase in traditional services

- High tech manufacturing shrunk

Between SMEs and large enterprises- All due to SMEs

b

b1

c

Shift-share analysis

What could have caused this?+ Why has LIS increased?

18

TechnologyTechnology could reduce the relative cost of capital, incentivising the substitution of capital for labour

Potential common factors

TradeTrade, particularly participation in GVCs, could increase the share of capital intensive economic activities

Foreign workers (?)Abundant supply of low-skilled workers could reduce the relative cost of labour, encouraging labour-intensive production choices

Impact of production structure of the economy

Capital intensive vs

Labour intensive

Factor income shares

Change in labourincome shareWith elasticity of substitution between capital and labour above one, a more labourintensive structure will increase the share of income going to labour

Potential impact on labour productivity

Cursory look at the common factors+ Why has LIS increased?

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0.00

0.10

0.20

0.30

0.40

0.50

0.00 0.10 0.20 0.30 0.40 0.50

20

16

2010

(c) Foreign Workers Intensity

-4

-2

0

2

4

6

8

10

12

14

16

-4 -2 0 2 4 6 8 10 12 14 16

Av

era

ge

gro

wth

ra

te,

20

14-

20

16

Average growth rate, 2011-2013

(a) Capital Intensity

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.00 0.10 0.20 0.30 0.40 0.50 0.602

016

2010

(b) Machines and Equipment

-4

-2

0

2

4

6

8

-4 -2 0 2 4 6 8

Av

era

ge

gro

wth

ra

te,

20

14-2

016

Average growth rate, 2011-2013

Labour Productivity

Trends in potential determinants of labour income share in Malaysia, 2010-2016

Labour productivity in Malaysia, 2010-2016

Trendline45° line

What do regressions tell us+ Why has LIS increased?

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Relatively lower technological adoption contributed to the increase in LIS…

• Variables that proxy investment in technology are found to be negatively correlated with LIS, and are consistently significant across various models specifications

… as well as reliance on foreign workers

• Sub-sectors with higher increases in foreign workers intensity experienced more pronounced increase in LIS

Reduced participation in GVCs and declining importance of high tech manufacturing could have explained the increase too

• Not explicitly modelled, but could have been accounted for by capital intensity and sector fixed effect

Explanatory Variables (1) (2) (3) (4) (5) (6)

Panel A: Exclude Mining, Electricity, and Fishing sectors

Log Foreign Workers

Intensity

0.007**

(0.003)

0.002

(0.004)

0.004

(0.004)

0.003

(0.004)

0.003

(0.003)

0.004

(0.004)

Log Capital Intensity -0.124**

(0.058)

-0.135**

(0.056)

-0.122**

(0.056)

-0.011

(0.087)

Machines & Equipment

Intensity

-0.445**

(0.210)

-0.346*

(0.173)

-0.287*

(0.143)

Log GDP -0.152***

(0.049)

0.048

(0.099)

Log Labour Productivity -0.141**

(0.052)

-0.118

(0.091)

Constant 0.019***

(0.006)

0.016**

(0.006)

0.018**

(0.007)

0.023***

(0.008)

0.015**

(0.006)

0.018**

(0.009)

Sector Fixed Effect Yes Yes Yes Yes Yes Yes

Observations 108 108 108 108 108 108

Overall R2 0.008 0.140 0.139 0.206 0.257 0.232

Panel B: Exclude Mining and Electricity sectors

Log Foreign Workers

Intensity

0.006**

(0.003)

0.004

(0.003)

0.006

(0.004)

0.004

(0.004)

0.005

(0.003)

0.006

(0.003)

Log Capital Intensity -0.113**

(0.051)

-0.119**

(0.050)

-0.109**

(0.049)

-0.001

(0.085)

Machines & Equipment

Intensity

-0.405*

(0.195)

-0.312*

(0.156)

-0.254*

(0.128)

Log GDP -0.157***

(0.050)

0.055

(0.100)

Log Labour Productivity -0.133**

(0.048)

-0.116

(0.092)

Constant 0.018***

(0.006)

0.018***

(0.006)

0.022**

(0.008)

0.025***

(0.007)

0.017***

(0.006)

0.021**

(0.008)

Sector Fixed Effects Yes Yes Yes Yes Yes Yes

Observations 114 114 114 114 114 114

Overall R2 0.007 0.111 0.115 0.179 0.214 0.199

Note: •Standard errors are shown in parenthesis. They are heteroskedasticity-robust and clustered by sector. •All variables, including the dependent variable, i.e. labour income share, are first-differenced. •*denotes statistical significance at 10% level, ** 5%, and *** 1%.

Regression results

Conclusion

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Our economic transformation+ Implications - is it good?

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0%

5%

10%

15%

20%

25%

30%

1990-94 1995-99 2000-04 2005-09 2010-14

High- and medium-tech

manufacturing

26%

13%

24%

10%

Manufacturing value-added as % in overall GDP

Malaysia – Deindustrialising?Manufacturing share in the economy peaked since 2000

0%

10%

20%

30%

40%

50%

2005-10 2011-16

Private sector services value-added as % in overall GDP

Modern services

41%

44%

14%14%

Malaysia - High value-added services? Modern services share in the economy has not grown

Reference: KRI (2017) - The Times They Are A-Changin’: Technology, Employment, and the Malaysian Economy

Outcome of our deindustrialisation+ Implications - is it good?

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DeindustrialisationThe shrinking importance of our manufacturing:- Shifting global landscape- Shortcoming of our model

Structural change since 2000s Nature of change Broad outcomes

Shift to be relatively more labour-intensiveA structure that is skewed towards:

1. More semi- and low-skilled workers rather than technology,

2. More traditional services rather than high-tech manufacturing,

3. Smaller firms rather than larger enterprises

Growth has been more inclusive…- Increasing LIS, improving Gini- Benefitting the majority of

Malaysians (~70% are mid-skilled or less, with secondary education or less)

… at the expense of future potential?- Relative slowing of aggregate

productivity growth- Relative lag in technological

adoption

Trade-offs going forward?+ Implications - is it good?

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This raises a number of important policy implications:

1. Promoting SMEs - Policies to raise the importance of SMEs in the economy, without significant effort to modernise them, could have an adverse impact on aggregate productivity and future growth potential of the overall economy

• SMEs create significant job opportunities – 65 per cent of all workers in Malaysia are employed by SMEs

• At the same time, SMEs are also significantly behind in terms of productivity and investment in technology. Labour productivity in large enterprises are 2.5 times higher than SMEs’

2. Enhancing technological adoption - Policies to drive technological adoption and productivity growth, without significant consideration on the impacts to jobs, could negatively impact the inclusiveness of growth

• Close to 70 per cent of all Malaysians in the workforce only have secondary education and below, and are working in low- and semi-skilled occupations

• They are at risk of being left behind without significant upskilling

3. Reducing reliance on foreign workers - Transitioning away from a labour intensive economic structure that is facilitated by the easy availability of low-skilled foreign workers could work against most Malaysians who are semi-skilled and benefit from the current structure

This paper highlights that the policies for Malaysia in moving towards an economy that is simultaneously productivity-driven and inclusive are wrought with multiple inter-linked trade-offs