An economic think tank, Khazanah Research Institute (KRIS) has a new study available and it can be found in Chapter 2: The Malaysian Workforce: A Changing Landscape, The State of Households 2018: Different Realities which shows that foreign workers have a limited impact on wages and employment in Malaysia.
And I must say they are right to point this out. We might even say that their logic proves that many free market economists are right as well on this point.
The economics of foreign workers is relatively straightforward, of course it’s economically beneficial, how could it be otherwise?
There are though several good arguments to the benefit and I wish to pick up some of the highlights from the chapter.
As KRIS pointed out:
“The evidence suggests that foreign workers generally complement rather than replace native workers and generate a higher level of economic activity.”
This is essentially Adam Smith, Ludwig von Mises and David Ricardo all over again.
They were pointing out that, we are made wealthier by the division and specialisation of labour.
The more people we can divide and specialise with the wealthier we shall be.
Suppose that 10 workers produce 20 chairs every week with each workers building a complete chair.
Those same workers can produce many more chairs every week if they specialise.
When one worker saws the wood, another carves it into shape, and a third fastens the pieces, the total output rises dramatically.
Greater specialisation leads to greater production and greater prosperity. Adding another five workers to the original 10 multiplies the benefits.
As the study notes:
“Low skilled jobs are dominated by foreign workers…This is an important point – around one in two unskilled workers are foreign workers, potentially reflecting how foreign workers play a complementary role to local workers…”
That’s all entirely true!
One might ask, if the foreign workers are largely unskilled then doesn’t that reduce the productivity of all Malaysians on average?
Well, the answer is no, it doesn’t.
Because having low-skilled and high-skilled labour increases the amount of the division and specialisation of labour that we get.
And as I argued earlier, this leads to an increase in output. And an increase in output is equal to us all becoming generally wealthier.
“Firstly, most studies conclude that foreign workers are imperfect substitutes for native workers. By extension, this means that they do not compete for the same jobs, even within skill levels as certain industries tend to employ more foreign workers. Hence, the impact on native employment tends to be limited.”
Just to explain that a bit more.
Sure, of course the foreign workers are ‘stealing’ jobs when they get here.
We might even think that leads to there being more unemployment among the natives.
It’s an understandable assumption. But that is not quite how it works.
Foreign workers take jobs from natives but it’s what happens next that matters.
A foreign worker just brings with him his labour along with him.
The worker also brings with him his demand for the goods and services like rent apartments, eats food, gets haircuts and buys phones produced by others.
And fulfilling those desires and needs creates a job or two that other people can do; some of those will obviously go to the natives.
So this is what economists mean when they say foreign workers don’t affect the employment market.
“From 2010 to 2013, the number of foreign workers increased from almost 1.7 million to 2.1 million. From 2013 to 2017, the increase has been smaller in magnitude with the latest figure at around 2.2 million.”
This clearly indicates foreign workers increase the size of the overall population which means they increase the size of the economy.
Their presence only changes which jobs should be performed and increase the amount of work in the economy, in the same manner as any other population increase.
“An increase in foreign workers led to 0.1% increase in full time employment and 0.3% increase in part time employment for Malaysians.”
So logically, if foreign workers were stealing jobs from natives, so would every young person leaving universities and entering the job market. And our country should become poorer as it gets larger.
In reality, of course, the opposite happens.
Some people could argue on the remittances the foreign workers send home but I think that’s a pretty weak argument though.
One final highlight:
“As for wages, a 10% increase in foreign workers raised the average wage of Malaysians by around 0.15%.”
The benefits from foreign workers appear to be broadly shared. Thus it adds more value than simple trade.
Given increased foreign workers to an area increases demand in the area for various goods and services, there is an increased demand for inputs producing those goods and services, inputs including labor.
This would mean that wages would rise.
Likewise, if there is a sudden influx of foreign workers into an area of the economy, and the wages for them start to fall, it naturally de-incentivises foreign workers to that area and rather incentivises it to other areas.
However, this is the beginning where most economists don’t agree.
But what I notice, when it comes to wages, most of the economists do not find any general decline in wages caused by foreign workers.
Instead they debate whether foreign workers cause the wages of natives in certain employment to fall or whether their wages slightly increase.
Economists also debate about how temporary any negative impacts on wages might be.
Nevertheless, it is true that foreign workers can temporarily reduce wages for natives whose skills closely match theirs.
But falling wages raise profits. And higher profits are the soil from which better wages grow.
Seeking those superior returns, investors bring more machines, expertise, new firms while entrepreneurs learn to enhance workers outputs.
Specialisation deepens, more production occurs, larger size of the economy, workers’ productivity soars, forcing employers to compete for their time by offering higher pay.
Foreign workers actually increase wages in the long run.
Therefore we should be welcoming more foreign workers and legalise their situation.
The more the merrier.
• Medecci Lineil is the acting director of the Institute for Leadership and Development Studies (LEAD)