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Foreign Labour on Malaysian Growth

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This paper is to examine the impact of foreign labour on Malaysian economic growth using panel data from three sectors: manufacturing, services, and construction for the period of 1990~2010. The short run and long run effects of foreign labour on output growth are analysed using the Autoregressive Distributed Lag approach. The study shows that the skilled and semi-skilled foreign labours have a positive and significant impact on the output growth in both the short run and the long run. However, the study finds that the unskilled foreign labour adversely affects output growth in both the short run and the long run. © 2014, Center for Economic Integration, Sejong Institution, Sejong University, All Rights Reserved.
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Foreign Labour on Malaysian Growth
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Abstract
This paper is to examine the impact of foreign labour on Malaysian economic growth
using panel data from three sectors: manufacturing, services, and construction for the
period of 1990~2010. The short run and long run effects of foreign labour on output
growth are analysed using the Autoregressive Distributed Lag approach. The study
shows that the skilled and semi-skilled foreign labours have a positive and significant
impact on the output growth in both the short run and the long run. However, the study
finds that the unskilled foreign labour adversely affects output growth in both the short
run and the long run.
JEL Classifications: J01, J08
Keywords: Skilled Foreign Labour, Semi-skilled Foreign Labour, Unskilled Foreign
Labour, Economic Growth
Foreign Labour on Malaysian Growth
jei
Journal of Economic Integration
Rahmah Ismail
Universiti Kebangsaan Malaysia, Selangor, Malaysia
Ferayuliani Yuliyusman
Universiti Kebangsaan Malaysia, Selangor, Malaysia
* Corresponding Author: Rahmah Ismail; School of Economics Faculty of Economics and Management, Universiti
Kebangsaan Malaysia, Bangi Selangor 43600, Malaysia; E-mail: rahis@ukm.edu.my.
Co-Author: Ferayuliani Yuliyusman; School of Economics Faculty of Economics and Management, Universiti
Kebangsaan Malaysia, Bangi Selangor 43600, Malaysia.
Acknowledgement: The authors would like to thank the University Kebangsaan Malaysia for providing a grant to
conduct this study.
2014-Center for Economic Integration, Sejong Institution, Sejong University, All Rights Reserved. pISSN: 1225-651X eISSN: 1976-5525
Vol.29 No.4, December 2014, 657~675
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jei Vol.29 No.4, December 2014, 657~675 Rahmah Ismail and Ferayuliani Yuliyusman
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I. Introduction
Macroeconomists and international trade economists have examined the influence of
migration on economic growth, which may be particularly interesting in the context of
increasing returns to scale. Rachel and Jeniffer (1995) argue that recent theoretical work
has made strides toward explaining the possible links between immigration and growth.
Theoretically, the recruitment of migrant workers could have a number of negative
effects, including: (i) a reduction in employment rates as employers use migrants to
replace native workers (displacement effect); (ii) an increase in the unemployment
rate; (iii) reduction in vacancies; and (iv) the suppression of wage levels. According to
Green et al. (2007), two main reasons exist concerning why employers recruit migrant
workers: (i) to perform jobs that require specialist skills which are not available in
the host country (i.e., to address skill shortages and deficiencies); and (ii) to fill in the
vacancies for which there are insufficient number of domestic workers.
Portes and French (2005) suggest that the effect of foreign labour is traditionally
viewed in terms of complementarity or substitutability with natives in the provision of
household services. A review of literature shows that results concerning the impact of
foreign labour on a host economy have been giving mixed signals. On the one hand,
foreign labour helps to address labour market deficiencies, supplying labour to fill
vacancies where there are insufficient number of workers and skill shortages in certain
economic sectors. The influx of foreign labour subsequently helps the host economy
to sustain positive growth by allowing for a continuous increase in productivity and
output. On the other hand, findings also show that foreign labour could have a number
of negative effects. Athukorala (1992) states that the evidence indicates migrant labours
are sending their income back to their home country in the form of remittance outflow,
which affects the balance of payment of the host country.
Malaysia relies heavily on foreign labour, particularly in low-end economic
activities like in the agriculture and business informal sectors. The employment of
foreign labour is predominant in the construction, plantations and the low-end services
sector such as gas station attendants, security guards, and housemaids. In 2010, the
number of registered foreign labours in Malaysia reached approximately 2.0 million,
which is approximately 17.0% of total employment. The figure is likely to double if the
illegally employed foreign labours in Malaysia are included (Ministry of Home Affairs
2011). Foreign labours consist of professionals, skilled, and unskilled labours and
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Foreign Labour on Malaysian Growth
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mainly concentrated in the manufacturing, construction, and agriculture sectors (Central
Bank of Malaysia 2011). Kanapathy (2008) indicates that unskilled and semi-skilled
labours constitute the largest component of migrants in Malaysia. As of 2006, 1,869,209
unskilled and semi-skilled foreign labours were present in Malaysia from 23 countries.
The number of expatriates, professional, and technical migrants was 55,549 during the
same year.
An extensive use of semi-skilled and unskilled foreign labour will inhibit the use of
new technologies within firms since it is much cheaper to engage in labour intensive
tasks using older technology. Nonetheless, in certain sectors, mainly construction,
plantation and low-end services sectors, foreign labour is crucial since not many local
labours are opt to work in these sectors. Therefore, foreign labour is required to sustain
these sectors. However, the presence of foreign labours are also likely to bring other
negative effects to the host economy as demonstrated in extant studies.
According to the Central Bank of Malaysia Annual Report 2013 (Central Bank
2013), the conservative projection of Malaysia economic growth is 4.5% to 5.5% for
2014 rather than what was projected earlier by the Malaysian federal government of
5% to 5.5%. The conservative growth outlook was lower due to perceived risks from
the global economy and other external factors, such as the heavy reliance on foreign
workers. Economic sectors involving the extensive use of foreign labour, including
the agricultural, mining and construction sectors, will have lower growth due to the
unskilled and less productive foreign workers.
Although several studies attempt to examine issues relating to foreign labour in
Malaysia, no serious effort has been made to assess the impact of foreign labour on
Malaysian economic growth. The present study examines the issue using a more
comprehensive approach involving the employment of Autoregressive Distributed Lag
(ARDL), through which the long run and short run effects will be demonstrated. The
study is important to provide a better understanding on the impact of foreign labour on
the host economy.
The paper is organised as follows. The next section presents a literature review of
empirical findings from previous studies. This is followed by sections presenting the
methodology, results, and the conclusions.
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II. Trend of Migration in Malaysia
Table 1 presents the number of migrant workers in Malaysia by country of origin
and shows that Indonesia comprises the highest number of migrants for all of the
years, followed by Bangladesh, Pakistan, Thailand, and the Philippines. The number
of Indonesian migrants to Malaysia increased considerably from 269,194 in 1999 to
approximately 1.2 million in 2006 and slightly dropped to 1.1 million in 2008. They
make up more than half of the total number of migrants in Malaysia. Migration from the
Philippines showed an increasing trend over time for which the number was between
7,299 and 26,713 from 1990 to 2008. The number of migrants from Thailand showed
an unstable trend, from only 2,130 in 1999 to 20,599 in 2002, 5,751 in 2005 and
then increased to 21,065 in 2008. Although the percentage of the Philippine and Thai
migrants is quite low, making up less than 5%, its impact is rather significantly on the
Malaysian economy. Considering their close proximity to Malaysia, future international
mobility from these three countries into Malaysia is anticipated to increase.
Table 1. Number of migrant workers in Malaysia by country of origin
(Measurement unit: %)
Country of Origin Year
1999 2002 2005 2008
Indonesia 269,194
(65.7)
788,221
(73.8)
1,211,584
(66.7)
1,085,658
(52.6)
Bangladesh 110,788
(27.0)
82,642
(7.7)
55,364
(3.0)
316,401
(15.3)
Thailand 2,130
(0.5)
20,599
(1.9)
5,751
(0.3)
21,065
(1.0)
Philippines 7,299
(1.8)
21,234
(2.0)
21,735
(1.2)
26,713
(1.3)
Pakistan 2,605
(0.6)
2,000
(0.2)
13,297
(0.7)
21,278
(1.0)
Others 17,644
(4.3)
152,833
(14.3)
507,507
(28.0s)
591,481
(28.7)
Total 409,660
(100.0)
1,067,529
(100.0)
1,815,238
(100.0)
2,062,596
(100.0)
(Source) Ministry of Home Affairs, Malaysia, 2008.
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Foreign Labour on Malaysian Growth
661
The majority of the migrant workers are in the manufacturing sector, comprising
with more than 30% of the total migrants in Malaysia. The second largest number of
foreign workers are concentrated in the plantation sector. The foreign workers in the
construction sector are the fourth largest as shown in Table 2.
Table 2. Number of migrant workers in Malaysia by sector
(Measurement unit: %)
Sector Year
1999 2002 2005 2008 2011
Maid 94,192
(23.0)
232,282
(22.0)
320,171
(17.6)
293,359
(14.2)
184,092
(11.7)
Manufacturing 155,277
(37.9)
323,299
(30.6)
581,379
(32.0)
728,867
(35.3)
580,820
(36.9)
Plantation 74,501
(18.2)
298,325
(28.2)
472,246
(26.0)
333,900
(16.2)
299,217
(19)
Construction 49,080
(12.0)
149,342
(14.1)
281,780
(15.5)
306,873
(14.9)
223,688
(14.2)
Services 36,610
(8.9)
64,281
(6.1)
159,662
(8.8)
211,630
(10.3)
132,919
(8.4)
Agriculture na na na 186,967
(9.1)
152,325
(9.6)
Total 409,660
(100.0)
1,067,529
(100.0)
1,815,238
(100.0)
2,062,596
(100.0)
1,5730,61
(100.0)
(Note) na is not available.
(Source) Ministry of Home Affairs, Malaysia, 2008, 2011.
III. Literature Review
Evidence appears to suggest that migrants tend to go where labour demand is
buoyant, filling gaps in the labour market and subsequently contributing to the output
of the economy. Studies also tend to suggest that migration process is beneficial to
the economy in addressing labour shortages and skill deficiencies thereby have a
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positive effect on output. For example, Portes and French (2005) find that the primary
impact of Eastern European migration to the United Kingdom since its accession to
EU is an increase in output. Green et al. (2007) find that migrant workers make an
important contribution to the West Midlands economy in the UK, contributing to 5%
of the regional output. Zimmermann (1995) claims that immigration creates extra
demand for goods and services; thus positively affecting output growth. However,
the study by Friedberg and Hunt (1995), which uses a modified Solow growth model,
determines that the effects of migration on the economic growth of the host country are
insignificant.
In a study by Coury and Lahouel (2011), the supply of foreign labour is assumed to
be perfectly elastic. The presence of foreign labour in Gulf Cooperation Council (GCC)
countries results in a stagnant growth rate of the per capita income because the majority
of the labours are unskilled. Tangavelu (2012) examines the role of foreign labour in
Singapore and found that foreign labours have a positive effect on economic growth
and the effect depends on the types of economic activities in which foreign labours are
utilized. Greater benefits are gained in more innovative sectors, including Information
and Communication Technology (ICT) and the tourism industry. The positive effect of
foreign labour on the economic growth of Singapore can be associated with the level of
skills possessed by foreign labours. The majority of foreign labours that enter Singapore
are skilled labours because the presence of strict regulations regarding foreign labour
makes it difficult for unskilled labourers to enter Singapore.
Christofides et al. (2007) study foreign labour in Cyprus using time series data from
the period of 1996 until 2006. According to this study, Cyprus experienced tremendous
economic growth during that period, which subsequently resulted in a labour shortage.
The country was required to rely upon foreign labour to sustain its economic activities.
The study suggests that the positive effect from employing foreign labour depends
on the education level and skills of the foreign labours. Highly educated and skilled
foreign labours have a positive impact on the economic growth in Cyprus, whereas less
educated and unskilled foreign labours have a negative impact.
Drinkwater et al. (2007) revisits Borjas’ work (1995) by calibrating a three-sector
general equilibrium model with endogenous growth to European Union economiesm,
and redefined immigration surplus in terms of the increase in welfare levels among
the natives in the post-immigration era. The study concludes that unskilled immigrants
have a negative impact on the size of immigration surplus and support the immigration
policies that favour skilled immigrants. By comparing their results with that of Borjas
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Foreign Labour on Malaysian Growth
663
(1995), Drinkwater et al. (2007) conclude that the positive effect of skilled immigrants
is larger in the dynamic case than that of the Borjas’ static case. Skilled immigrants tend
to increase long-term growth by stimulating more skill-intensive R&D activities in the
innovative sector. The gains in growth and immigration surplus increase further when
complementarity exists between skilled workers and physical capital.
In Malaysia, several attempts have been made to examine issues relating to foreign
labour, including the studies by Azizah (1998a, 1998b), Zehadul et al. (1999), Pillai
(1998), Kurus (1998), Solehah and Dicks (1999), and Rahmah et al. (2003). Azizah
(1998a; 1998b) provides a comprehensive review of the history and existing roles of
foreign labour in Malaysia. Both studies also outline governmental acts and regulations
relating to migrant workers, while highlighting problems concerning data compilation
for research on the migrant workers. Azizah (1998b) proposes that the Malaysian
government should implement a more transparent and comprehensive policy to govern
migrant workers.
In another study, Pillai (1998) analyses the effect of the 1997 Asian economic crisis
on the migrant labour in Malaysia. The study hypothesises that the economic crisis
would further accelerate the inflows of foreign labour into the country, especially the
illegal migrant workers. The study also predicts that the crisis would likely reduce the
income and work conditions of foreign labours engaged in low-end activities that were
badly affected by the crisis, including construction, manufacturing, and services. The
study recommends that Malaysia formulate a more comprehensive policy concerning
migrant labour in the future. Similar to Pillai, Kurus (1998) also examines the impact
of the 1997 Asian economic crisis on migrant labour, but the study focuses on Sabah,
where migrant labour makes up a large portion of the population. Similar to previous
studies, Kurus (1998) also suggests that the Malaysian government should implement a
more systematic mechanism to monitor and facilitate the movement of foreign labours
within the region, which could be accomplished through a multilateral agreement with
the sending countries.
Solehah and Dicks (1999) find that Malaysian firms continue to demand migrant
workers because it is cost-effective. According to the study, most employers believe it
is much cheaper to employ foreign labour due to relatively low wages than investing
in expensive high technology machinery. For many employers, the main advantage
of hiring migrant workers is that they are perceived as having a more positive work
attitude and ethic than native workers. Green et al. (2007) claims that it is an attitude
gap rather than a skill gap that results in employers’ tendency to recruit migrants.
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Rahmah et al. (2003) study the impact of foreign labour on output growth and the
demand for foreign labour in the Malaysian manufacturing sector. The study finds
that professional foreign labour contributes significantly to manufacturing output
growth. In addition, the study finds that professional foreign labour and local labour are
complementory, while the unskilled foreign labour and local labour are substitutes.
IV. Methodology and Model Specification
This section is divided into three subsections to include the discussion on dynamic
panel data analysis, model specification, and the source of data. The analysis in this
paper uses Autoregressive Distributed Lag (ARDL) method, which was introduced by
Pesaran et al. (1999). This method is well suited for the analysis of dynamic panel data
that have both large time series and cross-sectional data.
A. Dynamic panel data analysis
Pesaran et al. (1999) introduced a dynamic panel data analysis using the ARDL
approach, which involves the estimation of Pooled Mean Group (PMG) or Mean Group
(MG) that will capture the long run and short run relationships between the variables
of interest. Therefore, the estimation of PMG and MG will be conducted in this study
and based on the results of the Hausman test, one model will be chosen for the analysis.
If the Hausman test is not statistically significant, the PMG model will be chosen
since it produces a more efficient result. In general, the model for panel analysis of the
unrestricted error correction ARDL is written as follows (Pesaran et al. 1999):
Tti
uxyxyy
p
j
q
j
itijtiijjtiijtiitiiit
,...2,1,...;2,1
)(
1
1
1
0
,
'
,1,
'
1,
==
++++=
∑ ∑
=
=
µγλβφ
(1)
where yit is a scalar dependent variable; xit is the k x 1 vector of regressors for group
i ;
φ
i
is a scalar coefficient of the lagged dependent variable;
β
i is the k x 1 vector of
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Foreign Labour on Malaysian Growth
665
coefficients of explanatory variables;
λ
ij represents the scalar coefficients of lagged
first-differences of dependent variables;
γ
ij are k x 1 coefficient vectors of the first-
difference of explanatory variables and their lagged values; and
µ
i represents the fixed
effects. The disturbances (
µ
i) are assumed to be independently distributed across i
and t with mean equal to zero and variance greater than zero;
δ
2 > 0. Furthermore, the
error correction term is assumed to be less than zero (
φ
i< 0) for all i in which a long run
relationship exists between yit and xit ;
yit =
θ
i xit +
η
it
i = 1, 2,...N;t=1, 2,...T (2)
where
θ
ij =
β
t
φ
i
is the k x 1 vector of the long run coefficients; and
η
it’s stationary
with possibly non-zero means including fixed effects.
Equation (2) can be rewritten as a VECM system as follows:
∑ ∑
=
=
++++=
1
1
1
0
,
'
,1,
p
j
q
j
itijtiijjtiijtiiit uxyy
µγληφ
(3)
where
η
i,t
1 is the error correction term and, hence,
φ
i is the error correction
coefficient measuring the speed of adjustment towards the long-run equilibrium.
Pesaran et al. (1999) states that in order to determine the long run relationship between
the variables, an Error Correction Term (ECT) or hypothesis
ϕ
i<0 is required. Due
to the greater number of time series (t) compared to number of cross sections (n), the
PMG or MG estimation is more appropriate than the General Method Moment (GMM)
(Pesaran 1999). The analysis employs dynamic panel data concerning three sectors: the
manufacturing, construction, and agricultural sectors.
B. Model specification
The present study uses an economic growth model based upon the Cobb-Douglas
production function, which take the following form:
Yt = AKt
β
1LLt
β
2LFt
β
3e
µ
t (4)
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where Y is total output; K is value of capital stock; LL is quantity of local labour; LF
is quantity of foreign labour;
β
1….
β
3 are parameters; and t is time. When the variables
are measured in relation to growth, Equation (1) can be written as:
gYy =
β
0 +
β
1gK +
β
2gL +
β
3gE +
µ
t (2)
Alongside basic production inputs such as capital and labour, output growth is also
determined by other variables, including Foreign Direct Investment (FDI), economic
openness, and Research and Development (R&D). In order to examine the impact of
foreign labour on Malaysian economic growth, the study estimates two models. The
first model uses general data concerning local and foreign labours, while the second
model uses data concerning local and foreign labour according to their job categories.
The ARDL estimations models are written as follows:
Model 1
tjti
p
j
jjti
p
j
jjti
p
j
j
p
j
q
j
jti
p
j
j
jtij
p
j
jtijjtijti
ti
tititititiiit
gTLFTLLgK
DgR
gOPNgFDIgOUPgTLF
gTLL
gKDgRgOPNgFDIgOUPgOUP
1,
1
0
61,
1
0
51,
1
0
41
1
1
1
0
,
1
0
31
,21
1
0
,11,11,61
1,51
1,411,311,211,111,0
&
&
εγγγ
γ
γγλβ
β
ββββφα
++++
+
++++
+
+++++=
=
=
=
=
=
=
=
∑ ∑
(3)
Model 2
t
p
j
jtij
p
j
jtij
p
j
jtij
p
j
jtij
p
j
jtij
jti
p
j
j
p
j
jtijjti
p
j
j
p
j
jtij
p
j
jtij
p
j
jtij
tititititi
ti
tititititiit
gUSFL
gUSLLgSSFLgSSLgSFL
gSLL
gKDgRgOPNgFDI
gOUP
gUSFLgUSLLgSSFLgSSLLgSFL
gSLL
gKDgRgOPNgFDIgOUPgOUP
2
1
0
,102
1
0
,92
1
0
,82
1
0
,72
1
0
,62
,
1
0
52
1
0
,42,
1
0
32
1
0
,22
1
0
,12
1
1
,2
1,1021,921,82`,721,62
1,52
1,421,321,221,121,21
&
&
ε
γ
γγγγ
γ
γγγγ
λ
βββββ
β
ββββφα
+
+
++++
+
++++
+
+++++
+
+++++=
=
=
=
=
=
=
=
=
=
=
=
(4)
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Foreign Labour on Malaysian Growth
667
where, OUPT is the growth of real sectoral output; FDI is the growth of Malaysian
real FDI, OPN is the growth of real economic openness in Malaysia, which is
calculated as the real export and import value divided by the real Gross Domestic
Product (GDP); R&D is the growth of real expenditure on research and development;
K is the growth of real capital value; TLL is the growth of total local labour; TLF is
the growth of total foreign labour; SLL is the growth of skilled local labour; SFL is
the growth of skilled foreign labour; SSLL is the growth of semi-skilled local labour;
SSFL is the growth of semi-skilled foreign labour; USLL is the growth of unskilled
local labour; USFL is the growth of unskilled foreign labour; i is sector, which consists
of three main sectors, t is year;
α
1,
α
2,
λ
1j,
λ
2j,
β
11……
β
102,,
ɣ
11j….
ɣ
102j are parameters;
and
ε
1t,
ε
2t are the error terms.
C. Source of data
Since the study involves dynamic panel data analysis, sectoral data is utilised. The
study covers three main economic sectors where the hiring of foreign labour is more
prevalent: the manufacturing, services, and construction sectors. These three sectors
are also the main contributors to the growth of the Malaysian economy, contributing
more than three quarters of the GDP. The data is gathered from three industrial surveys:
the Industrial Manufacturing Survey, the Industrial Services Survey, and the Industrial
Construction Survey of 1990~2010. The survey data provide three main variables for
the study, which are output, number of local labour, and number of foreign labour.
Alongside these variables, the present study incorporates other variables, including FDI,
economic openness, and R&D. Data concerning FDI is gathered from the Ministry of
International Trade and Industry (MITI). Data concerning exports, imports and GDP,
which are utilised to measure economic openness, are gathered from the Ministry
of Finance (MOF). Finally, data concerning R&D is gathered from the Ministry of
Science, Technology and Innovation (MOSTI). All data values are in real terms and
based upon the year 2000.
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V. The Results
Based upon the Hausman test, the Hausman Probability of chi-square in Model 1 is
0.9997 and for Model 2 is 0.8651, which are not significant at the 10% significance
level. Thus, PMG estimations are selected for both models since their estimators are
more efficient.
The results of the PMG estimation are shown in Tables 3 and 4. Table 3 presents the
results of PMG estimation using ADRL (0, 1, 1, 0, 1, 1, 1). For this model, the results
in the long run demonstrate that all coefficients are positive and statistically significant
at 1%, influencing the growth of overall sectoral output (OUPT). 1% point increase
in the number of foreign labour will increase the sectoral output growth by 0.004
percentage point. However, the effect of local labour on the output growth is higher
than that of the foreign labour at 0.018 percentage point. Other variables that positively
affect the long run output growth are FDI, OPN, R&D, and K. Meanwhile, the growth
of OPN, K, TLL are positive and statistically significant only in the short run at the 1%
significance level. The results imply that foreign labours must be allowed to work for
longer periods in order for the Malaysian economy to benefit from their presence. The
long run positive effect may be due to better adaptation to local technology among the
foreign labours.
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Table 3. Pooled mean group regression model 1
Dependent Variable: Output Growth (ARDL 0,1,1,0,1,1,1)
Independent Variables The long run results χ2(2) P-value
gGDPt-1
gFDIt-1 0.0003 (4.41)***
gOPNt-1 0.0057 (2.60)***
gR&Dt-1 0.0220(3.21)***
gKt-1 0.0037 (2.76)***
gTLLt-1 0.0180 (2.47)***
gTLFt-1 0.0040 (2.66)***
The short run results
ΔgGDPt
ECT -0.7133 (6.80)***
ΔgFDIt-1 0.0027 (0.01)
ΔgOPNt-1 0.2277 (2.51)***
ΔgR&Dt0.0022 (0.46)
ΔgKt-1 0.0018 (3.71)***
ΔgTLLt-1 0.0024 (1.95)***
ΔgTLFt-1 0.0038 (1.11)
Constant 0.7110 (7.56)***
Hausman Test 2.4 0.9997
(Notes) (i) Number in the parenthesis represents the absolute value for z.
(ii) *** denote statistical significance at the 1% level,
** denote statistical significance at the 5% level,
* denote statistical significance at the 10% level.
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670
PMG estimation results for the second model are shown in Table 4. The results
for the long run demonstrate that some of the variables are positive and statistically
significant, but some of them are significantly negative. The growth of both skilled and
semi-skilled local labour and foreign labour have a positive and statistically significant
effect on the growth of sectoral output. 1% point increase in the skilled and semi-
skilled foreign labour will increase output growth by 0.0090 and 0.0561 percentage
points, respectively. Meanwhile, the coefficients of the unskilled local labour and
foreign labour are negative and significantly affect the sectoral output growth at the 1%
significance level. Based on the results, 1% point increase in the growth of unskilled
local labour will decrease output growth by 0.0241 percentage points, and 1% point
increase in unskilled foreign labour will reduce output growth by 0.0450 percentage
point. Therefore, it is proven that skilled foreign labours benefit Malaysian economic
growth in the three sectors examined. Other variables that positively affect sectoral
output growth in the long run include FDI, OPN, R&D, and K.
Meanwhile, the results show that only the growth of the FDI, OPN, R&D, K, and
USLL variables have a positive and statistically significant effect on the gGDP in the
short run, but the growth of the unskilled foreign labour demonstrates a significant and
negative effect. Therefore, the use of unskilled foreign labour jeopardises Malaysian
economic growth in both the long run and the short run. Skilled and semi-skilled
foreign labours, even though not statistically significant in the short run, are highly
significant in the long run. This implies that the positive contribution of skilled and
unskilled foreign labour to sectoral output growth will be observed in the long run when
the adaptation of such labour to new technology can more easily take place.
The results again suggest that the economy must utilise skilled foreign labour in the
long run in order to obtain benefits in the form of higher output growth.
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Foreign Labour on Malaysian Growth
671
Table 4. Pooled mean group regression model 2
Dependent Variable: Output Growth (ARDL 0,0,0,0,1,1,0,0,1,1,0)
Independent
Variables The long run coefcients χ2(2) P-value
gGDPt-1
gFDIt-1 0.0036 (2.16)**
gOPNt-1 0.8610 (6.72)***
gR&Dt-1 0.0025 (7.21)***
gKt-1 0.0024 (4.00)***
gSLLt-1 0.0035 (2.27)**
gSFLt-1 0.0090 (4.70)***
gSSLLt-1 0.0150 (2.61)***
gSSFLt-1 0.0561 (2.00)**
gUSLLt-1 -0.0241 (-2.39)***
gUSFLt-1 -0.0450 (-3.06)***
The short run results
ΔgGDPt
ECT -0.1241 (3.13)***
ΔgFDIt0.0010 (2.25) **
ΔgOPNt0.1242 (3.31)***
ΔgR&Dt0.0038 (-4.30)***
ΔgKt-1 0.0023 (4.45)***
ΔgSLLt-1 0.0058 (1.27)
ΔgSFLt0.0130 (0.67)
ΔgSSLLt-0.0062 (-0.74)
ΔgSSFLt-1 -0.0157 (-1.46)
ΔgUSLLt-1 0.1079 (1.80)*
ΔgUSFLt-0.0064 (-1.93)**
Constant 1.6857 (2.86)***
Hausman Test 2.6 0.8651
(Notes) (i) Number in the parenthesis represents the absolute value for z.
(ii) *** denote statistical significance at the 1% level,
** denote statistical significance at the 5% level,
* denote statistical significance at the 10% level.
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VI. Conclusion
The results from the study reveal that the benefits of hiring both skilled and semi-
skilled foreign labours are obtained in the long run, even though their contribution are
not significant in the short run. However, unskilled labours, irrespective of whether
foreign or local, have a negative effect on economic growth in both the short run and
the long run scenarios. The implications of hiring foreign unskilled labours are more
important in this context.
The results clearly indicate that skilled and semi-skilled foreign labours must be
employed in Malaysia for a longer period in order to gain benefits from their presence.
One of the significant issues is how to retain foreign labours for longer periods of time
in Malaysia. As far as skilled foreign labours are concerned, most enter the country as a
consequence of FDI. Therefore, Malaysia must;
Sustain FDI in the country long enough by providing suitable investment facilities.
Offer a more competitive wage structure and working environment.
Introduce more attractive scheme for their spouse and children.
Introduce law that is more flexible to ease the entrance to the country.
Provide enough skilled local labours through training to complement foreign skills
and new technologies brought by FDI.
Provide better infrastructures like health and education for foreign labours’ families.
Regarding the unskilled foreign labours who are proven to contribute negatively
to the Malaysian economic growth, Malaysia should restrict the entry of such labour.
Furthermore, the dependence on this type of labour must be kept low by;
Encouraging local labours to replace jobs held by unskilled foreign labours by
offering a better wage scheme or minimum wage.
Introducing a better working condition and job security for the unattractive sectors
like agricultural and security sectors.
Introducing a more stringent law to prevent the unskilled foreign labours from
entering the country and more effective enforcement of the law, for example, more
stern punishment.
Allowing the unskilled to work only in specified sectors where labour shortages
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Foreign Labour on Malaysian Growth
673
exist because of the reluctance of local labours to work in such sectors like
agricultural and security sectors.
In conclusion, the reliance on foreign labours cannot be avoided as the Malaysian
economy faces labour shortages in certain sectors. The economic activities must be
sustained and labour shortages must be resolved. However, the reliance on foreign
labours, especially on low skilled foreign labours, must be addressed since such labours
adversely affect the economic growth. The Malaysian government must design a stern
policy to curb the influx of unskilled foreign labours, while fostering policies to attract
skilled foreign labours to encourage brain gain.
Received 2 September 2014, Revised 9 October 2014, Accepted 20 October 2014
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