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Jurnal Ekonomi Malaysia 49(2) 2015 135 - 147
http://dx.doi.org/10.17576/JEM-2015-4902-11
The Demand for Foreign Workers in the Manufacturing Sector in Malaysia
(Permintaan Terhadap Buruh Asing dalam Industri Pembuatan di Malaysia)
Nasri Bachtiar
Rahmi Fahmy
Universitas Andalas
Rahmah Ismail
Universiti Kebangsaan Malaysia
ABSTRACT
The objective of this study is to investigate the demand for foreign workers in the manufacturing sector in Malaysia.
In order to achieve this objective, the simultaneous equation model is developed and the analyses are based on data
from the Industrial Survey conducted by the Department of Statistics Malaysia for the period of 1994-2005. The Labor
demand model is derived from the Cobb-Douglas production function. The results from the estimation of the production
function show that foreign workers in the category of professional signicantly contributed to the output growth of ISIC
35, ISIC 36 and ISIC 38, while skilled workers and technical-supervisors also give a signicant contribution to output
growth in ISIC 31. The demand for foreign workers reveals that professionals and technical-supervisors are positively
related to output level and wage rates. However, they are negatively related to the price of capital and local wage rate.
It means that the professional and technical-supervisor foreign workers complement the local workers and capital.
Keywords: Demand; output; foreign workers; wage
ABSTRAK
Objektif kajian ini ialah untuk menganalisis permintaan industri pembuatan terhadap buruh asing di Malaysia. Bagi
mencapai objektif ini, model persamaan serentak telah dibina dan penganggaran dibuat berdasarkan kepada data
Penyiasatan Industri Pembuatan dari Jabatan Perangkaan Malaysia selama tempoh 1994-2005. Model permintaan
terhadap buruh asing diperoleh melalui proses pembezaan fungsi pengeluaran Cobb-Douglas. Penganggaran fungsi
pengeluaran memperlihatkan bahawa buruh asing profesional mempunyai peranan yang signikan terhadap peningkatan
output kumpulan industri ISIC 35, ISIC 36 dan ISIC 38. Buruh asing mahir dan teknikal penyeliaan pula mempunyai
peranan yang siknikan terhadap peningkatan output kumpulan industri ISIC 31. Penganggaran fungsi permintaan
buruh asing profesional dan teknikal-penyeliaan menunjukkan hubungan yang positif dengan output dan upah buruh
asing itu sendiri. Bagaimanapun, kedua-dua kategori pekerja ini mempunyai hubungan negatif dan signikan dengan
harga barang-barang modal dan upah pekerja tempatan. Ini bermakna bahawa buruh asing profesional dan teknikal-
penyeliaan merupakan penggenap kepada modal zikal dan pekerja tempatan.
Kata kunci: Permintaan; pengeluaran; buruh asing; upah
INTRODUCTION
Over the past few decades, the Malaysian economic
structure has been experiencing change; from agricultural
sector to manufacturing and services sectors. As a result
of this change, Malaysia is facing labor shortages at all
job categories. The manufacturing sector, particularly, is
severely affected than other sectors due to its rapid growth
rate especially in early 1980s when export oriented and
heavy industries were introduced. To overcome this
problems, the Malaysian economy had to rely on foreign
workers through the implementation of policies that
permitted them to migrate legally into Malaysia. The
neighboring countries like Indonesia, the Philippines,
Thailand and Myanmar took advantage of this situation
by sending their workers, especially the unskilled to
work in Malaysia. This was done in parallel to overcome
their labor surplus. Despite a legal channel provided by
the government, the majority of foreign workers still
used an illegal channel in order to save costs in terms
of levy payments (See Azizah 1998; Mohd Anuar 1997;
Zulkiy 1996).
Osili (2007) suggested that part from changes in the
economic structure and dichotomy in the growth rate
between countries in the region, labor mobility was also
initiated by globalization which is signicantly taking
place all over the world. Changes in the international
trade structure and a rapid interaction between all
areas had motivated trade, investment, remittance,
saving and the flow of information technology that
136 Jurnal Ekonomi Malaysia 49(2)
foreign workers; (3). The elasticity substitution of foreign
workers to capital and local workers.
LITERATURE REVIEW
Whether or not an involvement of foreign labors in the
production process of a country will assist in economic
growth is still debated (Osili 2007). Some findings
showed a positive correlation between economic
growth and foreign labor because they can create job
opportunities and capital accumulation (Simon 1988).
On the contrary, other studies found that foreign workers
retarded economic growth because the majority of them
are unskilled (World Bank 1995). On the positive side,
some studies argued that the inux of foreign labors could
increase demand for food and services in destination
countries; and subsequently increased the rate of return
from investment and capital accumulation (Greenwood
& McDowell 1986).
The rst opinion is generally argued that countries
will get benets from the inux of foreign workers
because they can stimulate economic growth through
the increasing of public demand for goods and services,
and capital formation (Simon, Stephen & Sullivan 1993).
This opinion is based on the Say’s Law which suggests
that supply will always create a demand (supply create
its own demand). While others opinions expressed that
if the inux of foreign workers is massive, they could
hamper economic growth because they are of low-
skilled and low-educated. In fact, some argued that the
inux of foreign workers will only lead to problems in
the social, economic and political areas of the importing
country because many of those entered illegally (see also
Orjithan 1985).
A study conducted by Simon (1988) in the state of
California and the city of Los Angeles in the United States
found that the inux of foreign workers has provided
substantial benets to a wide range of industrial output
growth in both regions. While the negative effect of
the inux of foreign workers to local workers was very
small and mostly concentrated to the local workers who
come from Latin American countries. Furthermore,
the highest impact of the inux of foreign workers on
economic growth was mainly due to strong growth of
employment in both regions. During the 1970-1980
periods, employment had grown by 46.1% in California
and 52.7% in Los Angeles. The increase in the growth of
the labor force caused a 5.2% contraction in wage due to
the inux of foreign workers in those two regions.
In Europe, the ndings of a study conducted by
Zimermann (1995) concurred the study conducted by
Simon (1988). The inux of foreign workers signicantly
impact on economic growth, employment opportunities
and wages of local workers. This is because the inux
of foreign workers increases the capital formation and
creates new job opportunities for local workers. In
greatly inuenced labor mobility. In the ASEAN region
for example, the formation of growth triangle such as
Indonesian-Malaysian-Thailand Growth Triangle (IMT-
GT), Indonesian-Malaysian-Singapore Growth Triangle
(IMS-GT) and Indonesian-Malaysian-Philippines Growth
Triangle (IMP-GT) had stimulated the interaction among
these countries. Moreover, the main objective of this
formation is to increase investment, trade and export
among the region as well as to increase tourism and labor
mobility (See also Rahmah 1997; Zulkiy & Rahmah
1997).
Kanapathy (2008) supported the view that economic
transformation changed the structure of labor demand.
The rapid growth of the manufacturing and services
sectors has required more professional and skilled
workers to cope with the adoption of fast changing
technologically. However, the demand for semi-skilled
and unskilled workers is still high due to increase in the
total number of employment. In this regard, the Malaysian
economy facets two scenarios. The rst scenario is labor
surplus in certain job categories. This is as a result of
fast improvement in the educational attainment among
people and difculties in planning its human resource
in accordance to the country’s need. Apart from this,
people are becoming more selective in accepting job
offer. Another scenario is job abundance especially in the
lower rank; where by foreign workers are needed due to
reluctance from local workers.
According to the Mnistry of Home Affairs report
2011 (Mnistry of Home Affairs 2011), the number of
migrant worker in Malaysia by country of origin shows
that Indonesia has the highest number of migrant,
followed by Bangladesh, Pakistan, Thailand, and
Philippines. The number of Indonesian migrant workers
to Malaysia increased considerably from 269,194 in
1999 to approximately 1,1 million in 2008. They make
up more than half of the total number of migrants in
Malaysia. Migrations from the Philippines showed
an increasing trend over time of which the number
was at 7,299 and 26,713 in1990 to 2008, respectively.
The number of migrants from Thailand showed an
unstable trend, from only 2,130 in 1999 to 20,599 in
2002, and 5,751 in 2005 but then increased to 21,065
in 2008. Although, the percentage of the Philippine
and Thai migrants was quite low, making up less than
5%, the impact was rather signicant to Malaysian
economy. The majority of the migrant workers are in
the manufacturing sector, comprising with more than
30% of the total migrants in Malaysia. This shows that
the manufacturing sector in Malaysia depends highly
on foreign workers.
The objective of this study is to analyze the demand
for foreign workers in the manufacturing sector in
Malaysia. More specically, the objectives of this study
are to analyze: (1).The contribution of foreign workers
to the manufacturing output sub-industries in Malaysia;
(2).The determination of industrial demand factors to
137The Demand for Foreign Workers in the Manufacturing Sector In Malaysia
addition, the in ux of foreign workers does not adversely
affect the wages of local workers because they were
complementary in the production process (see Figure 1).
In Australia, a study conducted by Dickson (1975),
found that the in ux of foreign workers acts as a stimulus
to the economic growth of the country. The in uence
of this stimulus occurred through the complementary
relationship between foreign workers with local workers,
whereby the in ux of foreign workers encouraged the
local workers to be more productive; thus, stimulating
the increase in output and consumer demand for goods
and services produced. Shortly, we could note that the
complementary relationship between foreign workers
with local workers is believed to be one of the forces
that could encourage an increase in the rate of economic
growth in the country.
A study conducted by Norman and Meikle (1985) in
the same state also supported Dickson’s ndings (1975).
By using econometric analysis, Norman and Meikle
found that the in ux of foreign workers could improve
job opportunities for local workers far exceeding’s the
negative effect caused by the in ux of foreign workers.
Creation of employment opportunities is not only done
by foreign workers together with local workers to form a
joint venture, but it could also be done by foreign workers
themselves independently. Therefore, Norman and
Meikle (1985) believed that the form of a complementary
relationship between foreign workers with local workers
provided considerable bene ts to boost the country’s
economic growth.
In contrast to the studies by Dickson (1975), and
Norman and Meikle (1985), other studies conducted by
Greenwood and McDowell (1986) in the United States
found that the opposite situation; whereby the in ux of
foreign workers resulted in a negative and signi cant
impact on wages and employment opportunities for local
workers. According to them, the in ux of more foreign
workers surrogate (substitute) against the interests of
local workers for foreign workers to get involved and
become a member of the labor union. They generally
worked in non-permanent jobs and many of the foreign
workers worked illegally. This situation led to various
demands by local workers to improve their well-being
that was affected because of the foreign workers.
Therefore, Greenwood and McDowell (1986) believed
that the in ux of foreign workers, especially foreign
workers without permits had reduced employment
opportunities and wages of local workers.
The study conducted by Baker (1987) in Australia, as
well as a study conducted by Baker and Benjamin (1994)
in Canada supported the results of studies conducted by
Greenwood and McDowell (1986). According to those
researchers the in ux of foreign workers could hamper
the economic growth, employment opportunities and
wages of local workers because foreign workers enjoy
the bene ts from the use of capital without paying any
cost for it. Foreign workers utilized public facilities of a
country but they do not have to pay taxes, while taxes are
used to construct public facilities. This situation would
lead to an elimination of the amount of capital available
for local workers. Therefore, those experts believed that
the in ux of foreign workers could hamper economic
growth and the opportunity for raising wages earned by
local workers.
A study conducted by Baker (1987) in Australia for
example found that for every 1% increase in the number
of workers caused by the in ux of foreign workers
would raise 1% of investment. Mean while, the increase
of 1% in local workers could raise 8% capital formation
compared to capital formation caused by the in ux of
foreign workers. This suggested that the effect of the
in ux of foreign workers against capital formation is
very small and could inhibit the incoming of overall
capital formation. Therefore, Baker (1987) believed that
the in ux of foreign workers could hamper economic
growth, employment opportunities and rising wages of
local workers.
In Malaysia, there are several studies that investigate
the issues of foreign workers, such as the studies by
Zulki y (1995), Rahmah, Nasri, Zulki y and Zulridah
FIGURE 1 Effect of foreign workers against economic growth (opinion optimistic)
Increase Demand for Products in
Countries Destination
Increase Capital Development in
Countries Destination
The infl ux of Foreign Workers
- Increase Capital Rate of Return
- Increase Industrial Marginal Revenue
- Increase Output and Job Opportunities
Increase Economic Growth in
Countries Destination
The Effects of Stimulus
138 Jurnal Ekonomi Malaysia 49(2)
(2003) and Idris and Rahmah (2006). For example,
the study conducted by Zulkiy (1995) in the case of
foreign workers in plantation sector, he found that the
ratio of foreign worker to total labours had increased.
Meanwhile, the wage rate of local workers had shown
down ward trend due to the presence foreign workers
inux. Although, this studied was not tested emperically,
but it provides the indication that the inux of foreign
workers to Malaysia had brought unfavorable condition
to job opportunities and wage rate of local workers. The
inux of foreign workers had caused the job opportunities
and wage rate for local workers to decreased.
Rahmah et.al. (2003) studied the role of foreign
labour on output growth, job opportunity and wage
in the Malaysian manufacturing sector and found that
professional foreign labour contributed signicantly
to manufacturing output growth. The study also found
that professional foreign labour and local labour are
complementary, while the unskilled foreign labour
and local labour are substitutes. Similar to Rahmah
et.al. (2003), Idris and Rahmah (2006) also analysed
the elasticity of substitution between foreign and local
workers in the Malaysian manufacturing sector. The
results from the study showed that the foreign and local
workers are more of substitute than complement. It
indicates that when the foreign wage decreased, rms
would be willing to take foreign workers to cut cost of
production. A high substitutability are found in heavy
industry of basic metal products. Idris and Rahmah
(2006) also suggested that the inux of foreign labour
may jeopardized the local in terms of job opportunity,
especially in heavy industry.
THE DEMAND MODEL FOR FOREIGN WORKERS
As we know that the industrial demand for labor is
derived from the demand of manufacturing output.
Therefore, the demand function of the manufacturing
industry for foreign labourer can be derived from two
different approaches. The rst is the production function
with cost constraint, and the second is cost function
with production constraint. The former can be done if
the inputs of manufacturing production functions are
fully available, while the second can be done if inputs
of production function are limited (Hamersmesh 1984).
There are different types of production function –
(eventhough they assume that labor is homogeneous or
heterogeneous) – and they have long been developed
by economics experts, for examples: Cobb-Douglas
production function, production function with constant
elasticity of substitution (CES) and translog function.
Unfortunately, these three production functions have
limitations when they are used to analyze the capital
and labor roles through outputs of various industries.
The Cobb-Douglas production function weakness is
the aggregative, where by the total of all production
functions at rms level cannot be formed as a function
that is commonly accepted in an industry (Osman &
Maisom 1990). The CES production function is not easily
developed if we use more than two inputs in the process
of production. The translog production function cannot
analyze the data with a value that is equal or close to
zero (Bairam 1991).
The Cobb-Douglas production function has a
limitation. However, it is still more suitable to achieve
the objectives of this study. There are several reasons for
it this. First, this production function can accept more
than two inputs in the process of production where by this
advantage cannot be found in CES and translog production
functions. Second, it has a simple form and easier to
understand as it is formed in log-linear (Hamermesh,
1984; Osman & Maisom1990). The common form of
Cobb-Douglas production function is as the following
(see Gujarati 1995; Zanias 1991):
Q = A Kα Lβ, where A > 0; 0 < α and β < 1 (1)
Where Q is output, K and L are capital and labor
inputs, while α and β are parameters to show the
extending of technology that intensively utilize capital
and labor in the process of production.
This production function is a commonly written and
used by economic experts. It can be generalized to more
than two inputs that are used in the process of production.
For examples, the utilization of inputs combinations:
capital and local workers, capital and foreign workers,
local workers and foreign workers. There by Cobb-
Douglas production function with capital, local and
foreign workers inputs, could be written in equation form
as the following (Rahmah & Lum 2000):
Q = A Kα Lnβ Lmδ (2)
As like usual Q is output, A is the parameter that
shows technological improvement; K, Ln and Lm are
capitals, foreign and local workers in the process of
production, respectively.
The costs that are spent by industry for these three
inputs are very essential in determining the industrial
prots. This is because the highs and lows of outputs’
selling prices in the market depend on the uctuation
of inputs costs uctuation. Nevertheless, in practice the
calculation of costs spending by industry is complicated,
especially the cost for foreign workers. In that respect, the
industrial spending for various inputs can be estimated
through costs that are paid out by an industry.
Cost function that expresses the high and low of
outputs’ selling prices in the market can be written as the
following (Hebbink 1993):
C = r K + wn Ln+ wm Lm (3)
Where C is costs of r, wn and wm, are capital, goods
price, local workers wage, and foreign workers wage,
respectively. In this context, wage is seen as cost that has
to be paid in production process. It means, the higher the
wages for workers, the lesser the prots for employers.
139The Demand for Foreign Workers in the Manufacturing Sector In Malaysia
The increasing of wages causes the employers to rethink
and compare them between additional prots received
and additional costs for workers’ payment. In that case,
the increasing of wage will cause the decreasing of
industrial demand for foreign workers or the demand for
capital goods will increase.
By using the Langrange Equation (ξ), the industry
optimum benets can be gained by cost minimizing with
production constraints as follow:
ξ = rK + wnLn + wmLm + λ(Q – AKαLnβLmδ) (4)
∂ξ/∂K = r – λαAKα–1LnβLmδ = 0 (5)
∂ξ/∂Ln = wn – λβAKαLnβ–1Lmδ = 0 (6)
∂ξ/∂Lm = wm – λδAKαLnβLmδ–1 = 0 (7)
∂ξ/∂λ = Q – AKαLnβLmδ = 0 (8)
The equilibrium of inputs between foreign workers
with capital; and local workers, can be found by the
equation (5) to (8):
wm
–––
r = δK
–––
αLm
(9)
wm
–––
wn
= δLn
–––
αLm
(10)
wm
–––
r = βK
–––
αLn
(11)
By simplifying equation (9) to equation (11), the
demand of each input in the production process can be
written as follows:
K =
(
Q
–––––––
ALnβLmδ
)
1/α
(12)
Lm =
(
δr
–––
αwn
)
K
(13)
Ln =
(
βwm
–––
δwn
)
Lm
(14)
There are a few steps to complete the industry
demand derivatives of foreign workers. First, insert the
substitution equation (14) in equation (12) in order to get
a new equation. Second, the result of the new equation is
substituted in equation (13) to nd the demand function
for foreign workers:
Lm =
{(
δr
–––
αwn
)
α
(
Q(δwn)β
––––––
A(βwm)β
)}
1
––––
α+β+δ (15)
Where Lm is foreign workers demand, Q is output,
and r, wn and wm are prices of capital goods, wages for
local and foreign workers respectively.
MODEL SPESIFICATION AND VARIABLES
This study utilizes pooling data with cross section
analysis and time series. This specication may appear
biased; caused by rms differences that occur in certain
industry categories, for instance sizes, the amount of
workers, industry locations, and technology that are used
in the production process (Bregman, Fuss & Regev 1995).
Moreover, the new rms that merge with certain industry
categories cannot be observed during the study conducted
as well as for the rms that have been bankrupt.
From the model it can be seen that the output variable
(Q) and demand for foreign workers (Lm) interfere
with each other. Thus, to get the correct estimation, the
simultaneous equation is used as follows:
ln Qit = αi10 + αi11 ln Kit + αi12 ln Lnit
+ αi13 ln Lmit + ui1t (16)
ln Lmit = αi20 + αi21 ln Qit + αi22 ln rit
+ αi23 ln wmit + αi24 ln wnit + ui2t (17)
Where Q is output, and K, Ln and Lm are capital, local
workers and foreign workers respectively. In addition r,
wn and wm are prices of capital goods, wage for local and
foreign workers respectively. Variables that have signs
“it”, for instance “Qit” indicates that the Q variable is
output that resulted in industry i in year t.
There are ve categories of foreign workers to the
analyzed in this study: Professional workers, teckhnical-
supervisor, skilled, semi-skilled and unskilled. The
specication for production and the demand functions
for foreign workers can be rewritten as:
1. The Production Function
ln Qit = ln α11 + β111 ln Kit + β112 ln Lnit
+ β113 ln Lmpit + β114 ln Lmtpit
+ β115 ln Lmmit + β116 ln Lmsmit
+ β117 ln Lmtmit + μit (18)
2. The Demand Function for Foreign Workers
ln Lmpit = ln α130 + α131 ln Qit + α132 ln rit
+ α133 ln wmpit + α134 ln wnpit
+ μ13t (19)
ln Lmtpit = ln α140 + α141 ln Qit + α142 ln rit
+ α143 ln wmtpit + α144 ln wntpit
+ μ14t (20)
ln Lmmit = ln α150 + α151 ln Qit + α152 ln rit
+ α153 ln wmmit + α154 ln wnmit
+ μ15t (21)
ln Lmsmit = ln α160 + α161 ln Qit + α162 ln rit
+ α163 ln wmsmit + α164 ln wnsmit
+ μ16t (22)
ln Lmtmit = ln α170 + α171 ln Qit + α172 ln rit
+ α173 ln wmtmit + α174 ln wntmit
+ μ17t (23)
Where
Lmp, Lmtp, Lmm, Lmsm and Lmtm are
professional foreign workers, teckhnical-supervisor,
skilled, semi-skilled and unskilled, respectively.
140 Jurnal Ekonomi Malaysia 49(2)
Then wnp, wntp, wnm, wnsm, wntm are wages for
professional local workers, teckhnical-supervisor,
skilled, semi-skilled and unskilled, respectively.
Capital (K) inuences output through inputs
consumption in the production process. In this
case, capital is consisted of xed assets and current
assets according to time and types of industry and
technology that are used in production. Nonetheless,
in producing output the owners or employers of the
rms are still in need of machines and equipment.
The xed asset cannot change in a short time frame,
as capital cost is too high. Moreover, in many cases
when machines and equipment are bought, the
owners of rms usually obtain loans from the banks
with a low interest rate. Therefore, it is fair to surmise
that capital is an exogenous variables in this model
(Bedrossian & Petoussis1987).
Capital goods price (r) inuences output through
foreign workers demand. Thereby, the increase of capital
goods will cause decrease in the number of physical
capital inputs and skilled workers in the production
process. Eventually, the firms or industries would
switch to semi-skilled foreign workers (Griliches 1969;
Borjas1983; and Hamersmesh 1984).
Foreign workers wage (wm) inuences output growth
through industrial demand for foreign workers. The
increasing of wage could stimulate rms or industries
to their inputs’ consumption in their production process.
Then, the firms that are of an industry will usually
dispense their demand for foreign workers. In contrast,
there are many cases where increasing of wage causes
industrial demand for foreign workers. In the labor market
theory, there is a positive relationship between wage
and industrial demand for foreign workers whereby it
is discussed in higher wage economic theory (see Ress
1973 and Katz 1986).
In high wage economic theory, it is stated that
improvement in wage can create better moral and
prosperity among workers. It can also improve workers’
motivation. In this situation, high productivity and
competitiveness among the workers will cause them
to achieve better heights. Even in the new version of
the high wage economic theory, which is known as
efciency wage theory, it claries that the rms’ prots
can improve if wages are paid is above the equilibrium of
the market wage. It means, that high wage is a stimulus
for workers’ motivation, which in turn will minimize
workers’ turnover cost, reduce labor union bargaining
power, and attract more qualied workers (Katz 1986).
Local workers wage (wn) can also inuence output
growth due to industrial demand for foreign workers. The
increasing of local workers’ wages can inuence rms
to replace their labor input with a cheaper alternative.
In the short term, the employers’ alternative is replacing
the utilization of local workers with foreign workers
in the production process. The adjustment of this labor
input in labor market theory is known as cross elasticity
substitution between local workers and foreign workers
(Borjas 2000).
THE PROCEDURAL ANALYSIS AND SOURCES
OF DATA
As explained earlier, the output variable (Q) and the
demand for foreign workers (Lm) inuences one another.
That is why, the usual regression equation (OLS) often
used by econometric experts is less precise. To overcome
this problems, the simultaneous equations are use in order
to obtain the estimation results that are more precise and
accurate than OLS. To that end, there is an alternative
that we can use; which is to swap the equation system’s
structure as shown by equation (17) up to equation
(19) to the derivative equation form (reduced form).
Structured equation is an equation in which the function
of endogenous factors functions to the exogenous and
endogenous factors. When the equation of this structure
is transformed in the reduced form, the endogenous
factors in the model will serve to exogenous factors alone
(Greene 2000).
In general, the derivate equation (reduced form)
presented in this study are as follows:
ln Qit= Πi10 + Π11 ln Kit + Πi12 ln Lnit
+ Πi13 ln rit + Πi14 ln wmit + vi1t (24)
ln Lmit = Πi20 + Πi21 ln Kit + Πi22 ln Lnit
+ Πi23 ln rit + Πi24 ln wmit + Πi2t (25)
Where Πijk is a function of the parameter αijk in
equation (17) so that equation (19), or Πijk = f (αijk), and
vijt = f (αijk and uijt).
Instrument variables are used to avoid the mistakes
in simultaneous equations models. In this study, the
estimation for Production Function (Qit) and Demand
Function for foreign workers (Lmit) used instrument
variables, such as input of capital, price of capital,
and wage for foreign workers based on job categories.
Although, the utilization of instrument variables will
not solve all problems that are related to simultaneous
equations, the usage of instrument variables is expected to
minimize cross section variation (Bregmant et al. 1995).
Moreover, to estimate the parameters in simultaneous
equations, the equation of 2-SLS (two stage least
squares) is used. This equation is commonly applied
in econometrics. To obtain the desired parameters,
estimations are performed using the SPSS computer
program package.
Data used in this study are based upon the Industrial
Survey conducted by The Department of Statistics
Malaysia for the period of 1994-2005. This is after
the memorandum of understanding (MoU) between
Malaysian and Indonesian ofcials, and some other
countries in 1984. Specically the data used in this study
are as follows: First, production or output (Q) macro data
of each industry have a four-digit classications. The data
141The Demand for Foreign Workers in the Manufacturing Sector In Malaysia
covers gross value of outputs produced by each industrial
classication based on a constant price in 2000.
Second, capital data (K) consists of xed asset and
current assets, types of industry and technology that are
used in the production process. In practice, the physical
capital input data are very difcult to obtain,. This is
because the capital represents certain types of assets, such
as machines, equipments, vehicles, and building for plants
and ofces. Therefore, to calculate these assets for capital
stock can create some problems. To estimate the stock
value of capital, the data of machines and equipments
depreciation from various industries are used as proxy.
Third, the number of labor data (L), the number of
local workers (Ln) and the number of foreign workers
(Lm) for each industry, have five job categories.
They are professional workers, technical-supervisor,
skilled workers, middle-skilled and unskilled workers.
Professional workers are those who have professional
training to conduct certain tasks such as research, and
knowledge to solve problems related to technology,
economy and social welfare. Professionals are usually
connected to engineers, architects, doctors, lawyers, and
accountants. Technical-supervisors are those involved in
research and directed by professionals. Skilled workers
are workers who have formal training. Middle-skilled
workers are those with limited training and not included
in the skilled workers category. Further, the unskilled
workers are those who have never had related training
to do their jobs.
Fourth, the wage data in this study are the data of
wage paid by industry for all workers according to the
industrial classications and their job categories. The
wage data is real wage data that is accepted by workers
per year. In view that there is no detailed data available
regarding wages for every worker, the wage data used in
this study will be proxied by wage share that is paid by
each industry category for all workers according to their
job types. The data use consumer price index on the basis
of constant price in year 2000.
Others data are also used in this study; namely those
that are related to interest spent by each industry. In the
case of capital (K), it is difcult to select the appropriate
variable to be applied to measure the price of capital
goods. This is because it involves various values such
as assets values, depriciation, interest rates and tax
(Hebbink1993). The data used as proxy to measure the
price of capital goods (r) is interest rate; this means the
rm’s cost’s expenditure is as a consequence of getting
bank loan.
EMPIRICAL FINDINGS
Table 1 shows the estimation results of the Cobb-Douglas
production function and resources of outputs growth from
various categories of industry. In general, it can be stated
that the process of industrial development in Malaysia has
shown some results whereby physical capital and local
TABLE 1 Cobb-Douglas estimation function base on industry categories and job types
Variable ISIC (International Standard Industry Classications)
31 32 33 35 36 38
K
Ln
Lmp
Lmtp
Lmm
Lmsm
Lmtm
Constant
R2
N (Obs.)
1.177
(10.34)***
-.037
(-0.27)
-.044
(-.53)
.114
(2.28)**
.091
(1,80)*
-.122
(-3.14)***
.074
(0.79)
2.225
(2.44)**
.928
56
.457
(2.71)**
.487
(4.47)***
.170
(.826)
.060
(0.597)
-.029
(-.434)
-.090
(-.610)
.052
(.404)
3.964
(2.54)**
.983
18
.817
(4.12)***
.160
(-1.35)
-.167
(-1.352)
-.006
(-.062)
-.090
(-.853)
,098
(.570)
.092
(.719)
3.864
(2.54)***
.990
24
.416
(3.29)***
.216
(2.58)**
.292
(2.19)**
-.018
(-.214)
-.022
(-.351)
-.001
(-.011)
-.021
(-.324)
6.859
(5.20)***
.925
39
.770
(7.55)***
.263
(1.59)*
.431
(3.06)***
-.109
(-1.66)*
-.057
(-1.17)
.082
(.599)
-.063
(-.851)
1.793
(1.21)
.860
34
.462
(5.66)***
.518
(5.91)***
.129
(2.13)**
-.037
(-.951)
.014
(.371)
.014
(0.279)
-.016
(-.382)
3.888
(6.43)***
.956
93
Note: 31 = Food, Baverage and Tobaco Industry; 32 = Textyle, Garmen,and Leather industry;
33 = Wood, Wood Products and Furniture Industry; 35 = Chemical and Chemical products
36 = Non-Metal Products; 38 = Fabricated metals, Machinary, electronic and equipment
*** = Denote Statistical Signicance at the 1%; ** = Denote Statistical Signicance at the 5%;
* = Denote Statistical Signicance at the 10%
142 Jurnal Ekonomi Malaysia 49(2)
workers have a positive role and they are signicant at
improving Malaysia’s output, except for local workers
participation in the food, beverage and tobacco industry
(ISIC 31), wood, wood products and furniture industry
(ISIC 33).
The testing of Cobb-Douglas production function
shows that professional foreign workers have important
contribution to outputs growth of various industries
in Malaysia, particularly in heavy industries that are
capital intensive. For instances, chemical, chemical
products, petroleum, rubber and plastic industry (ISIC
35), non-metal products industry (ISIC 36), also as
well as fabricated metals, machineries, electronics and
equipments industry (ISIC 38). Meanwhile, skilled and
technical-supervisors of foreign workers have signicant
roles in the outputs of light industries, especially for food,
beverage and tobacco industry (ISIC 31). This means the
expatriate workers have consequential participation in
outputs’ growth of various industries in Malaysia.
Table 2 shows the estimation of demand function for
foreign workers according to industrial categories and job
types. In general it can be stated that outputs, the prices
of capital goods and wage have inuenced the industries
at various levels. However, positive and significant
elasticity of demand– outputs are founded in the textile,
garment and leather industries (ISIC 32); fabricated
metals, machineries, electronic and equipments industries
(ISIC 38); chemical, chemical products, petroleum, coal,
rubber and plastic industries (ISIC 35); and non-metal
products (ISIC 36).
This study ndings complement previous studies,
of Stein (1981) and Myint (1984). In their studies, they
TABLE 2 The estimation of industry demand function for foreign workers base on industry and job categories
Code
ISIC Variable
Job Categories
Professional Technical
Supervisor Skilled Semi-Skilled Un-skilled
31
Q
r
wm
wn
Constant
R2
N(Obs.)
.349
(5.26)***
-.041
(-.626)
.954
(27.60)***
-.423
(-9.51)***
-4.442
(-12.59)***
.971
56
.507
(5.29)***
-.031
(-.388)
1.012
(35.06)***
-.740
(-10.12)***
-2.789
(-7.18)***
.976
56
.019
(.178)
.054
(.484)
.972
(25.63)***
-.236
(-3.21)***
-.433
(-.735)
.949
56
-.044
(-.244)
-.075
(-.416)
.844
(13.96)***
.071
(.455)
.033
(.039)
.897
56
.017
(.144)
-.061
(-.469)
.831
(13.87)***
.010
(.071)
-.008
(-.010)
.925
56
32
Q
r
wm
wn
Constant
R2
N(Obs.)
.644
(4.99)***
-.242
(-1.253)
.647
(4.36)***
-.126
(-1.275)
-6.807
(-8.10)***
.981
18
.845
(7.16)***
-.416
(-4.03)***
.839
(14.69)***
-.321
(-2.05)*
-6.123
(-1`2.37)***
.989
18
.291
(2.56)**
-.277
(-2.90)**
.916
(40.94)***
.023
(.391)
-2.968
(-6.53)***
.996
18
-.263
(-.403)
.307
(.560)
.691
(4.410)***
.391
(.916)
-2.899
(-1.368)
.916
18
.063
(.458)
-.143
(-.1.287)
.859
(35.92)***
.204
(1.820)*
-2.031
(-4.08)***
.925
18
33
Q
r
wm
wn
Constant
R2
N(Obs.)
.014
(.065)
.185
(.672)
.586
(5.70)***
-.002
(-.013)
-2.789
(-2.71)**
.984
24
.386
(2.72)**
.184
(1.166)
.722
(15.82)***
-.347
(-3.69)***
-4.936
(-6.14)***
.996
24
.279
(1.039)
.073
(.228)
.908
(15.24)***
-.388
(-1.272)
-2.116
(-1.207)
.990
23
.149
(.670)
.342
(1.206)
.921
(14.08)***
-.645
(-2.03)*
-.067
(-.050)
.991
24
.535
(2.44)***
.109
(.501)
.810
(24.40)***
.445
(-3.54)***
-3.897
(-3.39)***
.994
23
143The Demand for Foreign Workers in the Manufacturing Sector In Malaysia
35
Q
r
wm
wn
Constant
R2
N(Obs.)
.882
(3.95)***
-.054
(-.329)
.563
(3.90)***
-.322
(-1.76)*
-9.753
(-5.29)***
.898
39
.634
(2.36)**
-.226
(-1.225)
.802
(9.69)***
-.049
(-.273)
-8.318
(-5.21)***
.932
39
.162
(.324)
.073
(.213)
.756
(10.02)***
.134
(,512)
-5.512
(-1.61)*
.869
39
1.252
(1.97)*
-.479
(-1.163)
.940
(7.63)***
-.655
(-3.045)***
-8.670
(-1.97)*
.780
39
-.283
(-.938)
.110
(.561)
.870
(27.99)***
.230
(2.84)***
-.249
(-.124)
.971
39
36
Q
r
wm
wn
Constant
R2
N(Obs.)
1.709
(4.44)***
-1.003
(-2.99)***
.670
(7.04)***
-.844
(-4.85)***
-7.130
(-3.93)***
.687
34
.062
(.296)
-.278
(-1.60)*
.895
(18.47)***
-.183
(-1.15)
1.288
(1.450)
.960
34
-.251
(-1.441)
-.298
(-1.92)*
.810
(19.76)***
.442
(2.22)**
.844
(.919)
.985
34
.103
(.305)
.087
(.232)
1.076
(6.857)***
-.892
(-4.58)***
3.504
(1.93)*
.712
34
-1.100
(-4.14)***
.783
(2.77)***
.848
(18.82)***
.450
(3.56)***
1.562
(1.131)
.938
34
38
Q
r
wm
wn
Constant
R2
N(Obs.)
.445
(3.34)***
-.082
(-.986)
.695
(16.52)***
-.097
(-1.132)
-6.250
(-11.55)***
.970
93
.020
(.294)
.151
(3.06)***
.841
(31.88)***
-.044
(-.662)
-3.405
(-13.96)***
.979
93
.551
(3.78)***
-.114
(-716)
.770
(17.93)***
-.373
(-3.74)***
-3.876
(-5.66)***
.900
93
-.098
(-.618)
.284
(1.89)*
.776
(17.36)***
-.117
(-1.030)
-.853
(-1.254)
.892
93
-.273
(-1.351)
.167
(1.075)
.812
(24.58)***
.208
(1.61)*
-.291
(-.340)
.911
92
Note: 31= Food, Baverage and Tobaco Industry; 32= Textyle, Garmen, and Leather Industry;
33= Wood,Wood Products and Furniture Industry;35= Chemical and Chemical Products;
36= Non-Metal Products; 38=Fabricated metals, Machinary, electronic and equipment.
***= Denote Statistical Signicance at the 1%; **= Denote Statistical Signicance at the 5%;
*= Denote Statistical Signicance at the 10%
found that the demand for foreign workers by export-
oriented industries tends to increase. However, industrial
demand for import substitution has a tendency to decline.
This is becaused export-oriented industries are more
likely to achieve the economic of scale than import
substitution industries. In addition, the prices of goods of
export-oriented industries are more stable than the price
of goods for import substitution industries.
The negative relationship between industrial demand
for foreign workers who have high skills with capital goods
in ISIC 32 and ISIC 36, indicate that capital and foreign
workers are complementary, especially for professional
and technical-supervisor foreign workers. It matches the
prior studies by Griliches (1969), Hamersmesh (1984),
Borjas (1993), and Rahmah et.al. (2003). They found that
there was a substitution relationship between capital and
unskilled foreign workers. Meanwhile, the relationship
between capital and high skilled foreign workers are
complementary in the process of production. This means,
if there is an increase in capital goods, the employers
will shift from their capital and invest more in unskilled
foreign workers.
TABLE 2 (continued)
Code
ISIC Variable
Job Categories
Professional Technical
Supervisor Skilled Semi-Skilled Un-skilled
144 Jurnal Ekonomi Malaysia 49(2)
The shift in response of industrial demand for
foreign workers as an affect to the increase in foreign
workers wage, is positive and signicant to all industry
categories. This positive relationship does not suit the
theory. Instead, it relates to the introduction of lower wage
labor applied by Malaysia since the 1970s. This policy has
brought some multinational corporations into Malaysia
(especially those who are labor intensive) to replace their
workers with contracted workers and cheaper foreign
workers from various countries such as Indonesia.
The positive relationship between wage and demand
for foreign workers is also related to foreign employers
or owners preferences of employing workers from their
own countries. In Malaysia, most foreign multinational
corporations prefer to hire workers from their own
countries, particularly for professional and technical-
supervisor workers. The demand for these high level
foreign workers is determined by owners’ decision,
although their wages are high. Hence, this situation is
also related to the owners’ perceptions (including local
owners); whereby they are more interested in hiring
foreign workers rather than local workers. They think
that foreign workers of this category are more efcient,
productive, and have a higher commitment to their jobs
(Immigration Department 2002).
The response of industrial demand for foreign
workers to the change of local workers’ wage shows
varying relationships from one industry to another.
However, the response of unskilled foreign workers to
the increasing of local workers’ wage is positive for all
industrial categories. Meaning, the increase in unskilled
local labors wage causes an increase in the industrial
demand for foreign workers. The nding of this study
indicates that unskilled foreign workers are substitutes
for local workers of the same category.
Although there is a substitution relationship
between local workers and unskilled foreign workers,
for high skilled foreign workers such as professionals
and technical-supervisors, there is opposite correlation,
whereby the coefcient results are negative. As such,
the high skilled foreign workers are complement to
local workers in the production process. This matches
prior studies such as by Dickson (1975), Norman and
Meikle (1985) in Australia, Winegarden and Khor (1991)
in the US, Zimmermann (1995) in some European
countries,Venturini (1999) in Italy, as well as Idris and
Rahmah (2006) in Malaysia. In their studies, they found
that foreign workers are complementsto local workers.
Therefore, those foreign workers could not be seen as
competitor for local workers in the production process.
CONCLUSIONS AND IMPLICATIONS
In conclusion, it can be stated that highly skilled foreign
workers are still necessary for industrial development
in Malaysia. At the same time, the presence of those
foreign workers negatively impact local wage level.
Therefore the dependence could be eliminated through
several efforts. First, by redesigning the human resource
development to produce the high skilled workers; that
is through the cooperation between universities and
industries. Second, by utilizing advanced technology and
investing in more machineries and modern equipments.
Lastly, by giving incentive to research and development
(R&D) staff, i.e. technology that corresponds to local
workers’ abilities.
THE USING OF PROFESSIONAL WORKERS
For middle and heavy industries that are capital intensive
in their process of production, such as in the chemicals
industry, chemical products, petroleum, coals, rubber
and plastic industries (ISIC 35), and non-metals industry
(ISIC 36) the professional foreign workers are still
needed, since they are as a catalyst for output growth.
Meanwhile, the technical-supervisors, especially of the
ISIC 36 should be reduced and replaced with local workers
since these foreign workers can stagnant outputs. The use
of professional foreign workers in these three industry
categories is essential to push technological transfer.
The demand for professional foreign workers is
still benecial for heavy industries, for example in the
fabricated metals, electronics, and equipments industries
(ISIC 38). However, their contribution to outputs’ growth
is relatively small compared to middle and heavy
industries that intensively utilize physical capital. For
the food, beverage and tobaco industries (ISIC 31), the
demand for skilled and technical-supervisor foreign
workers are still needed due to technological development
in the production process. In contrast, the use of middle
skilled foreign workers should be reduced, since they can
impede the output growth.
THE UTILIZATION OF ADVANCED TECHNOLOGY
Another way to reduce the dependence on foreign
workers, especially for low skilled workers is by using
modern technology. It is essential for those industries
which are labors intensive replace workers with semi-
automatic or automatic machineries. In the future, the
manufacturing industry cannot rely only on the laborers
of low cost, but to utilize technology and be of capital
intensive.
THE REGULATIONS OF PRICE INPUTS
The substitution ability between capital and labor shows
that each changes in price ratio, such as the increasing
in interest rate, will stimulate the demand for workers,
including foreign workers demand, especially for lower
skilled and unskilled. For capital intensive industries or
industries with high demand-capital elasticity, the policy
to increase the interest rate will cause the diminishing of
145The Demand for Foreign Workers in the Manufacturing Sector In Malaysia
industrial activities. Therefore, regulations that maintain
interest rate is critical to improve the investment and
utilization of technology for various industries in
Malaysia.
THE WELFARE OF WORKERS
Since the 1980s the cheap labor cost strategy used
is aimed to maintain the minimum wage rate. It has
provided a lot of benets for the growth of manufacturing
industries in Malaysia. However, in the future the cheap
labor strategy cannot be justied to maintain products’
competitiveness. The benets from lower labor cost have
since diminished as several industrial countries namely
the US and the European community had highlighted
on the social issues of labor during the World Trade
Organization (WTO) forum; whereby this problem is
related to the ILO agreement. If the agreement is not
followed, this issue will be a barrier of non-tariff trade
for developing countries.
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Nasri Bachtiar* (nas_ri2002@yahoo.com)
Rahmi Fahmy (feua2000@yahoo.com)
Fakultas Ekonomi Universitas Andalas
Kampus Unand Limau Manis, Padang 25163
INDONESIA
Rahmah Ismail
Pusat Pengajian Ekonomi
Fakulti Ekonomi dan Pengurusan
Universiti Kebangsaan Malaysia
43600 UKM Bangi Selangor
MALAYSIA
*Corresponding author
147The Demand for Foreign Workers in the Manufacturing Sector In Malaysia
APPENDIX
APPENDIX 1 Migrant worker in Malaysia by country of origin
Country of Origin
Year
1999 2002 2005 2008
Number %Number %Number %Number %
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 21,78 1.0
Others 17,644 4.3 152,833 14.3 507,507 28.0 591,481 28.7
Total 409,660 100 1,067,529 100 1,815,238 100 2,622,596 100
Source: Ministry of Home Affairs, Malaysia, 2011
APPENDIX 2 Mingrant workers in Malaysia by sector
Sector
Year
2002 2005 2008 2011
Number %Number %Number %Number %
Maid 232,282 22.0 320,171 17.6 293,359 14.2 184,092 11.7
Manufacturing 323,299 30.6 581,379 32.0 728,867 35.3 580,820 36.9
Plantation 298,325 28.2 472,246 26.0 333,900 16.2 299,217 19.0
Construction 149,342 14.1 281,780 15.5 306,873 14.9 223,688 14.2
Services 64,281 6.1 159,662 8.8 211,630 10.3 132,919 8.4
Agriculture NA NA 186,967 9.1 152,325 9.6
Total 1,067,529 100 1,815,238 100 2,061,596 100 1,573,061 100
Note :na is not available
Source: Mnistry of Home Affairs, Malaysia, 2011.
