This article first appeared in Forum, The Edge Malaysia Weekly on May 8, 2023 - May 14, 2023

Skill underutilisation can be defined as a condition where people have skills beyond those required to perform their job. The incidence of skill underutilisation is quite serious and significant in Malaysia, and seen to be persistent over time. The true potential of the worker cannot be maximised when there is a considerable gap between the skills possessed and the skills required in the workplace. Similarly, those who have higher skills but work in lower-skilled jobs often earn lower wages.

According to the Department of Statistics Malaysia (DoSM), the extent of skill underutilisation is growing in the post-pandemic period, increasing from 36.9% in the first quarter to 37.4% in the fourth quarter of 2022. It is notable that the extent of skill underutilisation in Malaysia is comparable to that of developed countries.

Skill underutilisation is a global phenomenon — eliminating it is almost impossible but reducing it is certainly a possibility. The figure shows the considerable extent of skill underutilisation observed in Organisation for Economic Co-operation and Development (OECD) countries, which is fairly comparable to the Malaysian context. Germany and Great Britain recorded incidences of 39.9% and 40.5% of skill underutilisation in 2019, while the average for OECD countries was 34.4%. This observation suggests that eliminating skill underutilisation is impossible in practice as far as economic cycles and structural shifting are concerned. However, reducing it is possible.

Given the extent of skill underutilisation in OECD countries, why has this issue not become a matter of public debate in developed countries? It is interesting that this is true in Europe, but the issue is more widely discussed in regions such as North America. This is due to the fact that the European labour market has a different structure and history than other regions. What can we learn from the European labour market systems? The key answer to those questions is fair wages.

Fair wages can help to attract and retain skilled workers, which can contribute to a better alignment of skills with the needs of employers. When workers are paid fairly, they are more likely to be motivated to stay in their jobs and develop their skills, which in turn reduces the risk of skills mismatch. In Europe, there is generally a culture of valuing skilled workers and providing them with fair wages and good working conditions. This can contribute to a more stable and productive labour market, which helps to reduce skills mismatch. Evidently, the average annual wage in Germany after adjusting for purchasing power parity is US$56,300 (RM250,700) (equivalent to US$4,691 per month) as shown in the figure. The German wage is almost seven times the Malaysian wage but the size of skill underutilisation between these countries is comparable.

In addition to wages, the vocational education and training systems in Europe are well developed, and workers are often trained in specific skills that are in demand in the labour market. This helps to reduce skill underutilisation by ensuring that workers have the skills that employers are looking for. Additionally, many European countries have strong social safety nets and publicly funded training programmes, which can help workers who experience skills mismatches to retrain and acquire new skills. Another factor that may contribute to the lower incidence of skills mismatch in Europe is the existence of strong unions and collective bargaining systems. Unions can help to ensure that workers are trained in the skills that are in demand in the labour market, and they can negotiate fair wages and benefits for their members.

In my view, Malaysia may opt for a two-stage intervention approach in dealing with the issue of skill underutilisation. The first stage is to implement efforts to increase wages, especially for low-income workers. This allows them to cope better with the increased cost of living. The second stage is to empower vocational and training systems and realign the supply of education and training programmes to keep pace with industry changes. In addition, efforts to improve social safety nets and collective bargaining systems also need to be addressed. The second-stage interventions are more directed towards medium- and long-term targets.

While studies, statistics and policy documents clearly emphasise the need to scale up wages in Malaysia, the question is are we ready to reform the wage system? Do we have the political commitment to implement it? I leave this answer to those who hold the administrative authority to implement necessary economic reform policies. In my view, no healing treatment is painless. Paracetamol is bitter but swallowing it can provide relief.

Associate Prof Dr Mohd Yusof Saari is chief economist at The Future Studies Bhd (The Future)

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