This article first appeared in Forum, The Edge Malaysia Weekly on October 21, 2024 - October 27, 2024

Malaysia’s economy is experiencing a robust recovery, marked by significant growth in key sectors and improvements in labour market indicators. The first half of 2024 has seen substantial economic expansion, with GDP growth rates of 4.2% in the first quarter and 5.9% in the second quarter. The World Bank projects that Malaysia will reach high-income status by 2027-2028, supported by strong GDP growth, a resilient manufacturing sector and a thriving services sector. Domestic demand is picking up and unemployment has reached its lowest level since the Covid-19 pandemic, at 3.3%. The manufacturing sector, in particular, is witnessing renewed momentum as global disruptions, such as the pandemic and the Russia-Ukraine war, begin to subside. Furthermore, Malaysia’s downstream manufacturing activities are benefiting from the global semiconductor boom, with a surge in demand for AI technologies further bolstering growth prospects.

However, economic growth alone does not necessarily translate into equitable improvements for the workforce, particularly in terms of wage growth. As Malaysia’s economy strengthens, it is crucial to assess whether the labour market is sharing in these gains, particularly through higher wages that reflect the economic progress. Understanding how wages have evolved in response to recent economic developments can provide critical insights into the inclusivity and sustainability of Malaysia’s growth trajectory.

Against this backdrop, this article aims to assess whether labour market wages are keeping pace with these developments. To do this, we examine wage growth from 2019 to March 2024. Furthermore, we break down this period into two segments: 2019 to December 2023, and December 2023 to March 2024, to evaluate the latest trends. This approach allows us to observe medium-term structural changes as well as short-term wage growth.

The chart illustrates the growth and decline in wages across different sectors in Malaysia between 2019 and March 2024, highlighting both medium-term and short-term changes. It is important to note that the data presented in the chart reflects after-tax and inflation-adjusted wages, providing a clearer picture of the real purchasing power of workers across different sectors. Several key trends emerge from the analysis, revealing the uneven nature of wage growth across various industries.

The manufacturing sector, which consists of one-fifth of the economy, has been a key driver of economic growth. While it registered a strong 8.2% year-on-year growth rate from 2019 to December 2023, the sector experienced a notable decline in wages in the short term, with a 17.5% drop from December 2023 to March 2024. This decline is concerning, especially given the ongoing efforts of Malaysia to move up the value chain into high-value semiconductor industries, such as integrated circuit (IC) chip design and research and development (R&D). While these are commendable goals, it raises the question of whether they will translate into higher wages for existing workers.

Transitioning to higher-value industries also means that current workers may lack the skillsets to support these new sectors. Therefore, substantial upskilling initiatives need to be introduced to existing workers, along with efforts to bring in more workers who are well-equipped for these industries. The problem is that many of Malaysia’s graduates are not ready for high-skilled manufacturing. Total tertiary graduates’ enrolment in 2023 numbered 1.25 million, with 40% being business administration, humanities and law students, while only 16% are engineering and construction students. Although there is a high number of tertiary graduates, the proportion with a science, technology, engineering and mathematics (STEM) background is limited. Major upskilling initiatives are needed for those without strong STEM fundamentals to be employed in higher-value chain manufacturing.

There are many grand plans to move Malaysia into higher-value chain activities. The National Semiconductor Strategy aims to train 60,000 engineers, but progress has been muted, with challenges in implementation and a lack of clear milestones. The TVET Madani programme offers a wide array of training initiatives, but the lack of a cohesive structure and limited wide-scale private sector collaboration has made it difficult to assess its overall effectiveness. Without significant improvements in coordination, these initiatives may fall short of equipping the workforce with the necessary skills for Malaysia’s economic transformation.

The services sector, which consists of half of Malaysia’s GDP and was a major driver of economic growth in the first half of 2024, has shown relatively modest wage growth compared with other sectors. According to the chart, the services sector experienced a slight decline in after-tax real wages of 0.7% (y-o-y) from 2019 to December 2023 and a further decline of 0.3% from December 2023 to March 2024.

This slow wage growth is particularly concerning, given that the services sector contributes half of Malaysia’s GDP and employs two-thirds of the workforce. Despite being a major driver of economic growth, many jobs within the services sector are low skilled and low wage, such as those in retail, hospitality, and food and beverage (F&B).

Improving national wages requires a comprehensive approach that extends beyond the manufacturing sector. It is essential to focus on upskilling workers, enabling them to transition into higher-value roles. For example, a retail worker could be retrained to enter the healthcare services sector, such as nursing or eldercare, where there are opportunities for higher pay and career advancement.

To transform the services sector into a higher-skilled part of the economy, Malaysia must target opportunities in sectors like global business services (GBS), financial services, IT development and support, and high-value tourism. Expanding the GBS sector, for instance, could create a demand for skilled workers capable of providing advanced business solutions to global clients, complementing Malaysia’s strength in manufacturing. Similarly, growing Malaysia’s role as a regional financial hub can drive demand for skilled financial professionals, while investing in IT development could align well with the digital transformation initiatives in manufacturing, enabling better integration of tech services with industrial growth.

High-value tourism and medical tourism also represent significant opportunities for upskilling service workers. By investing in specialised training for hospitality professionals and healthcare workers, Malaysia can create a premium tourism experience that attracts international visitors, thereby boosting income levels. The services sector has the potential to complement the manufacturing sector by providing essential support in logistics, technology and business services, ultimately creating a more diverse and resilient economy.

Because the services sector accounts for a significant share of employment, average overall wage growth declined 2.6% in the short term (December 2023 to March 2024). From 2019 to December 2023, long-term real wage growth stagnated at an average annual rate of 1.7%, which suggests that while Malaysia’s economy is growing, the benefits are not being trickled down into the labour market, raising concerns about the inclusivity of this recovery.

While Malaysia’s economic recovery shows strong growth in key sectors like manufacturing and services, wage improvements have been inconsistent. Short-term declines in both sectors, as well as long-term subdued wage growth, highlight the need for structural reforms to ensure inclusive growth. The government must address wage disparities and labour market challenges in high-stakes industries through targeted upskilling initiatives.

Doris Liew, an economist and public policy thinker at IDEAS Malaysia, regularly observes Asean’s economic development, policy frameworks and regional and international trade dynamics

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