June 11th, 2014 by Hafiz Noor Shams
I am pretty taken aback by the expansion of the Malaysian labor force in the past year or so. The rise has made me skeptical about the utility of the labor market numbers to ascertain the health of the economy. Whenever I look at it, I tell myself, wait until it normalizes. When? If you look at the first chart below, it seems like soon because for the “outside of the labor force” number, it is sort of reverting to its old mean.
The number of workers increased by more than 0.9 million people in 2013 alone and you can see in this in the first chart below. That is about 7% of the total labor force. It is huge. Concurrently, there was a drop of number for those outside of the labor force:
I did not really know why it increased in a big way in a very short time frame. Previously, I had read three points explaining the drastic increase. None was satisfying enough to me, but it explained something nonetheless.
The first was the minimum wage. The argument goes that the implementation of the minimum wage caused a lot of people joining the labor market (technically, joining means looking for jobs, not necessarily getting them). The drop in the number of those outside of the labor force strengthened the minimum wage argument (see the red line in the first chart). It made sense, until you realized the unemployment rate itself did not remain elevated for too long. It spiked back in October-November 2013 at 3.5% but it then stabilized at around 3.0%-3.1%:
It would make sense that the unemployment rate did not change much, if all of those attracted to minimum wage jobs would find placement immediately, but I am having problem believing that. Sounds way too outrageous. And data on this is a bit hard to find to prove anything conclusively. (p/s – looking at the data again, the spike in unemployment rate of 3.5% happened when the number for those outside of the labor force was at its lowest. So, the minimum wage may have some explanatory power. The V-shape can be explained by discouraged workers, who entered the job market only to find it was harder than expected to find a job, and left it altogether soon after. This makes the minimum wage narrative very promising but getting a hard number to test it out is hard.)
The second was the legalization of undocumented migrants. This was my favorite explanation, until recently. There was an amnesty program for these workers that began in October 2011 and ended in September 2013. Jason Ng at the Wall Street Journal reported about 0.5 million workers were legalized. The figure sounds right except the program ran for 2 years. Why would the labor force size increased significantly only in 2013? Was it the case of last minute legalization? Was all of the 0.5 million registered only in 2013? There was a renewed effort by the government in July and August 2013 to get all those undocumented foreign workers to register with the authorities but I think it would take guts to say yes and be all confident about it. Also, the increase in labor force was 0.9 million, which is far, far higher than the number of amnesty given out. So, there is a hole there. And… it cannot explain the drop of those outside of the labor force. The legalization, I think, should not affect that number. They are already working and their legalization would only increase the labor size. For these workers, it is merely a transfer from the underground economy to the “above ground” economy, not from outside to inside of the labor force.
The third possible reason was a population boom and this is my least favorite because it is a bit convoluted. If you look at Malaysia’s demographics, there is a bulge for cohort aged 20-24 in 2010.
There were close to 3 million of them and the year 2013 was about the right time these people graduated out of schools. But here is the thing. There were about 1.1 million students in Malaysia’s higher ed institutions, doing diplomas, bachelors and higher level degrees. It cannot be there the 0.9 million graduated in just one year. There is also a V-shape that cannot be explained by graduating students because it suggests these graduates leaving the labor market after joining them, which I do not think it is the case.
So, the three possible explanations come short in their own ways.
I was researching on something else recently until I re-discovered that Malaysia raised its mandatory retirement age in July 2013, from 55 years old to 60. I remember reading about this a long time ago but it completely went through my head within the context of labor size. That is an embarrassing thing to admit because it was such a big thing that I forgot. So, the raising of the retirement age sounds like a promising possible factor behind the increase in labor force. First, there were about a million of them. That is a good number because again, remember, the increase of the labor force in 2013 was about 0.9 million. Now, it is likely that not all of them are in the labor force. This is a number that needs some researching.
There is a problem with the explanation, though I think it is not as bad that it completely rules out the retirement age point. The problem the retirement age factor faces is not as big as those faced by the amnesty and population boom factors. The problem is that the labor force size markedly increased around January 2013, six months earlier than the implementation of the new retirement age. This requires a bit of a research but a possible explanation is that those nearing the old retirement age in 2013 just before the implementation date were given the choice to continue working. A sort of grace period for them. Since the retirement age act was gazetted in December 2012, the market knew of the details pretty early in the game. This can easily explain the rise of the labor force. The new retirement age might even attract those outside of the labor force who had retired to rejoin, and this can explain the descending slope of the V-shape for those outside of the labor market. I am unsure how to explain the rising slope however.
So, here is my explanation for the drastic increase in the labor force.
The retirement age increase drastically reduced the outflow of labor from the market for one time. The inflow of remained about the same, or maybe slightly bigger than before because of the amnesty program, minimum wage introduction and the (minor) population boom.
Summary? The raising of the retirement age is the main cause of the drastic increase in the labor force.
The new problem now is to explaining why the labor force has contracted since it peaked in October 2013 and why the number for those outside of the labor force rose after September 2013.
 — About 1.3 million of an estimated two million undocumented foreign workers had registered with the amnesty program, which started in October 2011 and ended in September of last year, according to government data. However, only about 500,000 received legal documentation, while around 330,000 were repatriated. The program that ended on Monday was an extension of the one that ended last September. [Malaysia Gets Tough on Illegal Immigrants As Amnesty Program Expires. Jason Ng. The Wall Street Journal. January 21 2014]
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