[2738] The growth of the Malaysian labor force explained, maybe

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:

20140611 Msian 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.[1] 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.

Malaysia demographic projection by Department of Stastistics

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.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

[1] — 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]

Economics Society

[2649] Malaysian demographics in 2040

Last week, the Department of Statistics released its projection of Malaysian population in 2040.[1] The Department projects that there will be 39 million persons living in Malaysia by 2040, of which 93% of them will be Malaysians. In 2010, there were 29 million persons living in the country with 92% of them being Malaysians. The median age is projected to be about 10 years older than what it is right now. In 2010, the median was 26 years old.

The projection has two population booms in it (possibly three; whether the third is part of the second or distinct by itself is up for debate). The first is the current generation either in universities or has just entered the labor market. The next boom is expected to happen between the next five and ten years or so as the earlier boomers start their own families and do what rabbits do (chart from the Department of Statistics):

Some rights reserved. Creative Commons 3.0. Hafiz Noor Shams

If the assumptions of the projection are taken to heart, Malaysia’s economic growth from now till 2040 might set to be strong if nothing disastrous like wars or institutional degradation happens. Growth may begin to slow down 20 years later in 2060 when the first Malaysian baby boomers enter retirement. The real demographic trouble may start in 2080 when the second boomers enter retirement.

The projection states that the Malaysian society will become an aging society by 2021 but this is merely definitional problem as the projected median age in 2021 is around 30 years old. That age is still well inside the productive age, and probably close to the optimal age/experience to productivity, wherever that point is.

It is possible that the second boomers may bring about a third boomers (there is a third local peak for 5-9 cohorts in 2040) but the fertility rate is projected to be pretty low by the time the second boomers reach their 20s, which is expected to happen in 2040s. Fertility rate in 2040 Malaysia is expected to match that of an advanced country.

The Malays and the other Bumiputras are expected to experience an annual population growth rate of less than one. The Chinese and Indians lose interest in making babies and only the mysterious “Others” will have an amazing rabbit-like rate of 2%.

So, it appears, 40 million to 50 million (or 60 million but anything above 60 million sounds like a very unlikely scenario) people may be the maximum number for Malaysia in this century.

The projection however may be conservative. The growth rate of non-citizens is low and given how ASEAN is set to integrate even further and on top of that, more globalization, one would expect more non-citizens.

But anyway, based on the population projection by the Department of Statistics, the population dividend Malaysia is enjoying is set to last for a very long time. It will probably outlast my generation, which is part of the first boom.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — [Population Projection, Malaysia 2010-2040. Department of Statistics. January 18 2013]