It can be all too easy to visit a country and focus on the visible: how people dress, the price of food, the different social norms. But it’s what people do for a living, and the challenges that they face in earning that living, where you can really understand a country’s story.

Being a foreigner living in Malaysia for the last 8 months, it surprised me how little I actually knew about the workforce dynamics and labor history. This article is a brief attempt to correct that gap in my own knowledge, and perhaps highlight some interesting insights about Malaysia’s economy.

A Historical Primer on Malaysia’s Plural Society

Rich in natural resources, the region was under foreign occupation by the Portuguese, Dutch, and British traders who were extracting rubber and tin, and expanding into palm oil production. With increased migration from Chinese and Indian workers, the population of the native Malays went from 90% in the early 1800s to around 50% by 1931.

The Federation of Malaya achieved independence on August 31st, 1957. What is East Malaysia today — the territories of Sabah and Sarawak, on the island of Borneo — joined the union in 1963, and Singapore separated from Malaysia in 1965. This plural society consists of the 3 primary racial groups: Malay, Chinese, and Indian.

With Chinese workers more likely to live in the country’s urban areas, and native Malays relegated more to agricultural work, the wealth divide began to fuel racial tensions, culminating in the 1969 Race Riots in Kuala Lumpur, where nearly 200, mostly Chinese citizens, were killed.

This incident is key to understanding the development of Malaysia’s economic and political system, where race plays an explicit role. Through the 1971 New Economic Policy (NEP), the government stepped in and asserted a social engineering agenda to raise the economic status of the native bumiputera or “sons of the soil.” This precedent has led to mandates such as discounted home purchase prices, requirements for Malay board representation, land redistribution policies, and specialized training programs.

In addition, the government has institutionalized these social goals through the creation of government-linked companies (GLCs), in which the government can exert influence through ownership rights. Although the country has been divesting their ownership in the last decade, the assets of GLCs still accounted for 51% of Malaysia’s GDP in 2015.

These policies have made an impact in improving economic outcomes for Malays, but as illustrated in the graph below, some inequality still persists along racial lines.

Malaysian Labor Dynamics in 2020

To reduce the volatility of its largely export-driven economy, Malaysia set its sights on Vision 2020, with the ambition to achieve the living standards of industrialized nations by 2020. Initiatives were introduced to move Malaysia towards a knowledge economy, industrial diversification, entrepreneurship and technology development.

The nation is split on whether Vision 2020 was a success, with a few persistent problems — including dependence on foreign labor and a mismatch between education and jobs — continuing to challenge the national labor landscape.

Dependence on Foreign Labor

As Malaysia ramped up its manufacturing capabilities in the 1980s, especially in the electronics sector, it began to attract foreign workers from surrounding nations, such as Bangladesh, The Philippines, Cambodia, Laos, and Vietnam, in a process referred to as South-South migration. Workers were attracted by the availability of jobs, and the domestic manufacturing industry was motivated by the supply of cheap labor, enabling them to control costs.

Today, foreign workers are around 40% of the total workforce. The consequences include:

1. Downward pressure on the wages of domestic workers. Employers are less willing to increase salaries when there is an available supply of workers that have a lower reservation rate.
2. Concerns about dangerous conditions and forced labor. Foreign workers frequently arrive in the country through recruiters, who can charge high fees, leaving newly arrived workers in debt with little recourse on the positions they are expected to work.

Malaysia is attempting to stimulate demand for domestic labor through payment incentives and new regulatory policies limiting foreign visas.

Mismatch between Education and Available Jobs

To raise wages and living standards, the Malaysian government has been investing heavily in its education system. Enrollment in primary and secondary education have become nearly universal, with gross enrollment in tertiary education up from 7% in 1990 to 40% in 2017.

But the improvements in education have not necessarily translated to suitable jobs, with problems including:

1. Underutilization of time and skills available. A 2017 study found that skill-related underemployment has been increasing, with women experiencing greater disparities.
2. Youth unemployment. Half of Malaysia’s unemployed are aged 15–24, with 21% of unemployed age 25–29, with many concerned about ways to ease the school-to-work transition.
3. Brain drain. It’s estimated that a third of the Malaysian diaspora living abroad has a tertiary education, but these talents are reluctant to repatriate, citing unsuitable remuneration and unsuitable opportunities in Malaysia.
4. Growth in gig work. An increasing share of the workforce is now employed as a freelancer or gig worker. In a survey of e-hailing drivers, the majority cited that they could not find another stable job, regardless of their education level.

The Malaysian Human Resources Ministry has released its report on The future of talent in Malaysia 2035, with initiatives intended to address the skills gaps to drive future economic growth.

What’s Next for Malaysia

I’ve barely scratched the surface on the economic development of Malaysia. But by starting to understand the dynamics of its institutions and challenges of its workforce development, we have a better foundation to understand the region and how the future of work will evolve.

I hope you enjoyed this article. If you’re looking for more stories and research on the topic of work and employment, consider subscribing to Workable, my monthly newsletter on the changing labor force.