Jens Matthias Arnold
Ken Nibayashi
OECD Economic Surveys: Malaysia 2024
Abstract
Malaysia has achieved impressive declines in poverty over recent decades on the back of strong growth, but social benefits could play a more decisive role to alleviate poverty by targeting those most in need, while considering an expansion of social protection in the medium term. This would also help to address inequalities in incomes and opportunities. The labour market has been resilient, but significant skill mismatches limit people from seizing opportunities, and many workers are trapped in informal jobs. As a result, the economy is not making the best possible use of its human resources, hampering productivity improvements. Women still have lower employment rates, despite progress made in the past.
In many respects, Malaysia is a success story of social inclusion. Poverty has declined consistently to low levels over the last decades, and poverty rates have narrowed across different ethnic groups. Income inequality has also fallen but remains at high levels relative to peers. Labour force participation has trended upwards over the last two decades, although it remains some 26 percentage points lower among women than among men. Similarly, noticeable gender gaps in employment and wages continue to put women at a disadvantage. Labour informality affects more than one in four workers in Malaysia. These workers are highly vulnerable as they are generally not covered by any social insurance scheme and have no access to social security benefits like an old-age pensions.
Poverty rates have reached low levels following years of decline
Malaysia’s poverty rates are substantially lower than those of many peer economies. Using the international USD 6.85 at purchasing power parity (PPP) poverty line, typically used for upper middle-income countries, Malaysia’s absolute poverty rate was 2.3% in 2021, a low number that compares favourably with peers in the Southeast Asia region and beyond (Figure 2.1).
Poverty line of USD 6.85 PPP, 2023 or latest
Note: Poverty lines are defined in 2017 USD at purchasing power parity.
Source: World Bank.
The low poverty incidence reflects substantial declines in poverty over the last 50 years, amid strong growth that improved earnings opportunities, including for those at the lower end of the income distribution. The national poverty line is defined at the level of household income and the resulting national absolute poverty rate is depicted in Figure 2.2. While almost half of households were living in poverty in 1970, this rate had decreased to 0.4% in 2016, based on the official poverty line applied until that year.
A revised, and more demanding definition of the absolute poverty line applied as of 2016 shows continued declines in poverty until 2020, when the COVID-19 pandemic affected many households’ incomes. Following the pandemic-related increase in poverty, poverty fell again during the recovery, to reach 6.2% in 2022, according to the 2022 national poverty line of MYR 2 589 per household and month, which corresponded to around USD 13 per day in 2017 USD at purchasing power parity. This, however, is still slightly above the pre-pandemic level of 5.6% measured at the 2019 poverty line of MYR 2 589.
Nationwide poverty rates hide significant regional disparities (DOSM, 2023[1]). Some regions have a substantially higher incidence of poverty than the national average of 6.2%, especially the states of Sabah (19.7%), Kelantan (13.2%), Sarawak (10.8%). By contrast, states and federal regions around the capital Kuala Lumpur have poverty rates of less than half the national average. Differences in poverty across ethnic groups have declined steadily over the last two decades but remain visible, with poverty rates among ethnic Chinese amounting to 1.9%, while the Bumiputera ethnic group, defined as ethnic Malays, the Orang Asli of Peninsular Malaysia, and various indigenous peoples of East Malaysia, has a poverty rate of 7.9%. Malaysians of Indian (5.4%) and other ethnicities (6.5%) have poverty rates close to the nationwide average of 6.2%.
Absolute poverty rate, %
Source: Ministry of Econoomy, Jadual 8 Insiden kemiskinan mutlak mengikut kumpulan etnik ketua isi rumah, strata & negeri, Malaysia, 1970–2022.pdf (ekonomi.gov.my), World Bank.
Income inequality remains high in international comparison
While Malaysia has a low poverty rate, it also has relatively high income inequality. The Gini coefficient, which is one widely measure of income inequality, remains high relative to most peer countries (Figure 2.3, Panel A). Another measure of income inequality is the P90/P10 ratio which is the ratio of the upper bound value of the ninth decile (i.e. the 10% of people with highest income) to that of the first decile, measured on the basis of disposable incomes of the working-age population. According to this measure, Malaysia had very high-income inequalities in 2019 (Figure 2.3, Panel B).
Source: World Bank, OECD Income Distribution Database.
One way to reconcile the relatively low poverty rate with high inequality is to look at the income distribution around the poverty line. Median household disposable income amounted to MYR 5 413 in 2022 (USD 1 135), for an average household size of 3.8 persons. Household incomes are concentrated in the range below MYR 5 000 (USD 1 048), which account for almost half of Malaysian households, while the density of the household income distribution gets increasingly thinner for income classes above that, except for the broader income class of household incomes above MYR 15 000 (USD 3 144), which accounts for around 7% of Malaysian households (Figure 2.4).
The recent trajectory of inequality over time suggests that while the Gini coefficient has fallen from a high of 56 in 1976 to 40 by 2014, the decline has stalled since then and the Gini coefficient stood at 40 in 2022. The COVID-19 pandemic is likely to have a lasting impact on income inequality. To the extent that children from low-income households were precluded from education for longer than those from better socio-economic backgrounds, particularly related to difficulties in accessing remote education during the pandemic, COVID-19 may have exacerbated income inequalities even in the longer run. At the same time, the pandemic also had particularly negative effects on other vulnerable groups such as senior citizens, persons with disabilities and women.
Share of households according to household disposable income
Source: Household Income Survey Report 2022, Department of Statistics Malaysia (DOSM).
Taxes and transfers have relatively small redistributive effects
The strong inequalities hint at scope for public policies to step up efforts to address inequalities and provide better opportunities for all. While in the long run, strong education and training policies are probably the most effective lever to open up better earning opportunities and enhance material living standards, in the shorter run taxes, transfers, public services and subsidies can play an important role for reducing inequalities.
An analysis of the distributional impact of taxes and benefits on the basis of 2019 data suggests that fiscal policy, including most taxes, monetary transfers and subsidies, could do much more to alleviate income inequalities (World Bank, 2023[2]). Taxes, transfers and subsidies reduce the Gini coefficient by 2.4 points from 43.3 to 40.9 (Figure 2.5). This reduction in inequality is more than what Indonesia and Viet Nam achieve, but it falls short of the 3.5 points in inequality reduction that taxes and transfers achieve in Thailand, and is much less than in the average OECD country.
This analysis can be taken one step further by estimating the monetary value of in-kind services provided by the public sector, such as healthcare services and public education (World Bank, 2023[2]). This analysis is obviously sensitive to the assumptions made in the estimations of monetary values, in contrast to the previous exercise, but the results can nonetheless give interesting insights. When accounting for the equivalent monetary value of health and education benefits in addition to taxes, transfers and subsidies, Malaysia’s inequality reduction of 6.4 points is also below the 8.9 points of inequality reduction in Thailand, while countries like Brazil, Argentina and South Africa lessen inequality by around 10, 17 and 19 Gini points, respectively. On the whole, while Malaysia’s public policies do more to reduce income inequalities than in some regional comparators, other countries achieve significantly higher equalising effects of taxes, transfers and public services such as education and healthcare.
Reductions in the GINI coefficient through public policies, in points of the Gini
Note: The methodology applied here follows Lustig, N. (ed.) (2022). The Commitment to Equity Handbook 2nd edition: Estimating the Impact of Fiscal Policy on Inequality and Poverty, CEQ Institute at Tulane University and Brookings Institution Press, Washington, DC.
Source: Malaysia: World Bank (2023). Malaysia Economic Monitor Oct. 2023. Thailand: World Bank (2023). Thailand Public Spending and Revenue Assessment, May 2023, Viet Nam: World Bank (2016). Systematic Country Diagnostic Viet Nam, 2016, Other countries: Commitment to Equity Institute (2023). Standard Indicators, May 2023.
One feature that sets the stage for the equalising impact that Malaysia’s public sector can have is its small size, often related to narrow tax bases (Chapter 1). Tax revenues are low at 11.9% of GDP, even in a regional comparison, placing limits on the amount of redistribution that can be achieved.
Beyond their mere size, however, the composition and design of Malaysia’s social expenditures is not particularly progressive. While the equalising effect of social spending would generally be maximised by targeting benefits towards the bottom end of the income distribution, all parts of the income distribution are receiving surprisingly similar shares of public benefits in absolute values, even if relative to total income the benefits are more substantial for low-income earners (World Bank, 2023[2]). For households in the lower deciles of the income distribution this means that even if they may not pay much taxes, but they do not get a disproportionate share of the benefits either, so that overall, they do not reap strong net benefits from fiscal policy interventions (Figure 2.6).
Benefit levels are generally too low to make a real difference for reducing inequalities. Even for the lowest income decile, cash transfers only augment market incomes by around 13%, while in many other emerging market economies, cash transfers constitute the bulk of income for lowest-income households. In Brazil, for example, the bottom decile of the income distribution gets about 27% of its gross income from social benefits (SEAE, 2017[3]). Only in-kind services like public education and healthcare have a significant effect on the lower half of the income distribution when comparing the monetary value of these public services to their market incomes before public intervention (World Bank, 2023[2]). The incidence of subsidies is particularly unfavourable for those with low incomes: While the bottom decile appropriates about 6% of the total amount of subsidies spent, the top decile gets around 15%. Shifting resources from broad subsidies to well-targeted social assistance benefits, for example, would strongly improve the progressive distribution effect of public spending. Subsidies amounted to 3.5% of GDP in 2023, while social assistance benefits amounted to only 1% of GDP. Amid rising fuel prices in 2022, the value of subsidies exceeded total public health spending and reached 72% of public education expenditure.
Besides public expenditures, the design of taxes can also shape the income distribution. Given its low tax intake and high present and future spending pressures, Malaysia will have to mobilise additional tax revenues, and several avenues for this are discussed in Chapter 1. With respect to reducing income inequalities, lowering the basic allowance in personal income taxes and making larger parts of the middle class pay personal income taxes would be one avenue for future action. Starting higher marginal rates at lower incomes than at present would be another way to sharpen the redistributive effect, as would taxing personal capital income and a systematic review of tax expenditures, many of which tend to bring greater benefits to those with higher incomes.
Note: The analysis in the chart covers all indirect taxes, personal income taxes and social security contributions, and almost all social spending and subsidies.
Source: World Bank (2023) based on 2019 Household Income and Basic Amenities Survey (HIS/BA) and Household Expenditure Survey (HES)
Cash transfers could do more to support vulnerable and poor households
A large part of the fiscal outlay for social protection, around 1.1% of GDP in 2019, is spent on social safety nets for those in working age, which consist of a fragmented set of programmes managed by multiple agencies at both Federal and State Government levels. At the federal level alone, the number of federal social assistance and subsidy programmes reached 154 in 2023. These programmes often lead to overlaps, leakages and benefit duplication. Based on different databases managed by multiple agencies, verification and enforcement is a challenging task. Recent efforts by the Malaysian Social Protection Council MySPC have led to progress in establishing a mapping of programmes by different types of support across the federal and state government and organisations.
Social safety net programmes are characterised by weak targeting towards the poor, which can be traced back to weaknesses in the design of these programmes. As a result, 78% of Malaysians report receiving some sort of social assistance benefit.
At the same time, benefit levels are low and insufficient to ensure that the most vulnerable households are able meet minimum living standards. The largest flagship programme is the Sumbangan Tunai Rahmah (STR), formerly known as BSH, BPR and BR1M, provides cash handouts to around 8.2 million households. Benefit levels are largely determined by household incomes and do not take full account of the household size, which diverges from common practice in other countries and could be fully refocused on household income per capita instead. Households with incomes below MYR 2 500 (USD 525), approximately the per-household poverty line of MYR 2589 (USD 543), receive a monthly benefit of MYR 500 (USD 105), while households with incomes below MYR 5 000 (USD 1 050) receive between MYR 100 (USD 21) and MYR 300 (USD 63). Although the official objective of the programme is to support the bottom 40% of the income distribution, this population segment received only 12% of the total allocation in 2019 (BNM, 2020[4]). By contrast, around 11% of those in the bottom 40% of the income distribution do not get a benefit (World Bank, 2021[5]; BNM, 2020[4]).
Improving targeting will be crucial, while consolidating the different programmes to avoid overlaps and duplications. Simulations suggest that refocusing the current spending on social assistance benefits on the 40% poorest, based on a proxy means test in the absence of actual data on incomes, would raise the poverty reduction achieved by social assistance benefits from 0.9 percentage points to 2.0 percentage points, more than doubling the poverty reduction effect. An additional budget increase from 1.0% of GDP to 1.5% of GDP spent on social assistance would raise the poverty reduction effect further to 3.1 points (World Bank, 2023[2]).
Several countries with successful cash transfer programmes have combined the handout with incentives for low-income households to invest in human capital, by conditioning the handout on school attendance of children living in the household or regular medical visits and pre-natal care. These conditional cash transfers combine short-term poverty relief with efforts to lift families out of poverty in the longer run to reduce benefit dependence. Malaysia could consider introducing such conditionalities, and also reach out to STR beneficiaries offering training or employment counselling services.
Efforts to improve targeting will also hinge on unifying the databases or social registries used to deliver social protection benefits. Current transfers rely on three separate registries (eKasih, eBantuan and STR). Malaysia has a unique person identifier number on which the unification and creation of a single digital social registry could build. Many countries have made significant progress in creating single registries of poor and vulnerable households, including Brazil, Chile and the Philippines. Malaysia has recently started an initiative to construct a single administrative database called PADU (Pangkalan Data Utama), which encompasses individual and household data for citizens and permanent residents of Malaysia, consolidating different sources of government data. Building a single registry for social benefit delivery on the basis of PADU would be a promising way to improve targeting.
Moving towards a well-targeted and less fragmented social protection system would also require stronger coordination among different public-sector institutions. Giving a strong coordinating role for social protection policies to a single institution, for example the Internal Coordination Unit at the Prime Minister’s office, would help to reduce overlap and fragmentation.
Pension coverage is narrow and inadequate
Public pensions are one area of social protection with significant scope for building on past efforts to reduce inequalities. Despite the economic expansion in the past decades, access to and coverage of old-age retirement schemes in Malaysia remains low. Overall pension coverage with mandatory pension schemes is around one-third of the population aged 15 to 64, which is substantially lower than other countries (Figure 2.7). In other words, two-thirds of the people in that age group, including informal, self-employed or unemployed workers, are not covered by social insurance schemes.
Malaysia’s main contribution-based public pension system is the Employees Provident Fund (EPF), a defined contribution scheme responsible for collecting mandatory contributions from employees and employers in private companies and non-profit organizations. Contributions to individual EPF member accounts amount to 12-13% of wages for employers and 11% for employees, depending on wage levels. Around 49% of workers contribute to his system during some part of their working life, although transitions between formal and informal jobs imply that many do not contribute during their whole working history.
% of population aged 15 to 64
Source: OECD (2022), Pensions at a Glance Asia/Pacific 2022.
However, the fact that private sector employees with formal labour contracts are covered under the EPF does not mean they are well prepared for retirement. Early withdrawal opportunities exist below the age of 50 up to MYR 50 000 for education, home purchases or medication, then again between age of 50 and 54 of the same amount, before receiving their remaining balance as a lumpsum at the retirement age of 55. As a result, EPF balances are on average higher for members aged 45-49 than for those approaching the retirement age of 55 (EPF, 2023[6]). Among OECD countries, early pension withdrawals are typically limited to complementary occupational pension plans, like in Australia, France and Sweden at age 55 (OECD, 2021[7]).
Early withdrawals leave many contributors with insufficient saving balances upon reaching retirement age. The EPF recommends its members to have basic savings of at least MYR 240 000 at the age of 55. However, at end December 2022, the median savings of active members aged between 50 and 54 were only MYR 134 926, in part related to exceptional withdrawal opportunities during the COVID-19 pandemic. Two out of three active EPF contributors are projected to have insufficient retirement savings to meet a minimum pension of MYR 1 000 per month, approximately half the current poverty line (EPF, 2018[8]). Estimates based on a hypothetical conversion of balances into annuities suggest that over 40% of EPF contributors will be left with monthly benefits below MYR 420, which is close to the current level of non-contributory social assistance pensions (World Bank, 2021[5]).
Looking ahead, there are several avenues for the EPF to provide better pension benefits to its members. Now that the pandemic is over, early withdrawals should be limited so as to prioritise the accumulation of pension savings. Given that early withdrawals of the EPF balance are currently the only recourse that some households may have in emergency cases, limiting early withdrawals also calls for strengthening the social safety net and devising other insurance mechanisms for households hit by a severe shock, without jeopardising their old-age pension. Households across the world are typically short-sighted when it comes to financial planning and tend to underestimate their financial needs during retirement, which is one reason why mandatory pension schemes exist in the first place. This argument would also call for paying out EPF balances on a monthly basis or obliging households to convert them into annuities, as practised in the United Kingdom over many years.
The current pension withdrawal age of 55 is significantly below the current OECD average of 65 years (Figure 2.8). The remaining life expectancy at age 65 in Malaysia is 24.5 years, which is longer than the time span during which many people contribute to the EPF, given transitions between formal and informal employment (World Bank, 2021[5]). The mandatory retirement age in Malaysia was raised from 55 to 60 in 2013, but full EPF withdrawals are still allowed at the age of 55, and contributions from age 55 to 60 can be withdrawn at age 60. In most Asian countries, people retire later, including the Philippines (65), Singapore (62) and South Korea (65). Indeed, surveys suggest that most Malaysians continue to work much beyond the age of 55, and life expectancy rose to 75 in 2023. A gradual increase in the EPF withdrawal age will likely increase retirement savings, providing individuals with additional working years to contribute to their retirement savings. Estimates suggest that raising the withdrawal rate to the age of 65 could almost double balances that most EPF beneficiaries would receive upon retirement (World Bank, 2021[5]).
Civil servants, currently 5.6% of the working-age population, are covered by the Malaysian Public Sector Pension Scheme, a defined-benefit scheme that is managed by Kumpulan Wang Persaraan (KWAP). Its budget costs are expected to rise four-fold between 2022 and 2040. Already, the share of pension liabilities in total federal government operating expenditure has increased to 9.8% in 2019 from 6.5% in 2009 (BNM, 2023[9]). Discussions are ongoing about phasing out this scheme and enrolling newly hired civil servants in the EPF instead. Given how costly the civil servant scheme is, this is a necessary step that should go hand in hand with improvements in the EPF and in social assistance pensions. There is also a small scheme for armed forces personnel covering 0.6% of the working-age population (Hamid et al., 2021[10]).
Over 60% of the working-age population are not protected by either of the three mandatory schemes, reflecting those in informal jobs, contract-for-service workers and self-employed individuals (Hamid et al., 2021[10]). These can voluntarily become EPF members, and the government tops up their contributions, but the take-up of this voluntary scheme has been very low, as highlighted in the 2021 OECD Economic Survey of Malaysia (Table 2.1). Median savings of members who voluntarily register with the EPF but have not contributed for at least one year are merely 4% of the balances that the EPF recommends its members to have at 55.
Current and future refer to retiring 2020 and entering the labour market in 2020, respectively
Source: (OECD, 2022[11])
Social assistance pensions that do not rely on contributions are one way to fill the insufficient pension coverage from the EPF and other contributory systems. The fact that a large share of the population is excluded from social security benefits is a common feature across many emerging-market and developing economies, not only in Asia but also in Latin America and Africa. Many governments have complemented formal social security with non-contributory social assistance benefits over the last two decades, and this has also been the case in Malaysia.
A means-tested, tax-financed allowance for older individuals, known as Bantuan Warga Emas (BWE), covers around 4.2% of the total population aged over 60 with a benefit of MYR 500 (USD 105) per month. It current fiscal cost is approximately 0.04% of GDP (Hamid et al., 2021[10]). However, it covers only around 26% of elderly Malaysian with incomes in the bottom 20%. At present, social assistance pensions fail to provide a consistent minimum protection for poor and vulnerable households.
Against the background of significant labour informality and low participation rates in the EPF, the most realistic avenue towards achieving universal old-age pension coverage would probably be to build on the non-contributory pillar and expand it gradually towards universal coverage of all those aged 65 and above with no pension or income from other sources. This would allow Malaysia to essentially eradicate old-age poverty at an estimated fiscal cost of approximately 1.7% of GDP (Hamid et al., 2021[10]). For comparison, Malaysia spent 3.5% of GDP on subsidies in 2023, which are ineffective as a redistribution mechanism and counter environmental objectives (Chapter 3).
Malaysia’s labour market has shown resilience in the face of subsequent shocks, and the current unemployment rate of 3.4% has returned to pre-pandemic levels (Figure 2.9, Panel A). Recent declines in unemployment have been mostly driven by those below the age of 35, although in levels, unemployment among those aged 15-24 remains more than 3 times the national average. In a regional comparison, Malaysia’s unemployment rate takes a middle position, while the level of labour participation exceeds that of regional peers (Figure 2.9, Panels B and C). Labour force participation has been on an upward trend over the last two decades, with notable gains during 2022 and 2023, reaching a record high of 70.2% in December 2023. The gender gap in labour participation is substantial and one of the highest in the Southeast Asia region, while the gender gap with respect to unemployment is low (see below).
Source: DOSM
Many people work in occupations that do not match their skills
A deeper look into the structural features of Malaysia’s labour market, however, reveals significant challenges, which are partly related to the high youth unemployment mentioned above. The labour market is characterised by significant skills mismatch, meaning that workers work in jobs that do not require – and in which they cannot use all the skills and qualifications they have acquired. This is particularly the case for workers with tertiary education, 37% of whom are working in mid-skilled and low-skilled occupations (Figure 2.10). This skills mismatch increased during the pandemic and has remained high afterwards.
Skills mismatch is affects particularly recent university graduates, of which more than 40% work in jobs with low skills requirements. This may be related to a mismatch between what universities teach and what employers expect in terms of skills, according to survey data (Ma’rof and Nordin, 2023[12]) (Holidi and Seman, 2023[13]). At the same time as tertiary graduates work in jobs that require lower skills, businesses are facing difficulties in finding the skills they need. Better coordination between tertiary education providers and employers may be a first reasonable step to align curriculums better with labour market needs, especially as the structure of the economy and skills expectations change. The current situation where young people invest in acquiring skills that are ultimately not appreciated as much as they could be by their future employers appears inefficient and may be holding back productivity growth, besides risking to reduce the incentives for tertiary education in the longer run.
Note: Skills mismatch is measured as those with tertiary education working in semi-skilled and low-skilled occupations. The skills mismatch rate is measured as skills mismatch relative to employment.
Source: DOSM
Coordinating a better match may also be facilitated by gathering information on skills requirements by industries, for example by incorporating information on skills requirements into the Malaysia Standard Classification of Occupations (MASCO) to establish a comprehensive and dynamic national skills framework, which could be used as the foundation for the development of the national skills registry. The Malaysia National Skills Registry (MyNSR) launched its pilot project in 2023, covering 68 occupations. This could be expanded to cover more of the 147 minor occupation groups and 6 630 minor unit occupation groups in MASCO (Ministry of Human Resources (MoHR), 2020[14]).
Technical and Vocational Education and Training (TVET) institutions also play a vital role in developing a wide range of high-level skills for the labour market. While on average TVET graduates receive lower starting salaries than university graduates, this does not apply to those with higher qualifications among them (Rahim and Suhaimi, 2022[15]). The effectiveness of TVET hinges crucially on its ability to deliver courses and provide skills that match firms’ needs and are directly applicable on the workplace. Malaysia’s TVET system could benefit from a reorganisation and streamlining, given that currently, ten ministries oversee various TVET programmes (Shamsunahar, Harith and Mohamad, 2023[16]). Both public agencies and private organisations provide TVET and in the absence of a single rating system for TVET programmes or a comprehensive register of programmes offered, different certifications and accreditations are often confusing, reflecting an overall lack of direction of Malaysia’s TVET strategy. Some of the factors behind the observed skills mismatch may also have their roots earlier on in education, where Malaysia’s performance is weaker than that of some regional peers (Box 2.1).
Adult or lifelong learning is also essential to support the career progression of individuals and allow them to move into more qualified jobs. Lifelong learning programmes attract interest, as 61% of surveyed workers in indicated an interest in upgrading their technical skills, and a similar fraction was interested in developing soft skills (Kamarulbahri and Abdullah, 2023[17]). However, Malaysia’s lifelong learning system could benefit from better coordination and monitoring at the national level. Overlaps between these programmes should be avoided to maximise learning outcomes and make better use of public support for such training. Expanding financial support for such programmes may have significant benefits for addressing skills mismatches and skill shortages. The recognition of workplace training courses could be better integrated into the Malaysian qualifications framework, as this could strengthen incentives for workers to engage in training. Wider use of lifelong learning courses would also provide substantial benefits to employers who report difficulties in finding the necessary workforce skills. In Malaysia, only 36% of employers provided training and development for their employees (Kamarulbahri and Abdullah, 2023[17]). Especially small- and medium-sized enterprises could become more involved in lifelong learning as one avenue for raising their productivity and giving their workers better opportunities.
Malaysia’s education system has made significant progress over the last decades, supported by a National Education Blueprint (2013-2025). Public education spending averaged 4.4% of GDP over 2013-2022, higher than in regional peers and close to the OECD average of 5.0%. Access to education has improved and enrolment rates have essentially reached 100% from primary education onwards. Public education has played a significant role in this, as 95% of students attend primary schools run by the Ministry of Education (World Bank, 2024[18]). However, learning outcomes reveal scope for improvement. Malaysia’s performance in the 2022 OECD’s Programme for International Student Assessment (PISA) exceeded neighbouring Indonesia and the Philippines, but weaker than in other regional peers such as Viet Nam; Hong Kong, China; Chinese Taipei and top performer Singapore, and also significantly below the OECD (Figure 2.11). As in many countries, Malaysia’s average 2022 PISA results below those of 2018, but while Malaysia moved up to the middle third of countries in 2018, it fell back into the bottom third in 2022 (OECD, 2023[19]; World Bank, 2024[18]).
Source: OECD PISA 2022 database.
Some of the roots of these performance gaps may be found even before children start primary school, as weaknesses in early childhood are likely to hamper skills development later on. Almost a quarter of children lack school readiness skills upon entering primary schools, hampering their learning progress later on (World Bank, 2024[18]). This is particularly the case for children from low-income households, among which over 35% of first graders lack these skills. This strengthens the case for further investments into access and quality of early childhood education, including through offering free public preschool education from earlier years of age, improving teacher training and establishing more systematic evaluations of education outcomes (World Bank, 2024[18]).
Wage growth has been slow but broadly in line with productivity
Besides skills mismatch, low wage growth has been a traditional feature of the Malaysian labour market. Median wages have grown broadly in line with labour productivity (Figure 2.12, Panel A). Compared with other countries, Malaysia’s real wage growth has been one of the lowest (Figure 2.12, Panel B). Slow wage growth has particularly affected young university graduates, of whom around half earned less than MYR 1500 (USD 320) in their first year of employment during 2019 and 2020, relative to a minimum wage of MYR 1200 in those years (Rahim and Suhaimi, 2022[20]).
Source: DOSM, ILO Global Wage Report Data.
Over a longer horizon, developments in labour productivity are a useful benchmark for judging the pace of wage growth as only productivity improvements can ensure scope for sustainable wage increases without jeopardising competitiveness or the employment prospects of workers. Focusing on Malaysia’s manufacturing sector, Figure 2.13 suggests that wages moved in line with productivity between 2016 and 2018, then outpaced productivity until approximately early 2022. Since 2022, manufacturing wages in Malaysia have lagged behind productivity, including due to a notable decline in wages during 2023. At the same time, such temporary divergences are not unusual, and over a longer horizon of the last 8 years, wages and productivity seem to have broadly moved in tandem.
Note: Labour productivity is deflated by output deflators, while manufacturing wages are deflated using the consumer price index. Based on quarterly data, using rolling four-quarter averages.
Source: Malaysia Department of Statistics, CEIC.
Malaysia established a monthly minimum wage in 2014, which reached MYR 1500 or USD 320 in 2022, after several gradual increases, and is set for revision in 2024. The median monthly wage in 2022 was MYR 2424 (USD 543), so the minimum amounted to 62% of the median wage. Evidence suggests that the minimum wage has been broadly successful in boosting wage growth for low-wage workers, although the data underlying this analysis excludes population groups with weaker attachment to the labour market such as domestic workers, part-time and temporary workers, and foreign workers (Muthusamy, Khalidi and Rahim, 2023[21]). However, this conclusion may not continue to hold in the future, given that the current minimum wage is high in international comparison, when compared to median wages (Figure 2.14).
Minimum wages relative to median wage, 2022
Source: OECD Employment and Labour Market Statistics, https://doi.org/10.1787/lfs-data-en, and Malaysia Department of Statistics.
The Mid-term Review of the Twelfth Malaysia Plan proposed introducing a “progressive wage model” to achieve better living standards and reduce brain drain in the long run (Ministry of Economy, 2023[22]). A progressive wage model is a type of job-specific minimum wage where salaries rise based on training and strategies to boost productivity. It is used primarily in jobs such as retail and maintenance sectors where salaries tend to rise slowly because productivity is difficult to increase. This system, which originated in Singapore, is based on the principle that wages should increase if workers enhance their skills and hence increase their productivity.
In Malaysia, the proposed scheme would be voluntary and provide incentives for training and raising productivity. Essentially, the state would partially compensate firms for raising the wages of low-wage employees who participated in training. A pilot project involving 1 000 companies in specified sectors is set to begin in June 2024, and the objective is to boost the median wage by 3.8% between 2023 and 2025. It would be available on a first-come-first- served basis, with an expected fiscal cost of 0.1% to 0.3% of GDP, leading to larger-scale implementation in 2025 (Williams, 2023[23]). One potential upside of the programme is that it may trigger an analysis of training needs, with a focus on semi-skilled entry level jobs.
If the progressive wage model is followed through, it should be subjected to regular impact evaluations to determine whether it is successful in achieving policy objectives. There are several potential challenges involved in this strategy. First, it would be difficult to verify that firms have, in fact, raised employee wages under the progressive wage model. It has been difficult in Malaysia to enforce minimum wages or to ensure that companies meet registration and licensing requirements. Second, the policy could encourage firms to rely on subsidies rather than focusing on organisational improvements or reducing economic slack and thus may not affect productivity much. Third, it could be expensive, while the benefits are uncertain. Another approach, which would not require government outlays, would be to require companies participating in government supply chains to verify that they have implemented a progressive wage system (Williams, 2023[24]).
Even without direct interference in the wage-setting process, there are several avenues for public policies to affect the process indirectly, for example by strengthening the position of workers and unions in the wage bargaining process. One way to rebalance bargaining power is to enhance wage transparency. Mandatory disclosures of information about wages could strengthen the relative bargaining power of workers. This would allow workers to seek new opportunities if they think that their pay is low compared to market wages. Wage transparency has a number of additional advantages, such as promoting fairness and equity by revealing wage disparities based on gender or ethnicity. In addition, it can motivate workers to excel, thereby raising productivity. Implementing a Wage Transparency Act would empower workers to make informed decisions about salary offers, strengthen the bargaining position of workers and enhance the efficiency of the wage-setting process.
In addition, measures to enhance the role of collective bargaining may also help to give workers more voice. Malaysia stands out for a low collective bargaining coverage, defined as the proportion of workers covered by collective wage agreements in force. Collective bargaining coverage of 0.4% in 2018 was well below the OECD average of 32.1% and is the lowest among comparable countries (Figure 2.15). Oddly, collective bargaining coverage is much lower than union membership of 8.7% in 2020, suggesting that the role of unions in promoting collective bargaining agreements could be strengthened.
Collective bargaining gives employers and workers a more equal voice in negotiations through the process of dialogue. It can also contribute to sound industrial relations and help prevent costly labour disputes (Hayter, 2011[25]). Collective bargaining plays a key role in the labour market in many OECD countries and tends to generate wage premiums for workers covered by such agreements. Moreover, they tend to improve the work environment by fostering lower work intensity, more training options and better prospects for career advancement (OECD, 2018[26]). Collective bargaining also fosters social partners’ engagement in occupational safety and health, working time, management practices, and the prevention of workplace intimidation and discrimination (OECD, 2019[27]).
Proportion of workers covered by collective wage agreements, 2018 or 2017
Source: OECD stats and ILO database.
The government could promote collective bargaining by setting the right framework conditions, including supporting the organisation of unions and employer’s associations as well as mechanisms for arbitration, mediation and conciliation. Public procurement could be leveraged to create incentives for firms to respect the terms of collective wage agreements where these exist. Upon South Africa’s transition to democracy, for example, a new labour relations act included the promotion of collective bargaining and the effective resolution of labour disputes (ILO, 2011[28]). Malaysia’s adhesion to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2022 required revision of labour laws, including the 1959 Trade Unions Act, which may enhance workers’ bargaining power in the future.
Tackling informality requires policy action on several fronts
Labour informality is a multi-faceted challenge that has many causes and consequences. Formal workers are typically defined as those that have access to at least one social insurance scheme or employment benefit, which are directly tied to contributions and/or a declared employer-employee relationship (World Bank, 2024[29]). Self-employed workers can be formal if they register their business activity and contribute to social insurance schemes. Many, however, choose not to contribute, including workers in the gig economy facilitated through digital platforms. Malaysia’s share of informal work falls between advanced countries, where informal workers account for an average of 14% of the labour force, and emerging market and developing economies, where the average is 42% (Ohnsorge and Shu, 2021[30]).
Based on this definition 26.8% of total employment in Malaysia was informal in 2022, down from 38.2% in 2009 (World Bank, 2024[29]). If the agriculture sector is excluded, the share drops to 23.3%. The rate of informal employment is higher among older persons – 50% of workers aged 55-64 are informal; those with less education – 83% do not have tertiary education and skills; and among those with low skills – only 18% are classified as high-skilled, compared to 28% of formal employment. Informal workers are more concentrated at the bottom of the income distribution, as 80% of those in the bottom income decile are informal compared to 14% in the top. Hourly wages for formal workers are 17% higher for men and 41% for women, relative to informal workers. Informal workers are also more likely to be in high-risk jobs. At the same time, informal workers put in fewer hours on average than formal workers. In addition, more than a third of informal workers work from home.
The distinction between formality and informality also applies to firms. Formal firms and entrepreneurs are those that have registered their business with the Companies Commission of Malaysia and complied with other licensing and permit requirements. Not all employees of formal firms are necessarily formal workers, while all employees of informal firms - mostly small, unregistered entities - are typically informal. Scaling up of micro, small and medium enterprises (MSMEs), as discussed in Chapter 4, can often lift these firms and their workers out of informality, typically raising their productivity and the prospects for better wages.
Informality is unlikely to disappear in the short run or be solved by economic growth alone, and tackling it calls for policy action along several dimensions. The 2023 Formalisation Programme for Informal Enterprises (Ministry of Entrepreneur and Cooperatives Development (MECD), 2023[31]) includes strategies to enhance incentives for firms and entrepreneurs to formalise the status of workers while improving the enforcement of laws governing business operations. However, while enforcement clearly has a role to play, too heavy-handed enforcement risks destroying jobs and businesses instead of bringing them into the formal sector. In addition to enforcement, improving incentives for formal job creation can play a crucial role.
Improving incentives for formalisation can entail several dimensions. One dimension relates to the rigid labour regulations governing formal employer-employee relationships. For example, the maximum work week is set at 45 hours, recently reduced from 48, which may still be more than what some workers wish to work, especially given that informal workers tend to work fewer hours. Reducing these weekly working hours, or at least providing the option for workers to work fewer hours, may be one way to entice some workers to join the formal sector.
Scope for strengthening formalisation incentives also exists with respect to non-wage labour costs, which can make it more convenient for business to hire informally rather than creating formal jobs, especially when the odds of getting caught by authorities are low. Non-wage labour costs include the mandatory 25% of wages in contributions to the social security fund EPF, which are paid jointly by businesses and workers. Workers may also feel inclined not to pay these contributions, given that EPF currently fails to provide sufficient retirement benefits for many of them.
One reform to consider would be to exempt low salaries in the vicinity of the minimum wage from mandatory contributions to the EPF, which currently fails to provide adequate protection against old-age poverty for most low-income workers in any case. Instead, these workers could be covered by tax-financed non-contributory pension benefits, which would have to be expanded significantly. This is not the only possible approach but it may be the more promising avenue than the EPF for many low-income earners and would strengthen the redistributive effect of social protection. Building on the Bantuan Warga Emas (BWE) as a basic universal but means-tested first pillar of the pension system for low-income earners may be one way to fight old-age poverty while reducing non-wage labour costs and promoting formalisation. Basic tax-financed or low-contribution benefits could also make it easier to provide protections for an increasing number of platform workers.
In parallel, improving and strengthening the EPF would allow turning it into a second, savings-based pension pillar for those with higher capacity to contribute, whose aim would be to provide old-age pensions that constitute a reasonable fraction of working-life incomes. Similar multi-tier social protection setups are currently under discussion in several Latin American countries (Levy and Cruces, 2021[32]; Tuesta and Bhardwaj, 2023[33]), and have also been recommended in OECD Economic Surveys on Colombia, Chile, Peru and Thailand (OECD, 2022[34]; OECD, 2022[35]; OECD, 2023[36]; OECD, 2023[37]).
A more central role of this tax-financed basic benefit tier, focused on poverty reduction, for fighting old-age poverty would hinge on the ability to raise more tax revenues (Chapter 1). While this may be politically challenging, it could still be an avenue worth pursuing. A 2012 reform in Colombia that reduced some social contributions shows that reducing non-wage labour costs can help to reduce informality. In the aftermath of the reform, labour informality declined visibly. Available impact evaluations suggest that the reform led to a reduction in the informality rate of several percentage points (Kugler, Kugler and Prada, 2017[38]) (Morales and Medina, 2017[39]) (Fernández and Villar, 2017[40]) (Bernal et al., 2017[41]).
The labour market is characterised by significant gender gaps, particularly with respect to employment and labour force participation. The gender employment gap is high in a regional context and has been widening in the last five years (Figure 2.16, Panel A). Labour participation is more than 26 percentage points higher among men than among women, one of the largest gaps in the region. This gap has widened further since 2018, reflecting rising participation since 2020 while female participation rates have been hovering around 56% (Figure 2.16, Panel B).
Source: World Bank, DOSM.
Gender differences in the labour market cannot be explained by differences in education. Gross enrolment rates for women at the secondary and tertiary levels have been consistently higher than those of men, suggesting that there is no dearth of skilled women in the labour market (Figure 2.17). Labour statistics show that, among employees with tertiary education, the share of women was about 50%.
Source: World bank.
The stronger performance of women in education is likely to remain for some time. Results of OECD’s Programme for International Student Assessment (PISA) suggests that girls outperformed boys in many aspects. Girls scored 10 score points higher than boys in mathematics, 31 score points in reading and 13 score points in science. These differences were among the highest in the region (Figure 2.18, Panel A). Furthermore, the shares of low performers (students with score points below level 2) in all areas were all larger among boys than girls (Figure 2.18, Panel B).
Note: Gender differences are defined as the outcomes of girls minus the outcomes of boys.
Source: OECD PISA 2022 Results.
Policies to reduce gender gaps and improve equal opportunities
One of the main barriers for women with respect to participation in economic activities is the heavy burden of unpaid care work, such as childcare, care for elderly relatives, or domestic work. Women spend 3.2 times longer hours than men on unpaid care work compared to an OECD average of 2.1 times longer (Figure 2.19). This burden reduces the time they can devote to economic activities and hampers their productivity in the formal labour market. A more equal sharing of this burden between men and women would be one way to encourage and enable more women to join the labour force.
The availability of affordable childcare services is still limited in Malaysia, and this is one obstacle to a further increase of female labour force participation (Schmillen et al., 2019[42]). Empirical evidence suggests that the lack of unpaid childcare reduces the hours worked by women (Choong et al., 2019[43]), while the presence of grandparents in the household raises the probability of a woman participating in the labour market (Salleh and Mansor, 2022[44]). In an expert survey conducted by the World Bank in 2024, 60% of respondents considered that affordable and quality childcare services are only available to half of women or less, suggesting significant bottlenecks (World Bank, 2024[45]).
In Malaysia, most providers of care for children aged 0 to 4 are private. The largest public provider is the Community Development Department under the Ministry of Rural Development, which currently operates 499 childcare centres, out of a total of 5420 in 2021. A means-tested childcare fee subsidy is available for parents of children aged 2 to 4. In addition, a tax deduction for childcare fees for children below the age of 6 is available, but only to households who are subject to personal income taxes, which excludes low-income households (see chapter 1). Tax-incentive schemes also encourage employers to provide on-site childcare facilities and support.
Further efforts will be needed to improve access to affordable childcare, including for low-income mothers and those working in small or informal firms that cannot provide on-site childcare facilities. For this group, subsidies or direct public provision are likely to be the most effective ways forward, as tax deductions and employer-provided childcare will not be able to reach many low-income mothers. Evidence suggests that paternity leave is one way to engage fathers more in unpaid work within their family and can lead to improvements in the communication and closeness between children and fathers (OECD, 2023[46]). This in turn has shown positive effects on mothers’ employment rates.
Under the amended Employment Act of 2023, paid paternity leave of 7 days was introduced for the first time in 2023. In parallel, the minimum duration of maternity leave was increased from 8.5 weeks to 14 weeks. This also makes it easier for women to reconcile employment with motherhood and is consistent with recommendations in past OECD Economic Surveys of Malaysia (OECD, 2019[47]).
Malaysia has room to build on this recent progress, as the lengths of maternity and paternity leaves are still below most OECD countries. Across the OECD, statutory rights to paid maternity leave are provided with an average length of 18.5 weeks as of April 2022. The average length of statutory rights to paid paternity is 2.3 weeks (OECD, 2023[46]). In addition to paid leave entitlements for fathers and mothers directly around childbirth, many OECD countries also grant parents paid parental leave and/or home-care leave, which allows fathers and/or mothers to take longer periods of paid employment-protected leave to care for their children during their first years of life (OECD, 2023[46]). For example, Japan has a generous shared parental leave policy of up to 12 months, which is structured to maximise flexibility by allowing leave to be taken in four instalments. Similar provisions could also be considered in Malaysia.
Ensuring that policies generate the right incentives for women to work is another unfinished agenda. Childcare assistance benefits of around MYR 180 per child are available only to families with an income per capita of less than MYR 800, compared to a minimum wage of MYR 1 500. While this low-income threshold improves the targeting of the benefit, which is in principle desirable in light of limited fiscal resources, it may discourage some women from working. There may be advantages for female labour participation from raising this threshold. Simulation results suggest that a conditional care allowance of MYR 100 could increase female labour participation from 54.4% to 56.0% and stimulate real GDP growth by 0.4% (Khazanah Research Institute, 2019[48]).
Female-to-male ratio of average time spent on unpaid domestic, care and volunteer work, 2023 or 2019
Note: 1. 2019 data.
1. The ratio shows the number of hours women spent on unpaid domestic, care and volunteer work within a day over the number of hours men spent on unpaid domestic, care and volunteer work within a day.
Source: OECD Gender, Institutions and Development Database (GID-DB), 2023 and 2019
Strengthening the incentives for women to seek employment also implies improving their prospects of obtaining high quality and well-paid jobs when they do join the labour force. Scope for further improvements in this area exists along several dimensions.
Women are typically more affected by the labour market skills mismatch challenges described above. As a result, addressing skills mismatch also has a gender dimension. In 2023, 43% of women with tertiary education were not working in occupations that match their educational backgrounds, compared with 33% for male counterparts. To some extent, the skills mismatch is related to labour informality, which is higher among women. In that light, efforts to bring more workers and firms into the formal economy would also help to improve opportunities for women (OECD, 2023[49]).
Strong action against gender pay discrimination can help to ensure equal pay for similar work. One approach adopted by many OECD countries is mandatory gender pay gap reporting and equal pay auditing requirements for private sector firms. Over half of OECD countries (21 of 38) now require private sector employers to report pre-defined gender-disaggregated pay information to stakeholders like workers, workers’ representatives, the government, and/or the public (OECD, 2023[50]).
Inequalities of opportunity with respect to career progression may discourage women from joining the labour market. Women are particularly underrepresented in management positions. While they represent 39% of the total employed persons, only 25% of workers in management positions are women (Figure 2.20, Panel A). Only 33% of Malaysian companies are headed by women (OECD, 2024[51]). This is particularly hard to reconcile with the higher average educational attainments of women. Even when women make it into management positions, they earn only 81% of their male counterparts (Figure 2.20, Panel B).
Recent trends in corporate leadership are encouraging, however. The share of women on boards of public listed companies on the Bursa Malaysia stock exchange has been rising steadily and is higher among top 100 companies (Figure 2.21, Panel A). This share is higher than elsewhere in Asia, and not too far from some European and North American markets (Figure 2.21, Panel B).
Source: DOSM.
Note: In Panel A, the 2024 figure refers to 1 January 2024. In Panel B, USA1 is New York Stock Exchange (NYSE) and USA2 is Nasdaq. CHN1 is Shenzhen Stock Exchange (SZSE) and CHN2 is Shanghai Stock Exchange.
Source: Securities Commission Malaysia, United Nations Sustainable Stock Exchanges (SSE).
Formal procedures to prevent gender discrimination in the labour market will also have a role to play. The amended Employment Act includes a provision for discrimination disputes, which is a first welcome step against gender discrimination, although it is a relatively weak provision at present. The amendment provides for a mechanism to investigate and settle such disputes at the discretion of labour authorities, and it remains to be seen to what extent this is an effective dispute settlement mechanism. Regular impact evaluations of this amendment could guide future refinements, if needed. Furthermore, opening such disputes would be facilitated if the law defined what is meant by “discrimination” and made it an offence, in addition to defining specific remedies in the case of conviction. Discrimination can only be investigated during a labour relationship, and not with respect to the hiring process. Strengthening the provisions that outlaw gender discrimination and improving the scope for prosecuting discriminatory practices would further improve the economic opportunities for women who decide to join the labour market.
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