Malaysia, a middle-income state, has transformed itself since the 1970s from a manufacturer of natural stuffs into an emerging multi-sector economic system. The Tenth Malaysian Plan to impel the state towards going a high-income and high-productivity economic system. Gross national income per capita must increase to RM38, 850 ( USD 12,140 ) by 2015. However, Malaysia still stuck in a in-between income trap. Although Malaysia ‘s income flight continues to exhibit a gradual upward tendency, it remains far below the ‘high income ‘ boundary. Several states have been able to do the passage to the ‘high income ‘ position, including Korea, Poland, Slovakia, and the Czech Republic. In Asia, Korea broke out of the in-between income trap after 1992 but regressed in the wake of the Asiatic fiscal crisis.

Malaysia ‘s GNP per capita is about USD7,600 yearly or RM2,200 a month. Inequality remains high, even with a decrease in the Gini coefficient from 50 % in 1970s. Presently about 4 % of all Malaysians and over 7 % of rural Malaysians live below the poorness line. The poorest 40 % of Malayan families earn incomes, on norm, hardly one-seventh that of the richest 20 % . For 1000000s of ordinary Malaysians, life is far worse than even the USD7, 600 one-year GNP figure suggests. 10 old ages before 2020, these figures provide a sobering reminder of how far Malaysia still has to travel before it becomes an advanced, high income economic system ( NEM, 2010 ) .

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Malaysia ‘s economic engine is decelerating. Whether in the future economic growing will better for Malaysia depends on policy actions to be undertaken now. Economic growing is the addition in value of the goods and services produced by an economic system. It is conventionally measured as the per centum rate of addition in existent gross domestic merchandise, or GDP. Since 1997 it has steadily fallen, making merely 20 % of GDP right before 2008 planetary fiscal crisis. In the mid 1990s, in the runup to the 1997 Asiatic fiscal crisis Malaysia ‘s GDP grew at an mean rate greater than 9 % yearly. Investing was 40 % of GDP in Malaysia in the mid 1990s. Growth rates have fallen to an norm of 5.5 % from 2000 to 2008.

Harmonizing Malaysia Productivity Corporation ( MPC ) , the Malayan economic system recovered strongly in 4th one-fourth 2009 with a GDP growing of 4.5 % . This was a applaudable accomplishment after the economic system experienced negative growing for the last three quarters. In 2009, GDP contracted by 1.7 % , a smaller contraction than the earlier prognosis driven by betterment in domestic demand, stronger ingestion and higher populace sector disbursement. The economic system is expected to go on its growing impulse in 2010 with GDP turning by more than 5.0 % . Among Asiatic states, China posted highest productiveness growing of 8.4 % followed by India ( 4.8 % ) and Indonesia ( 2.6 % ) . However, negative productiveness growing were registered by other Asiatic states viz. the Philippines ( -2.00 % ) , Taiwan ( -2.0 % ) , Hong Kong ( -2.9 % ) , Thailand ( -3.7 % ) and Singapore ( -4.1 % ) .

Malaysia ‘s productiveness growing was better than some of the Organization for Economic Cooperation Development ( OECD ) economic systems among which Sweden ( -2.5 % ) , United Kingdom ( -2.7 % ) , Japan ( -3.6 % ) , Italy ( -3.9 % ) , Finland ( -4.0 % ) and Germany ( -4.8 % ) . However, the USA, Ireland and Korea registered positive growing at 1.1 % , 0.8 % and 0.6 % severally. Within Asiatic states, Malaysia ‘s productiveness degree ( USD12,793 ) was higher than Thailand ( USD4,596 ) , China ( USD3,734 ) , the Philippines ( USD3,192 ) , Indonesia ( USD2,471 ) and India ( USD2,051 ) .

In 2009, the fabrication sector productiveness declined by 6.3 % which was really much affected by the planetary economic lag but the highest among selected states. Among the developed economic systems, the Republic of Korea, United States, Norway, Belgium and United Kingdom registered an addition in productiveness runing from 0.3 % to 1.2 % . Productivity decreased in 12 of the 18 economic systems with Singapore entering the highest productiveness diminution of 6.6 % , followed by Denmark at 4.5 % .

The fabrication sector recorded a lower GDP growing of 9.3 % in 2009 while its fabrication index grew marginally at 0.9 % . Entire trade for 2009 was RM770.6 billion while export declined by 11.4 % to RM411.4 billion. Employment in the fabrication sector increased by 2.2 % to 1,363,801 workers and the electrical & A ; electronic industry remained as the largest employer lending to 32.8 % or 453,495 workers of entire fabricating employment in 2009. Value added in the fabrication sector registered a negative growing of 4.3 % to RM110.0 billion as compared with RM114.9 billion in 2008. The bead in value added was mostly due to worsen in chemicals & A ; chemical merchandises of 18.1 % , Fe & A ; steel of 13.2 % and conveyance equipment of 6.9 % .

Before the Asiatic fiscal crisis, Malaysia was taking the part in labour productiveness growing. The weak productiveness growing highlights the blunt world that Malaysia still lacks creativeness and invention as shown in dead part by entire factor productiveness and instruction to end product growing. The human capital state of affairs in Malaysia is making a critical phase. The rate of outward migration of skilled Malaysians is lifting quickly. Just as serious is the fact that the figure of exiles working in the state has been steadily worsening. At the same clip, the instruction system is non bring forthing the accomplishments demanded by houses.

Malaya was the lone economic system capable of prolonging its labor cost fight as unit labour cost decreased by 4.7 % . Other economic systems experienced a decrease in unit labor cost runing from 0.8 % to 8.3 % . The highest unit labour cost of 8.3 % was recorded by Denmark, followed by Singapore at 7.5 % and Sweden at 6.9 % .

In a high income economic system the demand for cognition workers will increase. Educational reforms will be a critical demand for inclusive growing. Human capital policies must be given top precedence, as they will be important in doing more rapid inroads towards cut downing income inequality. Labour market imperfectnesss, including pay and employment favoritism, will hold to be rectified. Fragmented and segmented labour markets must be made more incorporate.

The human capital state of affairs in Malaysia is non bettering. Alternatively, we are losing the skilled endowment needed to drive future growing. The skill degree of the labour force is besides linked to instruction. The portion of labour force with third instruction for advanced states is normally high, for illustration in Korea, people with post-secondary instruction greatly exceed higher proportions in Singapore, Taiwan and Korea.

Low accomplishments occupations equal low rewards. Skilled occupations are most frequently synonymous with higher rewards. In Malaysia, non plenty high pay occupations have been created and the portion of skilled labor has declined across industries. In many cases, employers do non pay for accomplishments, trusting alternatively on a readily available pool of unskilled foreign workers and underpriced to bring forth net incomes from production of low value added merchandises and services. These factors have besides mostly dampened pay growing.

The relation between rewards and productiveness is of import because it is a cardinal determiner of the criterion of life of the employed population every bit good as of the distribution of income between labour and capital. If rewards rise at the same gait as productiveness, labour ‘s portion of national income remains basically unchanged. Wage addition can be divided into two major constituents ; ( a ) the compensation for higher productiveness and ( B ) the compensation for monetary value alterations or rising prices.

The Malayan authorities has long placed much accent on the importance of the relationship between rewards and productiveness. Labor productiveness is comparatively of import in act uponing pay additions in the labour market. The authorities recognized that pay degrees must increase in order to better the criterions of life and cut down poorness. However, addition in rewards without a corresponding addition in productiveness could worsen inflationary force per unit areas every bit good as erode the state ‘s international fight and its attraction as a profitable Centre for foreign investing.

In 2008, nominal rewards for both domestic and export oriented fabrication industries remained about unchanged. In contrast rewards in the agricultural merchandises treating industry increased well in the 2nd one-fourth of 2008. Nominal rewards in fabricating industries dropped by 5 per centum on norm in January 2009 but returned to pre-crisis degrees within six months because of the rapid diminution in employment. Nominal pay rises were seen in the 2nd half of 2009 as the economic recovery gained gait. The bead in rewards in early 2009 was about reversed by September 2009. Although the recovery in mean rewards in the export-oriented sectors levelled off through the 2nd half of 2009, rewards for both domestic fabrication and agricultural merchandise treating continued to increase until the terminal of the twelvemonth. With consumer monetary values about stable, this is true for both nominal and existent rewards.

The consequence of productiveness growing on rewards has been carried out by Carneiro ( 1998 ) in Brazil utilizing clip series informations for 22 fabrication sub-sectors for 1985-1993. He found alterations in sectoral productiveness to be a relevant account for the alterations in sectoral nominal rewards. Nominal rewards are based on the aggregative rewards of 10 economic sectors, viz. , fabrication, public-service corporations, transit, finance, authorities services, sweeping and retail trade, agribusiness, building, excavation and other services. Wakeford ( 2004 ) said that the rewards are so deflated utilizing the consumer monetary value index to supply a step of the workers ‘ existent buying power otherwise known as existent ingestion rewards.

1.2 Objective

By and large, the aim of this survey is to look into the features of Malayan industrial pay finding.

The other aim is

To analyze altering in sectoral productiveness are relevant to explicate alterations in sectoral nominal rewards.

Inspecting whether pay formation in each sector follows a common overall pay construction.

1.3 The Thesis Structure

The remainder of the paper organized as follows. Chapter 1 provides brief information about background economic system in Malaysia and current issues. In the following chapter, we will discourse past studied that related to the subject. Chapter 3 describes the methodological analysis used. Chapter 4 presents the consequences while chapter 5 concludes and proposes avenues for future research.

Chapter TWO


Productiveness can be defined as how expeditiously and efficaciously we use our resources at lowest possible cost. Labor plays a really of import function and see as a basic unit for the productiveness of any organisation. Labor productiveness is defined as the end product per hr of labour input. A valid economic theory connects rewards to labour productiveness. The pay paid by a competitory house should lift at the same rate as the rise in productiveness.

Adam Smith ( 1974 ) said that labour in general that proclaims the exclusive beginning of wealth and if labour creates wealth so increases in the latter can take topographic point under one of the undermentioned conditions ( 1 ) there is a rise in productiveness of labour or ( 2 ) the figure of productive workers additions compared to other members of society.

Bernolak ( 1997 ) define that productiveness means how much and how good we produce from the resources used. If we produce more or better goods from the same resources, we increase productiveness. Or if we produce the same goods from lesser resources, we besides increase productiveness. Martin Feldstein ( 2008 ) points out that the relation between rewards and productiveness is of import because it is a cardinal determiner of the criterion of life of the employed population every bit good as of the distribution of income between labour and capital. If rewards rise at the same gait as productiveness, labour ‘s portion of national income remains basically unchanged.

Efficiency pay theory proposes that rewards affect productiveness. To increase their employees ‘ productiveness or efficiency, houses pay their employees more than market glade rewards and high pay workers are less likely to discontinue. Firms can retain more experient and productive workers than freshly hired workers who may non be every bit productive as experient workers. Azariadis ( 1975 ) found that with a fixed pay workers feel secure and are non tempted to alter occupations while houses bear the hazards of confronting an economic depression and worsening gross revenues. Akerlof ( 1982 ) had proposed that when houses raise wage, workers put 4th greater attempts out of a sense of trueness to those employers.

Ho and Yap ( 2001 ) found a large positive important relationship between rewards and productiveness in their paper about pay formation in Malayan fabrication industry from 1975 to 1997 where the addition in existent pay exceeded the addition in labour productiveness in the long tally. Slichter ( 1950 ) in his paper, listed alterations in the productiveness of labour as one of the chief factors brought about in pay dialogues and argues that the speculate refering the effects of the pay construction upon the distribution of resources among topographic points, i¬?rms, and industries.

Carneiro ( 1998 ) said that recent work for a figure of states has found that rewards do be given to differ between industries and houses even after one controls for differences in accomplishments and working conditions. In his paper suggests that productiveness additions tend to be appropriated at their beginning by strong trade brotherhoods. The econometric analysis provided some support for the determination of a positive association between alterations in labour productiveness and alterations in sectoral industrial rewards. Estimated coefficients of his short tally dynamic pay equation showed that alterations in sectoral nominal rewards are positively influenced by alterations in monetary values, alterations in the alternate pay, and alterations in productiveness. Changes in the revenue enhancement cuneus appear as an of import restraining factor while alterations in unemployment seem less so.

On the other manus, Katz et Al. ( 1994 ) , have argued that the slowing in the rate of growing of the comparative supply of highly-educated workers has had a big consequence on pay derived functions, in both the United Kingdom and the United States. Quinna and Rubbb ( 2006 ) in their paper served to generalise the Mexican labour market literature i¬?nd a positive relationship between instruction attainment and rewards. Their paper i¬?nd rewards to increase by 6.5 % if male with each extra twelvemonth of schooling. The consequences suggest that the Mexican educational system is effectual ( though non needfully efficient ) at increasing productiveness and rewards.

Agenor and Aizenman ( 1995 ) examines in their paper about the effects of technological dazes on comparative rewards, the distribution of the labour force, and unemployment. Their analysis was based on the seminal theoretical account of efficiency rewards developed by Shapiro and Stiglitz ( 1984 ) , extended to integrate technological differences across production sectors, labour force heterogeneousness, lower limit pay statute law, and turnover costs and found that skilled-biased technological dazes may hold an inauspicious consequence non merely on unskilled employment, but besides on the employment rate of the skilled labour force.

Goldin and Katz ( 1998 ) said that if engineering grows, the demand for skilled labour additions or an addition in the supply of accomplishments induces faster engineering growing which leads to an increasing demand for skilled labour, severally. The demand for skilled labour is the pay or college premium ; the income of high-skilled labour relation to rewards for workers at a lower accomplishment degree. Acemoglu ( 1998 ) argues that an addition of supply of skilled labour decreases the pay premium ( substitution ei¬ˆect ) in the short tally. Prasad ( 1994 ) found in his paper the alteration in the composing of labour demand has been peculiarly marked in industries where unskilled labour and capital tend to be replacements, and skilled labour and capital complements.

Griliches ( 1969 ) found that capital equipment is less substitutable for skilled than unskilled labour and the proficient betterments will cut down the monetary value of equipment lead to equipment deepening, an addition in the comparative demand for skilled labour, and a rise in the accomplishment premium. Schmitt ( 1992 ) said that lifting returns to accomplishments in the face of big additions in the supply of skilled labour suggest a significant displacement in labour demand in favour of skilled workers and his analysis suggests this rise in mean-skill may hold helped do the addition in inequality whereas labour economic experts lifting mean-skill degrees as intensifying the enigma of increasing inequality.

Chapter THREE


Determination of rewards and wage is one of the most of import stages of an employee employer relationship. For any organisation it is truly of import to guarantee that each employee is decently compensated for the services rendered by him/her. Generally pay finding can be through a centralised, regulated, institutionalized system, or a decentralized system.

In theoretical footings, pay finding fits good within the model of pay bargaining type of theoretical accounts and gauging pay equation is the solution to a right-to-manage theoretical account. In right-to-manage theoretical accounts, there is dickering over rewards but one time the brotherhood and the house have agreed upon a peculiar pay degree, the house will exert the “ right-to-manage ” by one-sidedly finding the figure of workers to engage so as to maximise net incomes ( Nickel1 and Andrews, 1983 ) . In other words, the house determines employment at its convenience while the workers try to force the pay every bit high as possible.

The theoretical account proposed by Carneiro ( 1998 ) based on a conventional theoretical account of pay bargaining where the employer-employee relationship is taken into history. The informations are from Monthly Manufacturing Survey conducted by the Department of Statistics for 2000-2009. The study covers 110 industries, based on the Malaysia Standard Industrial Classification 2000. However, informations for merely 107 industries are published.

Corporate bargaining relates to those agreements under which rewards and conditions of employments are by and large decided by understandings negotiated between the parties. In modern democratic society rewards are determined by corporate bargaining in contrast to single bargaining by working. Corporate bargaining increases the morale and productiveness of employees.

Under this category of theoretical account, the negotiated pay rate will depend on the bargaining power of both parties and the employment degree will ever lie on the demand curve for labour ( Carruth and Oswald, 1989 ) . The political and societal environment affects this procedure since the power of trade brotherhoods, the extent of societal public assistance establishments, and authorities ‘s intercession in monetary values and rewards, among other factors, influence the comparative success of each group.

Harmonizing to the Trade Unions Act 1959 ( Section 2, p.10 ) , a trade brotherhood is defined as: “ aˆ¦any association or combination of workingmans or employers, being workingmans whose topographic point of work is in West Malaysia, Sabah and Sarawak, aˆ¦ , or employers using workingmans in West Malaysia, Sabah and Sarawak, .. ( a ) within any peculiar constitution trade, business or industry or within any similar trades, businesss or industries ; and ( B ) whether impermanent or lasting.

In the current state of affairs in Malaysia, somewhat less than one million workers in the private and public sectors are members of trade brotherhoods. This statistic may non stand for a important piece of the work force population, but their domain of influence is more extended than their rank size. Footings and conditions of service derived through corporate bargaining by a trade brotherhood in any work constitution besides cover employees who are non-union members. In general, trade brotherhoods serve as a force per unit area group on the authorities to present statute law and systems that will profit employees in general. Even though their rank size may be little, trade brotherhood members come from most sectors of the Malayan economic system.

Nik Nazmi Nik Ahmad said that the labour market could rectify itself, provided that there are no outside forces interfering in the supply and demand mechanism. But in our Malayan instance, the authorities has this regulation that undermines the labour markets dickering power in that employees can merely fall in in-house trade brotherhoods ; big countrywide umbrella trade brotherhoods are non allowed. As such, workers have no negociating power for the rewards they get.

In the instance where an employer, I, one-sidedly sets the degree of employment given a peculiar bargained pay, employment, Ni, is given by:

Ni = Ni ( Wi / Pe ( fifty +H ) , Xi ) ( 1 )

where W is the bargained wages and rewards paid, Pe is the expected consumer monetary value degree, H is the revenue enhancement cuneus capturing the difference between employer labour costs and workers take-home wage, and X is a vector of other variables finding the place of the labour demand agenda which may include other factor monetary values and input degrees and aggregative demand conditions. The revenue enhancement cuneus variable, H, is defined as the ratio between existent employers labour cost ( defined as rewards plus paysheet revenue enhancements deflated by a sweeping monetary value index ) and the post-tax ingestion pay ( defined as post-tax rewards deflated by the consumer monetary value index ) . If workers ‘ ingestion goods include imported points any addition in the domestic monetary value of such goods ( possibly ensuing from existent exchange rate motions ) will do workers comparatively worse off and widen the cuneus.

The house ‘s public-service corporation will depend on the sum of net income, I, associated with this wage/employment combination, over and above some disengagement degree, O:

one = I ( Wi / Pe ( 1 + H ) , Xi ) – O. ( 2 )

If we assume the house faces a individual trade brotherhood with useful penchants so the brotherhood ‘s public-service corporation can be written as:

Vi = Ni. ( Vi ( Wi /Pe ) – Vo ) ( 3 )

where V ( . ) is the brotherhood ‘s public-service corporation from the bargained pay when an understanding is reached, and Vo is a fallback public-service corporation.

We assume so that the finding of the wages and rewards paid rate can be described by the solution to an asymmetric Nash-bargain:

Wi = argmax ( . ) = [ Vi ( . ) ] I? [ I ( . ) ] 1-I? . ( 4 )

It is possible to construe the fall-back degrees, Vo and o, as the public-service corporation degrees that both brotherhoods and houses would make if there was a hold of a pay understanding. The fall-back public-service corporation of the house depends on the autumn in production due to a pay difference, and the fall-back public-service corporation of the brotherhood is likely to depend on the size of work stoppage financess and other related factors. In the Malayan context the fall-back public-service corporation of the brotherhood could be derived from the immense informal sector. Unfortunately such variables are either unavailable or really undependable in the Malayan instance.

The parametric quantity I? in Equation 4 captures the comparative power of the two sides in the pay deal and is normally density proxied by a step of brotherhood power, such as denseness. As I? tends to 1, we approach the monopoly brotherhood solution in which the brotherhood sets the pay one-sidedly while the steadfast sets employment at its profit-maximising point given this pay ; i.e. , the brotherhood chooses the pay that will maximise its public assistance map topic to the restraint of a downward- sloping labour demand agenda. In making so, it trades off the additions from raising existent rewards against the employment loss that will follow. If I? = 0, the house can take a pay degree and associated employment degree to maximise its net incomes merely constrained by holding to pay workers the fall-back pay degree ; and for 0 & lt ; I? & lt ; 1, any quasi-rents arising from a monopolistic merchandise market or monopsony in other factor markets are shared between the brotherhood and the house.

The pay equation, hence, is obtained from the first order status for maximization of Equation 4. In the instance of the right-to-manage theoretical account or the monopoly brotherhood theoretical account, this solution is to boot constrained by the fringy productiveness status. Where a existent pay is achieved at or below that required to bring forth full brotherhood rank employment ( presuming Equation 3 ) the solution will besides be on the declivitous fringy productiveness labour demand curve. A formal solution requires the full functional specification of production engineering and the brotherhood public-service corporation map, Vi ( . ) . It will bring forth an sum pay equation of the undermentioned inexplicit signifier:

Wi = Wi ( Pe, Ni, Mi, H, I? , Xi ) . ( 5 )

The appropriate expected monetary values will be captured through a consumer monetary value index. The insider power and bargaining power parametric quantity, I? , is normally allowed to vary and is proxied through variables such as brotherhood denseness and/or work stoppage strength. Union denseness is defined as the fraction of work force registered as members of trade brotherhoods. Trade brotherhood denseness in Malaysia is low, 9.35 per centum in 1990 ( Ministry of Human Resources, 1991 ) , dropping to 9.24 per centum in 1995 and 7.87 per centum in 2000 ( Dept of Trade Union Affairs, 2003 ; Department of Statistics, 2006 ) . In 2004, denseness was 7.84 per centum ( Department of Statistics, 2006 ) . Despite a little addition to 8.5 per centum in 2002, denseness has seen an overall diminution in subsequent old ages, with 7.8 % in 2006. We must presume in the present instance that any motion in I? over clip is proxied by motion in the other variables used.

A farther job arises in the parameterization of Equation 5 because of the coincident finding of rewards and employment in the theoretical account. Typically, hence, explanatory variables which include information about the employment degree, such as the unemployment rate or labour productiveness, are treated as endogenous.