REGIONAL CONFERENCE ON INVESTMENT

CLIMATE AND COMPETITIVENESS

IN EAST ASIA

SESSION 3 :
SKILLS FOR COMPETITIVENESS

ADDRESSING SKILLS GAP: MALAYSIAN CASE

STUDY

By
K. Yogeesvaran
(yogees@epu.jpm.my)
Economic Planning Unit
21 November 2005
 ADDRESSING SKILLS GAP : MALAYSIAN CASE STUDY

I. Objective

1. This paper presents the key findings of the Productivity and

Investment Climate Survey (PICS) 2002/2003 with respect to the status
of skills and education. This paper also outlines the measures that have
been taken to address the constraints that were identified by the survey.

II. Background

2. The PICS was undertaken by the Government of Malaysia

with the collaboration of the World Bank to identify the key constraints to
competitiveness as perceived by the firms in the manufacturing and
selected business support services sectors. The survey covered issues
related to the business environment, particularly related to human
resource availability, technology and innovation readiness, and the
regulatory regime. A total of 1,151 firms were surveyed with 902 in the
manufacturing sector and 249 firms in the selected business support
services sector.

3. With regard to skills performance, the PICS data offers

insights into how firms and workers perceive the quality of education,
skills, and training programmes in Malaysia. Employers were asked
about their experience in filling vacancies and deficiencies in the quality
of their existing workforce while employees were asked independently
about the skills they lack the most in doing their job as well as the
adequacy between their field of education and the work they do.

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III. Key Findings on Skills and Education

4. Shortage of skills was identified as a problem by the

majority of the firms surveyed. Irrespective of location, industry or firm
characteristics, the large majority of firms (between 41-46 per cent of
firms surveyed) identified skill shortages as a “severe” or a “very severe”
problem (Figure1). This is indicated by the average time taken to fill a
vacancy for a skilled technician, which takes longer in Malaysia than in
few other Asian countries where PICS have been carried out (Figure 2).
Around 70 per cent of managers surveyed identified insufficient supply of
university graduates as the most important reason behind the skills
shortages. This finding is consistent with the analysis on returns to
education and training.

Figure 1
Skills Shortages Faced by Firms

% of Firms Citing Skills

Shortages as Constraints

47
• Skills shortages are cited as one
46 of the main concerns among all
firms
45
• Concerns about skills shortages
44 are highest in low TFP firms

43

42

41

40
Note :
39
• High TFP Industries : Chemicals, Electrical
& Electronics, Rubber & Plastics
38
• Medium TFP Industries: Wood, Machinery,
High TFP Medium TFP Low TFP
Food
Growth Growth Growth
• Low TFP Industries : Textiles, Garments,
Type of Firms Auto Parts

2
 Figure 2
Assessing Skills Shortages – Average Time to Fill in Vacancies

Managers face acute shortages of skilled labor, especially professionals

No. of Weeks to Fill in Vacancies No. of Weeks to Fill in Vacancies

6 12

5 10

4 8

3 6

2 4

1 2

0 0
Malaysia Bangladesh Pakistan China
Manufacturing Services

Professionals
Skilled technicians
Skilled technicians
Unskilled production workers Unskilled production workers

5. In Malaysia, the market places a very high premium on

tertiary education, even higher than that found in OECD countries
(Figure 3). The returns on tertiary education is almost 18 per cent
compared with 9.5 per cent for secondary education and 4.5 per cent for
primary education. The rate of return on training is also large as much as
10 per cent in terms of higher wages for manufacturing workers with any
kind of training. Returns also increases with additional training, where
workers who received training from both their current and previous
employers receive the highest premiums at 15 per cent. The return to
training also differs by the level of education of workers.

6. In spite of the massive investment by the government

on tertiary education in the past, Malaysia’s higher education rates
are lower than the international norm. Although the fraction of
Malaysians with tertiary education almost tripled from 2.4 per cent in
1990 to 6.3 per cent in 2000, this level is still below par for its income
level (Figure 4).

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 Figure 3
The Premium for tertiary Education is Higher in Malaysia than OECD
Countries

The premium is very high for … this premium is even higher

tertiary education in Malaysia… than that in OECD countries

Mean log hourly wage Annual rate of return

to tertiary education (percentage)
2.75
35

2.50 Pakistan
30
2.25 Saharan AfricaBrazil
-
Sub

25 Europe/Middle East/North Africa*

2.00
Australia
Panama
20
1.75 Latin America/Caribbean*
India Singapore
Asia* Korea
MALAYSIA 2001
(PICS Manufacturing)
1.50 15
Canada
- Thailand New Zealand
High
-Income OECD Philippines
1.25 10
0 3 6 9 101112 1516 18 21 0 2 4 6 8 10 12 14 16

Years of formal education Percentage of tertiary education complete

in the total population 25 years old and over

Figure 4
Malaysia’s Higher Education Stocks Lags Behind Its Level of
Development

Malaysia’s higher education rates are lower that the international norms

% of Population > Age 25 with Higher

Education Complete, 2000
20
Korea
18

16

14 Philippines
Canada

12
Thailand
Chile
10

6
Malaysia 2000
4
India
2 China Malaysia 1990
Malaysia 1980
0
6 7 8 9 10 11

Log of Real Per Capita GDP in 2000

4
 7. The deficit in the supply of graduates was compounded
with the presence of skills mismatch as reported by firms. Because
of the shortage of university graduates, firms are forced to hire workers
with diploma to do the job of a graduate. The shortage in tertiary
education graduates contributes to sub-optimal hiring policies and loss of
productivity at the plant level. The mismatch is also reflected by the
qualifications of unemployed graduates registered for training schemes
where about 40 per cent of them have qualifications, which are not those
required by the manufacturing sector.

8. The PICS showed that improvements in the skills of the

workforce can result in substantial benefits. From the standpoint of
individual firms that are unable to hire as many skilled workers as they
require, the benefit in terms of higher sales foregone is estimated to be in
the order of 11 per cent (Figure 5). The industries where an increase in
skilled employment would have the greatest benefits in terms of
increased sales also have larger proportions of firms reporting concerns
about skill shortages. There are also likely to be substantial increases in
average earnings to the extent that expansion in the supply of skilled
workers allows Malaysia to expand into sectors that are skilled.

9. Although Malaysia has a world class skills training

infrastructure, it was noted that the number of firms that use these
facilities is low especially among the SMEs (Figure 6). A large
number of firms reported that the availability of skills training institutes
and the existence of the Human Resource Development Fund (HRDF), a
levy-grant scheme for retraining and skills upgrading of employees, was
critical in their decision to train. However, the firms that use skills
development institutes rate them very high. More than 75 per cent of
managers rank the top three institutes they use as of “good quality,” and

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around 20 per cent believe they are of “very good” quality. Firms believe
that they would train more if the processes for training were made more
efficient.

Figure 5
Benefits from Addressing Skills Constraints

• Econometric estimates suggest that addressing the skills

constraints can provide large benefits to firms, raising the sales
of most industries by 11 per cent of sales on average

Benefit From Reducing Skill

Industry Shortages (% Sales)

• Food processing 4.0

• Textiles 14.3
• Garments 9.6
• Chemicals 10.9
• Rubber/Plastics 9.0
• Machinery/Equipment 17.7
• Electronics 5.4
• Auto parts 16.0
• Furniture/Others 10.9

• The rate of return on training is also large, 10 per cent in terms of

higher wages for manufacturing workers with any training

Figure 6
Investment Climate – Skills Gap

UTILISATION OF SKILLS AND TECHNOLOGY DEVELOPMENT INSTITUTIONS

Number of firms that uses the skills development institutions is low, especially
among the SMEs

Electronics

Chemicals % Firms That Report Using The

Institutions
Rubber/Plastic
SMEs Large
Auto parts

Food
• Skills development
institutions 14.7 39.1
Machinery
• Technology support
Wood Products institutions 14.5 17.4
Garments • Technology
incentives 1.2 11.4
Textiles

TOTAL

0 10 20 30 40 50
% Firm Using Skills Development Institute

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IV. Measures Introduced and their Impact

10. The Government of Malaysia is acutely aware of concerns

regarding human resource, particularly with respect to skills shortages
and mismatch. Various measures have been introduced to address these
concern:

i. Expanding the supply of educated and skilled human

resource. The number of public higher education institutions
increased from 22 in 2000 to 70 in 2004, increasing the supply of
persons with university degrees by 18.3 per cent per annum
(Figure 7). As of 2002, the output from private higher institutions
overtook the output from public higher education institutions. A
total of 20 new skills training institutions was also established and
10 of the existing ones were upgraded since 2000.

Figure 7
Output from Institutions of Higher Education, 2000-2004

Output from higher education institutions, especially private institutions,

increased dramatically after 2002

Number of Persons (‘000)

160
139.2 137.0 135.0
140
120.2
120
96.3
100

80 74.8
70.3 66.9
65.7 64.4
60

40

20

0
2000 2001 2002 2003 2004

Public Institutions Private Institutions

7
 The Government also introduced a system of double shift-
training programme at 75 training institutions involving vocational
institutes, industrial training institutes, community colleges and
polytechnics as well as skills development centres. As a result, the
number of persons trained increased from 42,499 in 2000 to
66,908 in 2004 (Figure 8). In addition, retraining and upgrading
skills programmes for employees, particularly for the SMEs were
implemented. The coverage of the HRDF was also expanded to
include firms in the manufacturing-related services such as
logistics, market support and ICT industries.

Figure 8
Output from Training Institutions, 2000-2004

Output from both public and private training institutions increased since
2000

Number of Persons (‘000)

40 37.6
34.1
35
31.2
29.3
30 28.3
26.1
25 23.8 23.4
20.9
20 18.7

15

10

0
2000 2001 2002 2003 2004

Public Institutions Private Institutions

The increase in the capacity of the education and training

facilities has contributed to the improvement in the quality of labour
as indicated by the increased share of labour force with tertiary
qualification (Figure 9).

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 Figure 9
Labour Force by Educational Attainment, 2000-2004

The share of labour force with tertiary qualification has increased since
2000

% of Labour Force

60 55.4 54.5 55.3 55.1

53.8

50

40

30 26.1 24.1 23.5 22.4 21.9

16.7 17.5 18.3
20 15.4
13.9

10 6.2 5.1 5.3 4.8 4.7

0
2000 2001 2002 2003 2004

Non Formal Education Primary Secondary Tertiary

ii. Improving the quality of the education and training

delivery system. The following initiatives were introduced:

¨ review of the primary and secondary schools

curriculum and assessment of performance of students in
2002/2003 to nurture creativity, innovativeness and thinking
skills;

¨ increasing collaboration between institutions of higher

education and industry and for this purpose the Academia-
Industry Consultative Council was established in 2005;

¨ improvement and standardisation of the quality of

training for instructors by developing the National
Occupation Skills Standards (NOSS); and

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 ¨ introduction of the National Dual Training System
(NDTS). This system placed emphasis on training in the
workplace thus promoting greater private sector participation
with regard to skills training. About 100 firms are
participating by providing workplace training.

To a certain extent, these initiatives have contributed to the

decreased in unemployment duration of workers with university
level education (Figure 10). The percentage of university graduates
who are unemployed for more than six months declined from 30.7
per cent in 2000 to 23.3 per cent in 2004.

Figure 10
Unemployment Duration for Workers with University Education,
2000-2004 (Labour Force Survey)

The percentage of graduates who are unemployed for more than six
months has declined since 2000

% of Unemployed Graduates

70
61.9
60 56.7 56.7 55.4
51.8
50

40
30.7
30 26.6
25.2 23.3
23.0 21.3 22.0 21.3
20 16.7

10 7.4

0
2000 2001 2002 2003 2004

0 - 3 months 4 - 6 months > 6 months

iii. Improving the planning mechanism for human resource

development. To address issues pertaining to human resource

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 development in an efficient and effective manner, a human
resource development focus group discussion was established in
2005. The focus group has examined issues such as skills
mismatch, absorptive capacity of education and training
institutions, current supply of human resource and suitability of
education and training curricula as well as human resource
requirement of industry.

V. Conclusion

11. The PICS in 2002/2003 identified issues with regard to skills

and education in Malaysia. Among them were inadequate supply of
skilled workers, skills mismatch and quality. The Government of Malaysia
has introduced a host of measures to address these issues and they are
yielding positive results.

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