Meeting the Demand for Skilled Workers in a Rapidly Growing Economy - Malaysia

Source: ILO/World Bank

• Labour Market Developments
• Supply of Trained Workers
• Evaluating the Performance of Training Institutions
• Demand-Side Incentives for Training

Table 1. Output of Skilled Workers, by Education and Training Institution
Table 2. DDIT Participation by Firm Size, 1993
Table 3. Incidence of Training in Manufacturing by Firm Size, in 1994

Labour Market Developments

Malaysia's economy has experienced a sharp turnaround since the recession of 1985-1986. The changing employment pattern and rapid job growth have contributed to a tightening of the labor market. Unemployment rates have fallen to below 3 percent during the last decade, and quit rates for skilled and technical workers have increased. Between 1987 and 1993, the wages of skilled and semi-skilled workers rose by 10 percent annually, those of managers, technical workers and professionals rose by 7.5 percent, while those of unskilled workers rose by less than 5 percent. There are many reasons for these wage patterns, not all of which have implications for vocational education and training. But studies show that the main reason for widening wage differentials is that the supply of skilled workers has not kept pace: managerial and technical workers have the lowest supply elasticities, followed by skilled, semi-skilled and unskilled workers. This has implications for the VET system, which is critical for the supply of technical, skilled, and semi-skilled workers.

Supply of Trained Workers

Table 1 provides an overview of the supply of skilled workers in Malaysia from public educational and training institutions. Vocational and technical education and training is provided by a plethora of institutions under several ministries. In total, there are 30 government industrial and skills training institutes. They include 10 industrial training institutes (ITI) and the Center for Instructors and Advanced Skill Training under the Manpower Department of the Ministry of Human Resources; 10 skills institutes under the Ministry of Public Enterprises, and 7 youth training centers (YTCs) under the Ministry of Youth and Sports. The Government has also set up two advanced training centers with German and French assistance. Finally, the Ministry of Education runs 70 vocational schools, 9 technical schools, and 7 polytechnics providing vocational education similar to that available in the public training institutions.

Table 1. Output of Skilled Workers, by Education and Training Institution (Percent)

Surveys reveal a low reliance on public training institutions for re-training and skill upgrading of currently employed workers. Together, the public training institutions under the Ministries of Human Resources, MARA, and Youth and Sports, train about 7,000 trainees per year, primarily at the basic and intermediate levels and The Ministry of Educations vocational and technical schools produce twice as many trainees. Employers report that only about 5 percent of skilled workers scheduled for training will be sent to public institutions. In-plant training was the principal source of training at between 60 and 90 percent.

Coordination of vocational education and training

The National Vocational Training Council (NVTC) was established in 1989 to promote and coordinate vocational and industrial skills training programs. The NVTC has initiated the setting up of interagency committees to consult on issues relating to training and trade certification, and has fielded several surveys which have a broader focus than the tracer studies which individual ministries have conducted for training institutions under their purview. However, the NVTC does not have the legal standing to coordinate training across public and private training institutions. Private training institutes are supposed to register with the Ministry of Education. Some do, but many others only register with the Registrar of Companies, so that little data are available on their training activities. There have been recommendations that a national vocational training law be enacted to strengthen the NVTC.

Evaluating the Performance of Training Institutions

Tracer Study Results

A 1992 survey of over 4,000 individuals who took trade tests administered by the National Vocational Training Council found that graduates of private institutes are most likely to find work. Conditional upon working, trainees from private institutes are likely to get higher starting pay, and are most likely to find jobs in areas in which they were trained. Some public training institutions do quite well both in absolute terms and relative to private providers.

Enterprise Survey Results

A 1994 survey of 2,200 manufacturing firms showed that a high fraction of firms either provide their workers with no training, or rely exclusively on informal on-the-job training. There are marked differences in the incidence of training by firm size: the proportion of firms that do not provide any training is highest among the micro firms; conversely, formal training is most common among the large firms (see table 2). Most firms which provide formal training also have informal on-the-job training. Survey results demonstrate that the most important reason why firms provide little or no training is that they use simple technologies requiring few skills.

Table 2. DDIT Participation by Firm Size, 1993

Most firms either meet their skill needs in-house or through private providers. Public training institutions play a relatively minor role in meeting the in-service training needs of private firms. Of the 21 percent of employers that train formally, about an equal proportion use in-house resources as they do external training providers. The most common external sources are private training institutes, skill development centers, and advanced skills training institutes. The least popular external sources are government-run youth training centers, IKM institutes, and vocational and technical schools. The relatively small role of government institutes reflects their focus on pre-employment rather than in-service training.

A higher proportion of technicians and supervisors (about 30 percent) are trained as compared to production workers (about 15 percent). Production workers are also less likely to get external training as compared to non-production workers. Survey results indicate that employers are more likely to provide formal training for all groups the more educated are their workers: a one year increase in the education of the workforce is associated with a 2-3 percent higher probability of training. A higher level of education also raises the probability that the firm will train in-house relative to sending workers for external training. Training is associated with a 6 percent increase in wage, suggesting that the productivity gains from training are shared with workers in the form of higher pay.

Demand-Side Incentives for Training

Policymakers believe that Malaysian companies underinvest in training. Given the limited role of public training institutions in retraining and skills upgrading of the workforce, the government has implemented two programs-- the Double Deduction Incentive for Training (DDIT) scheme and the Human Resource Development Fund (HRDF) scheme--to encourage companies to play a greater role in meeting their own training demands.

Double Deduction Incentive for Training

The DDIT scheme allows firms to subtract twice their training expenditures from gross income to compute tax liability. It can be used by sending employees to approved training institutions or by applying to Malaysian Industrial Development Authority (MIDA) for approval of in-plant training programs. Firms sending employees for training in approved institutions are automatically qualified to claim the double deduction incentive from the Department of Inland Revenue. Between 1987 and 1993, MIDA approved a total of about 600 in-house training programs involving about 3,000 trainees and costing a total of 33 million ringgit. Statistics on approved programs overstate the number of firms that utilize DDIT since firms submit multiple applications. Changes in the scope of permissible training, in the number of approved training providers, and simplification of the application process were associated with a rise in the number of DDIT applications. But the numbers have remained low, despite MIDA's rejection rate declining over time from over two-thirds in 1988 to about 25 percent in 1993.

The take-up of the DDIT incentive has been uneven across subsectors and firm size and ownership. Between 1988 and 1993, just the electric and electronics sector accounted for almost 60 percent of incentives approved by MIDA. DDIT use has also been dominated by multinational companies: in 1992, about 50 percent were wholly foreign-owned and another 45 percent had some foreign ownership. The take-up of DDIT by small firms has been low (see table 3). In surveys, over half of all firms responded that they were unaware of the scheme or lacked detailed information, and another 25 percent said they did not need training. Since 1993, only companies with less than 50 employees are eligible for DDIT; the government has decided to use a levyrebate scheme to promote training in larger firms.

Table 3. Incidence of Training in Manufacturing by Firm Size, in 1994

The Human Resource Development Fund

The HRDF was established in 1992, with a matching grant from the government. It is administered by a council with both the private sector and government representatives. Unlike the DDIT program, the HRDF is not a subsidy scheme. Employers who have contributed 1 percent of total payroll for at least six months can reclaim a portion of allowable training expenditures. The rates of reimbursement vary by type of training and firm size. The scheme has three components--the ATP (Approved Training Program) scheme for approved training in registered institutions, the SBL scheme for ad hoc in-plant or external training from non-approved institutions, and the PLT scheme for firms that train regularly and do not want to submit applications every year.

Initial use of HRDF scheme was low. By 1994, about 3,300 firms had registered. A 1994 survey of employers found that out of 1,500 eligible firms, 28 percent were not registered with the HRDF, and one-third of registered firms did not claim reimbursements under any scheme. The rate of utilization among contributing firms (the take-up rate) of the SBL and ATP schemes was about 13 percent each. About 80 percent of eligible companies did not use either scheme. The take-up rate is much lower for smaller firms: firms with less than 100 workers had a take-up rate of 5 percent, while those with over 1,000 employees had take-up rates of almost 50 percent. As with the DDIT scheme, there are wide variations in take-up and noncompliance across sectors. The highest rates are in scientific instruments and machinery, and subsectors with low rates are food, textiles and apparel.

Preliminary analysis indicates that of those registered with the HRDF, about 50 percent increased training over the last three years and about 40 percent said that their training had remained the same. In contrast, of the eligible firms not registered with the HRDF, 27 percent said that their training had increased, and about 50 percent said that their training had remained unchanged. It appears, therefore, that the HRDF scheme may have increased the incidence of training modestly.

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