With the rapid growth of labour inflows from less-developed to rapidly-growing countries within the developing world, whether increased presence of foreign workers constrains domestic wage growth with adverse implications for growth and structural transformation in the domestic economy has become a major concern in economic policy debate in the latter countries. In this paper, we have attempted to inform this debate through a case study of Malaysia, which has emerged over the past one-and-a-half decades as the major host to foreign workers in Asia.
We do find a statistically significant negative impact of foreign worker dependency on real manufacturing wages, but the magnitude of the impact is small. Real manufacturing wages seem fundamentally embedded in the structure and performance of domestic manufacturing, with the influx of foreign workers having an impact only at the margin. Our results caution against putting the blame for slow wage growth mainly (in not solely) on foreign workers, as has been done, for example, in an influential policy report (NEAC 2010), without probing the issue in the wider context of the industrialization process, the underlying policy framework and the resultant incentive structure. The long standing labour market regime that has cushioned specific industries against wage bargaining within the national trade unions may also have played a role.
In this paper we have solely examined the impact of foreign workers presence on manufacturing wages treating the contemporary policy concern that foreign workers thwarts capital deepening and industrial upgrading through wage suppression at face value. Further research need to focus specifically on the nexus of wage and technological change. As Kindleberger (1967, p. 203) has aptly put it in an important early study of the impact of migrant workers on European growth, this is an issue ‘in which our ignorance is profound’.
The working paper is available here