WHILE continued economic activity expansion is expected this year as conditions normalise following the Covid-19 pandemic, labour market reforms must be accelerated to support economic growth, Bank Negara Malaysia (BNM) said.

Slack in the labour market – shortfall in demand for labour relative to the supply of available workers in the economy – is expected to reduce further and supported by continued strength in the employment recovery momentum, it said in its Economic and Monetary Review (EMR) 2022 report.

Nevertheless, the central bank said Malaysia’s labour market is still some way away from tightness, that is high labour utilisation.

“Specifically, there remains some degree of underutilisation, given the high labour force participation as well as a small number of workers who have remained outside the labour force due to Covid-19, that is ‘potential’ labour force,” it said.

“This is supported in part by the gradual re-entry of foreign workers alleviating residual labour shortages”.

BNM said there is some room for salaries and wages, and, therefore, the income of Malaysian workers would increase before exerting significant pressure on prices.

“The ratio of compensation of employees to GDP declined in 2021 to 34.8%, a reversal of trends observed prior to the pandemic (2020: 37.1%; 2019: 35.9%),” it said.

“Besides, the uneven recovery continues to impact vulnerable groups such as women, youth and low-skilled workers.”

The central bank said to support monetary policy considerations, the pandemic necessitated the expansion of its surveillance tools in assessing labour market conditions.

It said more comprehensive and nuanced assessments on overall labour market conditions contributed towards supporting evidence-based monetary policy decisions.

“Although monetary policy is primarily a countercyclical tool, it is heavily interdependent with structural policies, which affect an economy’s ability to withstand shocks,” it said.

“A sustainable recovery has a higher chance of being more enduring when it is further facilitated by complementary structural reforms,” it said.

Addressing structural issues

BNM opined the pandemic represented a critical turning point and an opportunity to address structural issues inhibiting the Malaysian labour market since before the crisis.

It said these include an over-reliance on the low-cost production model, the low creation of high-skilled jobs and significant skills mismatches.

“Unaddressed, these issues would continue to constrain wage levels and amplify the negative impact of shocks, such as Covid-19, on households’ incomes,” it said.

Economic policies, therefore, BNM said, should be geared towards creating high-skilled and high-paying jobs through quality investments, developing a dynamic and high-calibre workforce, accelerating the adoption of technology and digitalisation, and strengthening the social protection system.

“Ultimately, we must ensure that economic gains are translated to commensurate pay for workers,” it said.

The central bank also pointed out that the wage-productivity linkage must be strengthened.

“We also recognised that considerable challenges remain, including low worker bargaining power and frictions in enforcing labour contracts,” it said.

BNM said the relatively muted recovery of wages observed post-pandemic emphasised the urgent need to overcome such challenges.

“The conclusion remains that Malaysia will need to accelerate reforms to ensure our long-term growth is sustainable and inclusive, in addition to building household and labour market resilience against shocks,” it added. – Bernama, April 2, 2023.