Do foreign workers really steal jobs?

An economic think tank, Khazanah Research Institute, has a new study available. “Chapter 2: The Malaysian Workforce: A Changing Landscape, The State of Households 2018: Different Realities” shows that foreign workers have a limited impact on wages and employment in Malaysia.

And I must say they are right to point this out. We might even say that their logic proves that many free market economists are right as well on this point.

The economics of foreign workers is relatively straightforward: of course it’s economically beneficial, how could it be otherwise?

There are, however, several good arguments to the benefit and I wish to pick up some of the highlights from the chapter.

As Khazanah Research Institute pointed out:

“The evidence suggests that foreign workers generally complement rather than replace native workers and generate a higher level of economic activity.”

This is essentially Adam Smith, Ludwig von Mises and David Ricardo all over again. They were pointing out that we are made wealthier by the division and specialisation of labour. The more people we can divide and specialise with, the wealthier we will be.

Suppose that 10 workers produce 20 chairs every week with each worker building a complete chair. Those same workers can produce many more chairs every week if they specialise. When one worker saws the wood, another carves it into shape, and a third fastens the pieces, the total output rises dramatically.

Greater specialisation leads to greater production and greater prosperity. Adding another five workers to the original 10 multiplies the benefits.

From the study itself:

“Low skilled jobs are dominated by foreign workers… This is an important point – around one in two unskilled workers are foreign workers, potentially reflecting how foreign workers play a complementary role to local workers…”

That’s all entirely true!

One might ask, if the foreign workers are largely unskilled, doesn’t that reduce the productivity of all Malaysians on average?

Well, the answer is no, it doesn’t, because having low skilled and high skilled labour increases the amount of the division and specialisation of labour that we get. As I argued earlier, this leads to an increase in output. An increase in output is equal to us all becoming generally wealthier.

“Firstly, most studies show that foreign workers are imperfect substitutes for native workers. By extension, this means that they do not compete for the same jobs, even within skill levels as certain industries tend to employ more foreign workers. Hence, the impact on native employment tends to be limited.”

Just to explain that a bit more.

Of course the foreign workers are “stealing” jobs when they get here. We might even think that leads to there being more unemployment among the natives. It’s an understandable assumption. But that is not quite how it works.

Foreign workers take jobs from natives but it’s what happens next that matters.

A foreign worker arriving has just brought his labour with him. The worker also brings with him his demand for goods and services like apartment rental, food, haircuts and phones produced by others. Fulfilling those desires and needs creates a job or two that other people can do; some of those will obviously go to the natives.

So this is what economists mean when they say that foreign workers don’t affect employment.

“From 2010 to 2013, the number of foreign workers increased from almost 1.7 million to 2.1 million. From 2013 to 2017, the increase has been smaller in magnitude with the latest figure at around 2.2 million.”

This clearly indicates that foreign workers increase the size of the overall population which means they increase the size of the economy.

Their presence only changes which jobs should be performed and increases the amount of work in the economy, in the same manner as any other population increase.

“An increase in foreign workers led to a 0.1% increase in full-time employment and 0.3% increase in part-time employment for Malaysians.”

So logically, if foreign workers were stealing jobs from natives, so would every young person leaving university and entering the job market; our country should become poorer as it gets larger.

In reality, of course, the opposite happens.

Some people could argue about remittances, the money they send home, but I think that’s a pretty weak argument.

One final highlight:

“As for wages, a 10% increase in foreign workers raised the average wage of Malaysians by around 0.15%.”

The benefits from foreign workers appear to be broadly shared. Thus it adds more value than simple trade.

Given that increased foreign workers to an area increases demand in the area for various goods and services, there is an increased demand for input producing those goods and services, input including labour.

This would mean that wages would rise.

Likewise, if there is a sudden influx of foreign workers into an area of the economy, and the wages for them start to fall, it naturally de-incentivises foreign workers to that area and rather incentivises them to other areas.

However, this is the point where most economists disagree.

But what I notice, when it comes to wages, is that most economists do not find any general decline in wages caused by foreign workers.

Instead, they debate on whether foreign workers cause the wages of natives in certain employments to fall or whether their wages slightly increase.

Economists also debate about how temporary any negative impacts on wages might be.

It is true that foreign workers can temporarily reduce wages for natives whose skills closely match theirs. But falling wages raise profits. And higher profits are the soil from which better wages grow.

Seeking those superior returns, investors bring more machines, expertise, and new firms while entrepreneurs learn to enhance workers’ output.

Specialisation deepens, more production occurs, the economy grows and workers’ productivity soars, forcing employers to compete for their time by offering higher pay.

Foreign workers actually increase wages in the long run. Therefore we should welcome more foreign workers and legalise their situation.

The more the merrier.

Medecci Lineil is from the Institute for Leadership and Development Studies. -FMT