More youths slipping into low-skills, low-wage trap

 

In part 1, I identified the optimism in the job market and argued that there exists underlying structural issues that warrant attention and intervention.

To recap, part 1 highlighted the underemployment quandary that primarily affects young, educated workers. I also argued that underemployment substantially impacts their lifetime income, which magnifies the longer they remain underemployed.

This part will address another concern of the job market: the low-skills, low-wage trap and the trend that more young people are slipping into the trap.

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Understanding the low-skills, low-wage trap

Low-skilled workers have limited employment options. SPM graduates who did not go for higher education are considered low-skilled. Their options pivot among entry-level jobs, part-time employment and physically demanding professions. These jobs often come with low wages.

According to the statistics department’s 2020 report on salaries and wages, low-skilled professions – such as elementary occupation, service and sales workers, craft and related-trade workers, plant and machine-operators and assemblers – earned median wages between RM1,400 and RM1,900 in 2019. This is considerably lower than the national median at RM2,442.

The term “trap” portrays a lack of upward mobility for these workers. These low-skilled workers lack the capability and training to perform complex work, limiting their career progression.

For example, a food and beverage server with years of experience finds taking on a managerial role challenging due to a lack of specific skill sets tied to the position.

The “Building from the Bottom Up” report by Joseph B Fuller and Manjari Raman of the Harvard Business School provides insights into the low-skills, low-wage trap. They can be summarised as such.

• Despite working long hours, low-wage workers struggle to escape poverty;
• The majority of these workers are trapped in entry-level positions, even after accumulating years of working experience; and
• Employers underinvest in skills training and raising workers’ productivity. Low-skills, low-wage workers often feel stuck and see no avenue to move up the ladder

Since individuals without higher education are most susceptible to falling into the trap, the natural solution would be to increase the level of educational attainment of the future workforce. The trend is promising.

The proportion of the Malaysian workforce with a diploma or degree increased from 24.6% of the total workforce in 2010 to 32.8% in 2020, whereas those with an SPM certificate and below dropped from 68.5% to 59.6% in the same period.

However, the presence of the gig economy and the onslaught of Covid-19 changed the situation. Working as a Grab driver pushes the low-skilled worker’s income bracket to RM 3,687, according to indeed.com, relatively higher than the median salary of RM2,442.

Obtaining a certificate for higher education has many costs, including substantial opportunity costs, which requires a student to forgo current income for higher future income. Many individuals in poorer households cannot afford these costs, so they decide to enter the workforce after SPM.

A survey released by the statistics department reveals that 72.1% of Malaysian youth chose to enter the workforce directly after SPM, either as gig workers or as social media influencers. According to the survey, these youths do not see the value in further studies.

If the report accurately portrays youth sentiments, we expect future Malaysian human capital to deteriorate.

Low-skills workers vs gig workers vs professionals

From the standpoint of the youths, it makes sense to join the gig revolution since it provides them with an income that is higher than even fresh university graduates.

How will youths’ career decisions affect their cumulative income? The gig economy pays well, and it does not need extensive training. Anyone with a driving licence or motorcycle licence and a satisfactory vehicle can sign up for work in a matter of days. There would not be extensive, nerve-wracking interviews, and these workers enjoy flexible working hours. It is an ideal summer job, but is it a good career option?

The debate on the nature of the low-skilled labour vs gig economy vs tertiary education is multifaceted, from career progression to company benefits, work hours, income stability, workplace training and social safety nets. This column seeks to understand the dynamics from an income perspective.

For this thought experiment, I have used DOSM’s salaries and wages report 2020 to project the cumulative income of the three groups of workers. Several assumptions were put in place:

• Workers with SPM and below (non-Grab) and the Grab driver start working directly after SPM, at the age of 18;
• SPM and below (non-Grab) workers have a starting monthly pay of RM1,912. They enjoy a 13th month bonus and a 5% pay increment every five years;
• The Grab driver has a take-home salary of RM3,687, in line with the figure given by indeed.com. They do not enjoy any bonus or increment; and
• Higher education workers only start working at age 23. They have student debt of RM15,000. They will earn a starting salary of RM3,278 as technicians and associate professionals for five years. They will then be promoted to professionals with a RM5,175 monthly wage. At age 36, they will ease into the role of manager and take home RM6,908 a month. Similar to non-Grab SPM and below workers, they also enjoy a 13th month bonus.

From the number crunching, Grab drivers consistently outperform non-Grab workers in cumulative annual income. Those who decide to pursue higher education take a long-term view.

After they start working at age 23, they quickly catch up to their peers who began work earlier. At age 29, they have in seven years earned more than what the non-Grab SPM and below workers make in 12 years.

By 37, the diploma and degree graduates are expected to have accumulated wealth surpassing Grab and non-Grab workers without tertiary education. The gap widens significantly after 37 as these graduates become specialists or move into their respective industries’ leadership roles.

By 50, holders of diplomas and bachelor’s degrees would have accumulated RM2.08 million in total earnings. (We have not considered EPF contribution, other performance bonuses and investment profits.)

Individuals who have worked as Grab drivers from 18 to 50 years old would have amassed RM1.46 million.

The SPM graduate in other low-skilled industries would only have earned RM988,000 in 33 years, an average of RM2,490 a month. Based on the cost of living in Malaysia, workers trapped in this low-skilled, low-wage career would struggle to make ends meet.

Investment in knowledge pays best interest

The role of human capital in enhancing economic development and standard of living has been well-studied. Education enables upward economic mobility and remains the critical remedy to escape poverty.

In an OECD report, “Education at a Glance 2019”, Indicator A4, working-aged individuals with a bachelor’s degree earn 44% more than their counterparts with upper secondary education, in line with our projection. The wage advantage increases to 91% for individuals with a master’s degree or doctorate.

The reasons for these advantages are pretty intuitive. Higher levels of educational attainment lead to better opportunities for high-paying careers. Universities and colleges provide formal technical and skill training that provides the means for high-skilled, high-wage jobs. In contrast, workers who do not possess the education and skills set would be ensnared in the low-skills, low-wage trap.

Even though we understand the long-term benefits of higher education, individuals in poor households cannot afford the luxury of higher education. This creates a poverty loop where lower-income households remain poor because they do not have the avenue to send their children to tertiary studies.

Hence, the public provision of education support becomes critical in enhancing human capital, raising national income and alleviating poverty. Our education system needs a review, with consideration of the current trends and development.

As stated by Benjamin Franklin, “an investment in knowledge pays the best interest”. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.