Malaysia’s Demographic Shift Poses Big Challenge

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Low birth rates and an ageing population are shrinking the talent pool.

People are having fewer babies today. There has been a steady decline in fertility rates worldwide since 1950. Live births have shrunk by half, from five babies per woman in 1950 to only 2.5 babies in 2015. Economists think this could imminently impact economic performances if no measures are taken to mitigate the demographic shift.

In Malaysia, changes in the demographic landscape are rarely picked up by policymakers. The prolonged implications that population policies – such as health care, wealth creation, human capital and community service – have on economic development are therefore not effectively reviewed. A long-term plan is needed to formulate strategies that capture the welfare needs of our future ageing population, as well as our human capital requirements.

The Trend in Penang

The age structure of a population is an important measure of demographic change. High numbers of the working age population merely stimulate economic growth to a certain degree; the economy shrinks as unemployment and social issues may arise when the working age population becomes overcrowded.

Penang’s working age population is growing slower than its non-working age population, with the former (consisting of 15 – 64-years-old) expecting to record a hefty decline over the next 10 years. On the contrary, the growth rate of its non-working age population (65 and above) has increased from 0.5% a year from 1970 to 1990, to 1.7% from 2010 to 2030, and has outpaced the increase of younger cohorts aged 15 and below.

From 1970 to 2015, there has been a reversal of the young and old age dependency ratio (Figure 1); the former ratio has fallen significantly, while the latter has been on a steep rise since 2015, and is estimated to surpass the young age dependency ratio by 2035.

This could subsequently affect the working age population. The in-migration of workers should not be a panacea, and the issue should instead be further examined based on skills shortage, which is more pronounced in the blue-collar economic sectors. (Malaysia is facing an out-migration of both blue and white-collar workers to its neighbouring countries.)

Many policymakers are understandably concerned with the influx of low-skilled foreign workers, which has undeniably rescued many companies from labour shortage issues. It is more important for the country to increase its talented workforce and gear itself towards a knowledge economy; many developed countries resolve their labour issue by hiring foreign human capital based on an identified skills shortage list to fill positions that are not locally available.

On top of that, the five-year Malaysia Plan should continuously address population and family planning policies so that societal burden and productivity loss can be alleviated. If the ratio of the working age and non-working age populations can be stabilised, the number of people entering the workforce will follow.

It is common for Chinese families to delay having children.

Fertility Factors

While the increasing female labour force participation is a solution for demographic shift, studies have also found that the fertility rate of females tends to decline if more women participate in the workforce. Although Penang’s married workforce is nearly at 60%, the likelihood of having more than two children per couple is still low; this shift is a relative norm in developed countries.

For example, demographic transition is well advanced in the East Asian region, namely China, Japan, South Korea and Singapore, followed by South-East Asia and South Asia. As the share of working age population increases – with a reduction in fertility rate and an increase in life expectancy – income per capita and output are elevated, with a lower number of dependents per household. But as the working age population dwindles, economic growth could be substantially affected if this persists.

To add to things, it has become common to delay having children; this is relatively evident in Chinese and Indian families. According to the Department of Statistics Malaysia, Bumiputeras have the highest fertility rate, with 2.5 live births per female, compared to 1.3 live births for Chinese and Indian females.

Malaysia recorded the lowest ever fertility rate in 2016. The 2017 Malaysia Vital Statistics published by the Department of Statistics Malaysia shows that the fertility rate was at 1.9 babies per female aged between 15 and 49. This is lower than the global average fertility rate of 2.5 babies born per female, based on the latest figures published by the World Bank.

Malaysia’s total fertility rate is also below the replacement level of 2.1 babies. This means that the average number of children a female has is insufficient to replace herself and her partner. A sustainable replacement level of fertility is crucial in the long run so that each generation is sufficiently replaced.

In the short run, though, economic efficiency and poverty reduction can be improved through low reproduction rates. A fall in fertility results in a low dependency ratio – the consequence of an increase in the proportion of working age population and a decrease in the proportion of child population – and the cost of supporting a smaller-sized family is relatively lower.

This may not be sustainable over time, as can be seen from countries with low fertility rates and high economic growth such as Singapore (1.2 births per female in 2015); the in-migration of knowledge workers is then encouraged to increase its working age population. In 2016 China’s government loosened its fertility policy to alleviate shrinking population woes, which includes rapid population ageing, skewed sex ratio and a shrinking workforce. Its one-child policy thus became a two-child policy.

Malaysia has no such restrictions; instead, it has a number of policies to address changes in family development and older persons. The mid-term review of the 4th Malaysia Plan (1981-1985) found that the increase in population growth could be beneficial to national development goals; however, the Second Population Strategic Plan Study 2009 found family size getting smaller and the total fertility rate on a declining trend.

The level of economic development also influences the fertility rate in different states across Malaysia. Terengganu and Kelantan represented only 2.6% and 1.9% of the national economy respectively, but recorded the highest fertility rates in the country, with 3.2 children per female (Figure 2).

On the other end of the spectrum, the more developed states, such as Selangor, KL and Penang, recorded a fertility rate below the national average (1.7 babies, 1.5 babies and 1.4 babies respectively in 2016).

This low rate of fertility is superseded by inter-state migration for work and education.

In a nutshell, fertility rates drop as the economy prospers. Less developed countries are more fertile compared to more developed countries, and the share of world population is also shrinking in the more developed regions.1

Education and Growth

The structure of the labour force has shifted towards an older workforce. As there are more opportunities for higher education today, the youth labour force aged between 15 and 24 has shrunk by half – from 30.8% in 1985 to 15.2% in 2015 – albeit labour supply has doubled since then.

The number of older cohorts aged 40 and above grew faster than prime working age cohorts (25-39 years old), with an annual rate of 3.8% compared to 2.7% for the younger cohort (Table 2). In other words, more prime working age talent is needed.

For the past 30 years, Penang’s labour supply has become more educated; tertiary-level employees have quadrupled, while the number of employees educated up till the primary level has seen a three-fold decline.

Secondary-level employees make up the largest proportion of the labour force. It is very likely that this group needs to go on the upskill by undergoing training and harnessing technological competences in light of the rise of automated processes.

Interestingly, Penang’s workforce is relatively more educated than the national workforce. While the number of tertiary-educated employees has generally improved, this proportion is larger in developed states such as Penang (32.4%), KL (42.7%) and Selangor (37.6%), versus the national percentage of 27.7% in 2016. For employees with primary-level education, the proportion of national labour supply is larger than the share in Penang.

Malaysia is facing an out-migration of blue-collar workers to its neighbouring countries.

Conclusion

The sustainable growth of the working age population is vital for continued economic growth. If birth rates are stagnant, the entry of young talents to support the new engine of growth is likely to be affected. Furthermore, working behaviours are changing following the rise of a gig economy,2 which will likely affect the employment policies of companies.

A number of population-related policies have been formulated to address the low fertility issue as well; these include the National Social Policy (2003), a revised National Women Policy (2009), National Policy for Older Persons (2011), and National Policy on Reproductive Health and Social Education (2009).

Policymakers should also attempt to incentivise workers from states with higher fertility rates to relocate to states that have lower fertility rates. In the same vein, a long-term policy is needed to tackle low births in developed states.

The government needs policies in place to address the healthcare and social security issues of the elderly. More ageing community centres and family-friendly policies are needed to cater to the needs of the baby boomer and millennial generations, respectively. That way, the elderly can spend their time in a healthy and meaningful environment, while working adults have the support system they need to start their own families.

References

Bloom, D. E., Canning, D. and Sevilla, J. (2001). Economic growth and the demographic transition. National Bureau of Economic Research (NBER) Working Paper.

Bloom, D. E. and Finlay, J. E. (2009). Demographic change and economic growth in Asia. Asian Economic Policy Review, 4, 45-64.

An, C.-B. and Jeon, S.-H. (2006). Demographic change and economic growth: An inverted-U shape relationship. Economics Letters, 92, 447-454.

1Bloom, D. E., Canning, D. and Sevilla, J. (2001). Economic growth and the demographic transition. National Bureau of Economic Research (NBER) Working Paper.

2A gig economy is characterised as independent contractors who work part time or temporarily, and hold many flexible jobs. The gig economy undermines the traditional economy of full-time workers who rarely change positions.

Ong Wooi Leng heads the Socioeconomics and Statistics programme at Penang Institute. Her work lies in labour market analysis and socio-economic development.



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