Immigrants Are Welcome Here: A Case Study of Immigration in Malaysia

In the last year, immigration has captured political and economic debates in numerous countries. Some argue that immigrants displace citizens of the receiving country, while others claim that their tax contributions stimulate economic growth. In spite of these contradictory views, current nationalist movements have made immigration an issue permeated by negativity. This single-sided narrative has set the role of the immigrant as dangerous and harmful to society and the economy. However, evidence suggests that immigration can benefit both immigrant and native workers by decreasing a firm’s costs and increasing production.

Özden and Wagner, in their study “Immigrant versus Natives? Displacement and Job Creation,” estimate the impact of immigration on native workers in Malaysia through two effects: the level of substitution between natives and immigrants in the labor market, and the scale effect, which models the increase in demand for native workers as immigrants reduce production costs due to their lower wages, leading to increased output.

Malaysia is an appropriate example for understanding how low-skilled immigration affects the domestic labor market. Between 1990 and 2010, the percentage of immigrants in the workforce increased from 3.6 to 10.6 percent. In 2010, 66 percent of immigrants had at most primary school education, while those who finished high school represented 19 percent. On the other hand, in the same year, 20 percent of native workers had primary school education or less and 66 percent had at least high school education. Immigrants are primarily employed in agriculture and construction, with a few in manufacturing, and even less in higher-skilled service sectors.

To determine the effects of immigration on native workers, Özden and Wagner identified three parameters: the elasticity of substitution between native and immigrant labor, the elasticity of demand for native work, and the elasticity of supply for native work. They used data from the Malaysian Labor Force Survey from 1990 to 2010 to estimate three fixed-effects models (industry-region-year): the effect of immigration on native employment, native wages, and immigrant wages.

Their findings showed that employment and wages of native workers had no correlation with immigration flows. However, a second analysis found that the elasticity of labor demand was greater than the elasticity of substitution between natives and immigrants, which signals that the scale effect is larger than the substitution effect. This means that for every ten additional immigrant workers, jobs for native workers increased by 4.1 in a local labor market, while the effects on wages were minor. At the national level, a ten percent increase in immigrant workers (equal to a one percent increase in workforce) is correlated with an increase of 4.4 percent in native employment and 0.14 percent in native wages, although immigrant wages decreased by 3.9 percent.

Education also proved to be a contributing factor with regards to who benefits from immigration. Native Malaysians with higher levels of educational achievement benefited more from immigration. Ten additional immigrant workers generated 1.6, 3.1, and 0.4 jobs for natives with lower secondary education, completed secondary education, and some type of vocational training, respectively. On the other hand, natives with lower levels of education are also displaced by immigrant workers.

Overall, their study found that immigration had a positive effect on the Malaysian labor market as the reduction of costs and the expansion of output compensate for the displacement of some native workers. Moving forward, this paper is relevant to debates over immigration policy by showing that immigration can have positive effects in the local labor market, specifically in sectors with large-scale effects or where natives are more educated than immigrants.

Article source: Cağlar Özden and Mathis Wagner. “Immigrant versus Natives? Displacement and Job Creation.” The World Bank Policy Research Working Paper 6900, 2014: 1-63.

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