Hidden subsidy behind cheap labour

AS Bangladesh and Malaysia discuss reopening labour recruitment and strengthening worker protections, an uncomfortable question remains unresolved.

Malaysia’s recruitment fee problem is usually treated as a corruption story. But it is also an economics story, and that is what makes it more stubborn. When workers borrow heavily to secure jobs here, the cost becomes debt, and debt changes behaviour.

A worker who arrives already carrying years of repayments cannot easily negotiate for higher wages, refuse excessive overtime or endure periods without pay. His effective earnings are substantially lower than the wage stated in his contract, and the debt helps lock in a labour market built on cheap, compliant work rather than productive competition.

Both the recruiter and intermediaries collect the money. But the economic effect resembles a hidden subsidy to low-cost labour, enabling employers to benefit from a more stable supply of workers without directly bearing recruitment costs themselves.

Consider a labour-intensive enterprise recruiting a thousand workers. If the cost of recruitment is shifted almost entirely onto workers rather than borne by employers, millions of ringgit in labour-supply costs are effectively removed from company balance sheets over each recruitment cycle. The costs are simply carried elsewhere.

This is what economists mean by externalisation. The cost of bringing a worker from Dhaka to Selangor – recruitment, documentation, travel and placement – is unavoidable. Someone must bear it.

In many labour markets, employers bear these costs directly, or wages are high enough that workers can absorb them without falling into debt. Malaysia’s recruitment system has often done neither. It shifts much of the cost onto workers, wraps it in a fee structure administered by private intermediaries and prices it above what many low-wage workers can bear without borrowing.

The consequences extend well beyond worker welfare. Many of Malaysia’s labour-intensive industries have evolved around labour-cost assumptions that are reinforced by the externalisation of recruitment costs. If employers bear these costs directly, as the International Labour Organisation’s employer pays principle envisages, the economics of labour-intensive production would likely shift – not catastrophically or overnight, but perceptibly.

The incentive to automate, upgrade processes and rely less on ever-expanding pools of low-cost labour would become stronger. That, in turn, would put pressure on a development model that has often relied on relatively cheap hands rather than more productive ones.

The New Industrial Master Plan or NIMP 2030 seeks to push Malaysian industry towards automation, higher productivity and more sophisticated production. Yet, those ambitions sit uneasily beside a labour market that continues to socialise recruitment costs onto workers and thereby preserve the economics of labour-intensive production. Such hidden subsidies weaken the commercial case for precisely the investments in automation and upgrading that Malaysia says it wants to encourage.

This helps explain why employer-paid recruitment reforms have struggled to gain lasting traction. The Employer Mandatory Commitment, introduced in 2017, faced strong resistance from industry groups and underwent several revisions before eventually becoming part of Malaysia’s formal recruitment framework.

In practice, implementation and enforcement have remained uneven.

The persistence of large recruitment debts despite formal employer-pays commitments suggests that the underlying incentives to externalise these costs have never fully disappeared. The problem is deeper than administrative difficulty or political hesitation. Industries that depend heavily on low-cost labour have powerful incentives to preserve the existing arithmetic.

The recruitment fee, therefore, also functions as a structural feature of the production model, shaping labour costs in economically significant ways.

Malaysia is hardly unique in facing this dilemma. Labour systems that rely on heavily indebted and relatively immobile migrant workers, including aspects of the Gulf’s kafala system, have often struggled to generate strong incentives for productivity upgrading. Easy access to low-cost labour can become a substitute for innovation.

Malaysia is ageing. Its domestic labour force is growing more slowly, and its dependence on migrant labour remains substantial. The government has acknowledged major worker shortages across several sectors, while industry groups have consistently argued that the shortages are even more severe than official estimates suggest.

Whatever the precise number, the direction is clear: Malaysia will need more migrant workers. But it will also need a recruitment system in which workers arrive as employees rather than trapped debtors.

An economy that depends on workers who borrow everything to be here, and who cannot easily change jobs or leave without forfeiting what they paid, is building on fragile foundations. Trapped labour – as economic history repeatedly suggests – is a ceiling, not a base.

This is not an argument against migrant labour. It is an argument against an unfair recruitment system that is also economically self-defeating. Every ringgit shifted onto workers as a recruitment cost is a ringgit that reduces their effective earnings, weakens labour mobility and reinforces an economic model built around cheap labour.

Malaysia cannot move decisively up the value chain while significant parts of its production system remain organised around the availability of the cheapest possible labour. The recruitment fee is not separate from that problem. It is one of the mechanisms that reproduces it.

The reopening of the Bangladesh labour corridor offers an opportunity to rethink this model. The question is not whether recruitment channels will reopen, but whether they will be rebuilt on a genuinely employer-paid basis, with enforceable protections and transparent fee structures.

Malaysia would still depend on migrant labour, but it would begin removing one of the hidden subsidies that has kept parts of the economy dependent on cheap labour and slow to upgrade.

For industries built around the current arithmetic, that is not a comfortable conclusion. But it is the right one.

The man who arrived at the Kuala Lumpur International Airport in debt did not create Malaysia’s productivity problem. He is carrying it.