External Influences and Labour Market Differentials in Manufacturing: Evidence from Malaysian Panel Data

There are two stylized facts regarding labour market differentials in the Malaysian manufacturing sector - diverging trends in skill and wage differentials and asymmetric experience of these differentials between the 1980s and 1990s. These trends coincided with increased trade flows, foreign direct investment and the influx of foreign migrant labour. The paper seeks to examine the impact of external influences on labour market differentials for the period 1983 to 2000, using relative employment and wage equations derived from a standard translog cost function. The estimations are conducted for a new panel data set, specially constructed for the study. The results show that foreign participation in the form of foreign direct investment does not matter for the observed differentials. However, the other two international strands, foreign labour and foreign competition in the form of imports, have significantly influenced labour market differentials. In conclusion, external factors are relatively more important for labour market differentials in manufacturing in the 1990s vis-à-vis the 1980s.