Why might focusing on labour income share be misleading for Malaysia?

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Focusing on Labour Income Share Could Mislead Malaysia's Economic Policies

The focus on Labour Income Share (LIS) as a primary measure for narrowing Malaysia's income gap may be based on a flawed marker, potentially hindering the nation's industrialisation and technological advancement. Available evidence suggests that an increased LIS might conflict with Malaysia's objectives of upgrading its industrial base and transitioning towards more productive, capital-intensive production methods. This presents a significant trade-off between the country's economic growth and its distribution goals, as policies anchored on LIS could inadvertently mask underlying inequalities and lead to suboptimal policy responses.
LIS Trend Suggests Deindustrialisation

An analysis of LIS in Malaysia between 2005 and 2016 revealed an underlying trend of deindustrialisation. During this period, the observed increase in LIS was largely attributed to the expansion of low- to medium-skilled industries. These sectors characteristically depend on less advanced technologies and a larger workforce, rather than driving innovation and higher productivity.
Weak Correlation with Income Inequality

Khazanah Research Institute (KRI) argues that LIS is not a reliable indicator of income inequality, nor an effective tool for reducing it. Technical analysis, specifically regression modelling of LIS data, showed a negative response in the Gini coefficient, indicating a tenuous relationship between wage share and income inequality. This suggests that a higher LIS does not necessarily translate to a more equitable distribution of income.
Alternative Measure Proposed for Greater Accuracy

Researchers propose Labour Income Dispersion (LID) as a more accurate measure to understand income inequality in Malaysia. LID assesses wage disparities across or within specific economic sectors, offering more granular insights than LIS. A KRI study found a wider disparity among paid workers and the self-employed compared to overall income inequality, highlighting the importance of examining wage gaps more closely.
Implications for Industrialisation and Policy Response

The potential disconnect between increasing LIS and Malaysia's industrialisation goals implies a need for a re-evaluation of current policy frameworks. To foster technological upgrading, a shift in focus from targeting factor income shares to understanding the parameters that shape them is recommended. This approach could lead to more effective policies that genuinely address income inequality while supporting the nation's transition to higher-value economic activities.

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Why might focusing on labour income share be misleading for Malaysia?

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