Pertanika J. Soc. Sci. & Hum. 5(2): 139-144 (1997) ISSN: 0128-7702© Universiti Putra Malaysia Press

Measuring Labour Productivity through Labour RequirementApproach: The Malaysian Experience

ZAKARlAH ABDUL RASHID and CHAN KHAI YEW*Economics Department

Universiti Putra MalaysiaFaculty of Economics and Management

43400 Serdang, Selangor, Malaysia

Keywoods: sectoral labour productivity, input-output analysis, direct and indirect labourrequirements, comparative measurements of labour productivity

ABSTRAK

Kertas kajian ini mengukur produktiviti buruh dengan menganggar keperluan langsung buruh dan keperluantidak langsung buruh bagi setiap unit output yang cIihasilkan. Anggaran keperluan buruh ini diperolehidengan menggunakan kaedah input-Dutput. Kajian ini juga menggunakan dua jadual input-Dutput unlukcIua rahun yang berasingan supaya hasil kajian ini menjadi lebih mantap. Hasil kajian kemudian diuji denganmembandingkannya dengan indikator produktiviti buruh yang biasa digunakan seperti nilai ditambah setiapburuh, upah dan gaji setiap buruh dan output kasar setiap buruh. Hasil kajian ini menarik kerana walaupunkeperluan langsung buruh memberikan ukuran yang man tap bagi keseluruhan ekonomi namun sektor­sektor tertentu menunjukkan pentingnya peranan keperluan tidak langsung buruh d<!lam mengukurproduktiviti buruh.

ABSTRACT

The present paper measures labour productivity by estimating direct and indirect labour requirements perunit of output. Labour requirements are estimated by using an input-Dutput technique. The paper uses twoinput-output rabIes for two different periods to ensure the results are more consistent. The results of thestudy were then tested by comparing them with the ordinary measures of labour productivity such as value­added per labour; salaries and wages per labour and output per labour. It is interesting to note that althoughfor the whole economy direct labour requirement appears to be the consistent measure of labour produc­tivity, for some sectors of the economy indirect labour requirement is also important.

INTRODUCTION

In many production processes, labour costsrepresent a substantial proportion of total cost,with costs of materials. A rise in labour costordinarily alters many economic decisions withrespect to technological changes and obsoles­cence of techniques (Zakariah 1989). Aneconomy experiencing a rapid increase in itslabour cost would lose its competitive edge inthe world market unless its rate of increase inlabour productivity at least compensates theincrease in the labour cost. Improvement inlabour productivity is measured as the amountof output per unit of labour which leads to amore competitive production process. Risinglabour productivity, therefore, seems to be theonly way to solve the problems of a tight labourmarket, which is normally found in a progressiveeconomy.

In Malaysia, present labour shortages beganin the plantation sectors of oil palm and rubberand have spread to other sectors such asconstruction and manufacturing. The crisis isfelt most acutely in the manufacturing sector,the economy's engine of growth, which accountsfor 23.9% of total employment. As indicated inthe Economic Report 92/93 (Ministry of Finance1992), the manufacturing sector continued toachieve double digit growth of 13% in 1992. Interms of employment, the manufacturing sectorstill led other sectors in generating 74,000 newjobs in 1992. With a projected deficiency in therate of growth of the labour force (2.9% peryear) compared to the rate of job growth (3.1 %per year), the current labour crisis will bepersistent, at least in the short term.

Labour productivity, measured by addedvalue per worker, has improved in recent years.

Zakariah Abdul Rashid and Chan Khai Yew

In 1991, it amounted to RM25,021 with a growthrate of 9.54% during (MITI 1994). Labourproductivity in the manufacturing sector grewby 4.5% over the 1988-1992 period, comparedwith 3.4% in agriculture, and 3.1 % in miningsectors, but slower than the construction andservices sectors which registered 5.1 and 5.5%,respectively (Table 1).

Oshima (1989) shows that labourproductivity grew at 3.8% in Malaysia in theperiod 1960-1980. The growth rate was higherthan the average productivity growth of 2.7% forSoutheast Asian countries as a whole during thesame period, but lower than the average for thenewly industrializing economies (NIEs).

Many studies on labour productivity describeaverage productivity of the whole economy orbroad sectors of the economy. Maisom andMohd Ariff (1994), however, computed labourproductivity by sector (3-digit Malaysian IndustrialClassification) to explain the contribution oflabour productivity to total factor productivitygrowth of the Malaysian economy. By usingtraditional two-factor production function, thestudy does not take into account the inter­industrial relationships that may influence labourproductivity in a particular sector. An initialattempt of incorporating direct and indirectlabour requirements to fulfil final demand bysectors was made by Zakariah (1991).

DATA AND METHODOLOGY

In this paper, industries in Malaysia are classifiedbased on input-output classification, which hasbeen reduced to 40 industries. The input-outputtables published by the Department of Statisticsare aggregated to 60 x 60. The present studyadopts the input-output industrial classification

of the Department of Statistics except the servicesectors (sectors 39, 40, 42-60) which have beenaggregated to a single "service" industry. Theinput-output tables used in the study are for theyears 1983-1987. Data on the amount of labourengaged, value-added, and salary and wages werecollected from the SU11Jey of ManufacturingIndustries, published by the same department.Labour is defined as the number of personsengaged and classified according to MalaysianIndustrial Classification (MIC) at 3-digit level.The conversion from MIC to input-outputclassification was done by information given bythe Department of Statistics.

Labour coefficient may be defined as thequantity of labour per unit of output and iscalculated by dividing the amount due to labourby its total output. It thus shows how muchshould be contributed directly to labour foreach ringgit of output. It is the most widelyused index of labour productivity. An increasein input of an industry will increase the demandfor labour directly and other industries' demandfor labour indirectly. Through the input-outputrelations, the direct and indirect labourrequirements per unit of output, which show acomprehensive picture of labour productivity,can be obtained.

Each element in the matrix of Leontiefinverse, (I-A)'I, represents direct and indirectrequirements of intermediate inputs for oneunit increase in final demand. Labour coefficient,on the other hand, represents the amount dueto labour for each unit of output. Therefore,pre-multiplying the row vector of labourcoefficient by the Leontief inverse yields thedirect and indirect labour requirements per unitof output.

TABLE 1Productivity in the various sectors, 1988-1992

Sector 1988 1989 1990 1991 1992 *Growth rate

1988-1992

Manufacturing 15.9 15.9 ]6.6 17.7 18.5 4.5Agriculture 7.3 8.0 8.1 8.1 8.4 3.4Mining 183.9 194.3 198.9 203.9 202.0 3.1Construction 6.0 6.2 6.6 7.1 7.5 5.1Services 4.9 3.3 7.4 6.9 4.9 5.5

Note:Source:

140

"Compounded average annual growth rateMIT1, Malaysia, Ministry of International Trade and Industry, Report 1994, p 278, Table 7.27

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Measuring Labour Production through Labour Requirement Approach

Now, we can distinguish two concepts oflabour productivity. First, direct labour, I,measures labour inputs required per unit ofoutput of a sector. Second, given a completestructural description of the economy, the total(direct and indirect) labour con ten t of structuraldeliveries to final demand, may be derived:

wher,e the row vector in the left hand side ofequation (I) shows the sectoral labourcoefficients while the matrix shows the Leontiefinverse matrix, (I-A) ,I. Since bij of the matrixrepresents the inter-dependence coefficients, thefirst column of the matrix shows the amount ofsectoral output directly and indirectly requiredto fulfil one unit of final demand of the firstsector; and the interpretation is accordinglyapplied to second and nth columns. The productof the above matrix multiplication, shown in theright hand side, thus can be interpreted asfollows:

~);bil as the amount of labour directly andindirectly required to fulfil one unit of finaldemand of the first sector. Similarly, I);b;2 andsubsequently L;I;bin are, respectively, the amountof labour directly. and indirectly required tofulfil a unit increase in final demand of thesecond and nth sectors. And the grand totalLL.Ib, therefore, represents the total amount of

I I Ulabour directly and indirectly required to fulfilone unit increase of final demand.

The above expression can be compactlywritten as:

[

b b ... bII 12 in

[I I' 19 ••• I \] b b ... b- 1 21 22 2n

b b ... bn1 n2 nm

1* = I (I-A) ,I

IjIi

IjI;

IjI;

bin

b;2

b;n

(2)

(2)

AU: element in the Leontief inverse is the directand indirect increase in output of sector i foreach increase in tlnal output of sector j

IiA jj : direct and indirect labour to produce oneunit of sector j output

where 1* is vector of man-years required todeliver a unit of labour of each sector's productto tlnal demand. Changes in 1 measure changesin the overall labour requirements of an economyin delivering various kind of tlnal outputs. Suchchanges are the net result of changes in directand indirect labour coeftlcient of many sectorsand of shifting division of labour among sectors.Concurrent analysis of changes in direct and intotal labour requirement for particular outputgives some notion of the importance of shiftingindustrial specialization in the changingproductivity picture.

Since direct requirements of labour describethe amount of labour required in a particularindustry to produce a unit of output, whereas itsindirect requirements are the amount of labourrequired as a result of expansion of otherindustries, the latter is a result of inter-industrialrelationships among industries.

RESULTS AND DISCUSSION

Table 2 shows the results of simple regressionsof each of the direct and indirect requirementsof value-added per labour cost and value-addedper employee for 1990. The direct requirementsof labour appear to be a better measurement oflabour productivity compared to the indirectrequirements of labour. The adjusted R squareis higher and the coeftlcient of the independentvariable is highly significant in the firstmeasurement, whereas the coefficient in thesecond measurement is insignitlcant.

TABLE 2Direct and indirect labour requirements as measurement of labour productivity, 1990

Value-added per labour cost Value-added per employee

DirectIndirect

R-Square

0.3540.043

Coefficien t

-1.835-0.169

P-Value

0.00020.135

R-Square

0.2620.063

Coefficien t

-0.00006-0.000007

P-Value

0.00180.0934

Note: data on independent variables are compiled from Industrial Survey, 1990.

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Zakariah Abdul Rashid and Chan Khai Yew

The present study examined which of thetwo independent variables, value-added perlabour cost or value-added per employee,explained better the direct requirements oflabour. Both variables show the expected negativesign of the coefficients, implying that as labourproductivity increases less labour is requireddirectly. Table 2 reveals that the value-added perlabour cost explained better the variation in thedirect requirements of labour. The adjusted Rsquare for value-added per labour cost is 0.354,compared to value-added per employee of 0.262.Both variables have highly significant coefficients.

Changes in the number of persons engagedand in salary and wages can be used to detectproductivity changes. Since the former does nottake into account differences in skill levelswhereas the latter varies directly with skill levels,changes in salary and wages will captureproductivity differences better among differentcategories of workers. This may be theexplanation behind the different values of theadjusted R-square shown in the Table 2.

The size of the coefficients explains thesensitivity of value-added per labour cost, andvalue-added per employee variables (exogenous)on the labour requirements variable (endoge­nous). Given an increase in the labourproductivity, as measured by a decrease in theamount of labour required per unit of output,a relatively larger increase in value-added perlabour cost than those in value-added peremployee would be expected.

Since direct requirements of labour describethe amount of labour required in a particularindustry to produce a unit of output whereasindirect requirements are the amount of labourrequired as a result of an expansion of otherindustries, the latter is a result of an inter­industrial relationships among industries.

Results of our analysis show that in themanufacturing sector, direct requirements arelarger than indirect requirements of labour.About 70% of its total requirements representdirect requirements. However, some industries'indirect requirements are greater than theirdirect requirements. The industries whichindirectly require more labour include dairyproducts, oils and fats, animal feeds, beverages,industrial chemicals, paints, petroleum products,cements, and basic metals. These industries areresource-based industries and linked signifi­cantly with the rest of the sectors, their backward

linkage indices are generally higher than theaverage (Zakariah 1994). The direct influenceof labour requirements tends to deteriorate,perhaps due to the non-improvement in theeconomy's inter-industrial linkages (U IDO1992) .

Table 3 shows the indirect labourrequirements in 1971, 1981 and 1990 to fulfilfinal demand in resource-based and non­resource-based industries. The results show thatresource-based industries indirectly requirelarger amounts of labour than non-resource­based industries do. However, the difference inthe average indirect requirements of labourbetween the industries is non-significant. Theweighted average (Lespeyres indices sectoralgross outputs as weights) of the indirectrequirements of labour in the resource-basedindustries in 1971, 1981 and 1990 are,respectively, 27.218, 7,941 and 5,601 while thosein the non-resource industries based are 22.119,7.594 and 5.468.

The above results imply that improvementin labour productivity in the resource-basedindustries is more a result of an expansion ofother industries, whereas improvement in labourproductivity in the non-resource-based industriesis a result of an expansion in its own industries.

The indirect requirements of labour in thenon-resource based industry of electricalmachinery is particularly low, about one-half theaverage requirements of the non-resource basedindustries. The industry produces amongst thelargest output, but has amongst the lowestbackward linkages. The indirect requirementsof labour in the resource-based industry offurniture and fixtures, on the other hand, areparticularly high, about twice the averagerequirements of the resource-based industries.The industry has a fairly high backward linkagewith the rest of the economy.

From the above analysis, resource-basedindustries have higher-backward linkages andlarge indirect requirements of labour whereasnon-resource based industries have lowerbackward linkages and smaller indirectrequirements of labour. Testing the abovehypothesis, the Spearman rank correlationcoefficients between backward linkage indicesand indirect requirements of labour for 1983indices against 1981 requirements and 1987indices against 1990 requirements of 0.208(n=31) and 0.056 (n=31), respectively; were,

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Measuring Labour Production through Labour Requirement Approach

TABLE 3Indirect requirements of resource-based and non-resource based industries

(I) (2) (3)Sectors 1971 1981 1980

Resoure-based1 Dairy Foods 26.476 9.853 7.6052 Vegetables and Fruit 22.806 7.773 5.8843 Oils & Fats 24.100 7.776 5.4044 Grain Milling 12.252 3.874 2.8285 Bakery and Confectionery 24.855 8.916 6.5996 Other Foods 18.761 9.446 4.8237 Animal Feed 17.439 6.316 4.7808 Beverages 27.322 9.336 6.5829 Tobacco 16.857 6.456 4.786

10 Sawmills 19.833 6.681 4.993II Furniture and Fixtures 42.822 14.766 10.15312 Rubber Process 8.663 2.799 2.15913 Rubber Production 22.470 7.213 5.60814 Textiles 38.061 12.359 7.75915 Industrial Chemicals 37.122 6.150 4.00716 Paints, etc 23.628 7.273 5.45617 Other Chemical Products 28.824 8.960 6.40318 Petrol Production 62.284 5.847 3.11719 Plastic Production 20.107 6.681 5.08620 Glass Production 28.015 7.614 5.68521 Cement 25.707 7.546 6.10622 Non-Metallic 29.235 8.283 6.01523 Basic Metals 43.666 10.731 6.25424 Other Metals 31.934 10.942 6.337

Total 653.241 190.59 I 134.429Average 27.218 7.941 5.601

Non-resource-based1 Wearing Apparel 27.558 9.014 6.2652 Paper and Printing 26.] 12 9.]67 6.5173 Non-electrical Machinery 26.234 8.312 5.5084 Electrical Machinery 11.487 4.113 3.2525 Motor Vehicles 19.558 7.323 4.9936 Other Transport 24.822 8.562 6.5677 Other Manufactured Products 19.059 6.668 5.173

Total 154.830 53.159 38.275Average 22.119 7.594 5.467

Source: Computed from equation (1)Note: (I) and (2) calculated by using 1983 input-output tables while (3) used 1987input-output tables.

however, found to be insignificant at 5%. Thismay be explained by (i) the earlier finding thatthe indirect requirements of labour in resourcebased industries is not significantly larger thanthose in the non-resource based industries; and(ii) the correlation coefficients are calculatedfrom different years (the linkage indices canonly be calculated in the years in which input­output tables are published).

CONCLUDING REMARKS

Labour productivity is usually measured by value­added (or output) per unit of labour cost or perunit of employee, but it can also be estimated bylabour requirements to fulfil a given finaldemand. The advantage of using the latter isnot, it captures both the direct and indirectrequirements, incorporating the inter-industrialrelationships of an increase in final demand,

PertanikaJ. Soc. Sci. & Hum. Vol. 5 No.2] 997 143

Zakariah Abdul Rashid and Chan Khai Yew

whereas the former captures only the directrequirements of labour. The element of indirectrequirements of labour on labour productivitychanges is particularly important in resource­based industries. We may conclude thatmeasuring labour productivity changes by lookingonly at the direct requirements of labour maygrossly underestimate the "true" changes inlabour productivity.

The results of our analysis show that, ingeneral, direct requirements of labour are abetter description of labour productivity of thewhole economy than to its indirect requirements,thus affirming such studies. However, the roleof indirect requirements of labour should notbe overlooked, especially when studies arefocused on resource-based industries. Althoughthe results are statistically inconclusive as theyare limited by the given input-output tables, theycertainly provide a clear understanding of theextent of indirect requirements of labour,particularly in the strong resource-basedbackward linkage sectors.

REFERENCES

MAlso:Vl, A. and MOHO. ARIFF HeSSEI:-.1. 1994.Decomposition of labour productivity inselected Malaysian manufacturing industries,1973-1990. Paper presented at SeminarEkonomi dan Pengurusan, organised byJabatan Ekonomi, Fakulti Ekonomi danPengurusan, Universiti Pertanian Malaysia, atPort Dickson, 18-19 October.

MALAYSIA DEPARH-IE1'iT OF STATISTICS. Input-OutputTables for various years: 1983 and 1987.

MALAYSIA DEPARTMENT OF STATISTICS. Survey ofManujactwing Industries, for various years: 1971,1981 and 1990.

MALA\SIA Ml:-.1ISTRY OF FI1'iANCE. Economic Report 92/93.

MALAYSIA, Ml:--iISTRY of blTERi\ATIONAL TRAD1:: andIi\'DUSTRY. 1994. Malaysian International Tradeand Industry Report 1994.

OSI1I~IA, HARRY T. 1989. Savings and investment inA~ian productivity growth. Malaysian foumal ofEconomic Studies 26:

Ui\IDO 1992. Final report on dynamic input-outputanalysis and sectoral projections of theman ufacturing sector 1990-2000. KualaLumpur: Government of Malaysia.

ZAKARIAI-I ABDUL RASHID. 1989. Price stHlcture,technological obsolescence and labourproductivity - a vintage approach. SingaporeEconomic Review 34:

ZAKARIAI-I ABDUL RASHID. 1991. Costs of productionand labour productivity: 1978 & 1983 Malaysianvintage technology. Jurnal Ekonomi Malaysia.26: 95 - 124.

ZAKARIAI-I ABDeL RASHID and M.S.H. OTH:VI~\I. 1994.Economic impact of oil trade in a developingcoun try: An empirical investigation of conse­quences of recent Gulf Crisis in Malaysia. JurnalEkonomi Malaysia. 26: 39-55.

(Received 27 Ap'ril 1997)

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