Product Quality Changes and the Demand for Skills: Evidence from Malaysia’s Trade in Manufactures

The competitiveness of the Malaysian manufacturing sector has become a major issue given recent arguments that Malaysia is being squeezed by low wage competitors and rich country innovators. Critical to competitiveness is product quality. The findings of the study indicate a less than favourable position for Malaysia due to lack of product differentiation coupled with severe trade-induced adjustments in the highly driven traded sector of machinery and transport equipment. Low quality varieties continue to dominate Malaysian exports. It is thus not surprising to note that exports do not influence skills upgrading in manufacturing, since the demand for labour is a derived demand, inherently derived from the products being produced. The higher utilisation of unskilled relative to skilled labour in manufacturing is therefore a reflection of high volume manufacturing of low quality varieties. Thus the findings of the study do not indicate an overall progression of the Malaysian manufacturing sector in terms of moving up the quality ladder.