Malaysia's latest income inequality trends explained, according to the World Bank
KUALA LUMPUR, Feb 5 — Malaysia has the highest rate of income inequality among peers nearing high-income status, with intra-ethnic disparity being the biggest contributor despite the widely-held belief that wage gaps between races are bigger, according to the World Bank's latest report released this morning.
So what explains Malaysia's income inequality patterns?
The Bank said despite pro-poor growth, income is still highly concentrated at the top.
While income has grown more rapidly for the poor and for people in the middle of the income distribution, but because they started from a low base, absolute gaps remain.
As of 2022, the bottom 20 per cent of people in Malaysia held less than 6 per cent of income, up from just 4.6 per cent in 2004.
The share of income held by the Top 20 per cent of the distribution fell from 46 per cent in 2004 to 41 per cent in 2022.
'The labour income share of gross domestic product in Malaysia grew over the last two decades but may have fallen after the pandemic. While sources differ as to the exact share of national income going to labour in the last two decades, data indicated similar trends,' the Bank said.
Between 2004 and 2014, it grew rapidly when income inequality was falling.
It then slowed down between 2014 and 2019 when income inequality flattened out. The trend eventually reversed during and after the Covid pandemic, driven by lower incomes in the service sectors.
By 2022, labour share of income was likely below the 45 per cent target set by the government as part of the Madani Economic Framework.
Employment imbalance
Employment remains the main source of income for Malaysian households. Salaries and wages represent 50–60 per cent of household income, and self-employment income accounts for almost 40 per cent, the Bank noted.
The rich, on the other hand, derive additional income from capital, which is not taxed.
Capital ownership is highly concentrated among top income earners, with the richest 10 per cent of Malaysian households holding 70 per cent of total wealth, meaning that this outsized income share benefits the richer few.
This concentration of wealth and income is reinforced by the differences in skills premium across income distribution.
The premium to higher education, be it vocational or university, typically results in an upward slope, which means that for the same level of education, richer workers in Malaysia receive a larger return than poorer workers do
Several factors explain the lower return for poor workers.
One of them is that poorer children learn less at school than richer children and tend not to pursue fields that yield high salaries.
Many also do not graduate with the skills that are in demand and are usually forced to take up the same types of jobs.
'Workers from poorer households earn less in the labour market because they are also more likely to be own account workers (28 per cent in the bottom decile versus 15 per cent in the top decile), work in informal employment (over 80 per cent in the bottom decile versus less than 20 per cent in the top decile), and work in lower-skilled occupations,' the bank said.
Smaller family unit
Decline in household size among the poor is also likely a factor.
The Bank noted fertility rates, and consequently household size, have plummeted in Malaysia, especially among the poor.
This trend contributed to the decline in inequality in 2004–14, when average household size fell 5.3 per cent.
The decline was much greater for households in the poorest 40 per cent of the distribution, particularly households in the poorest 10 per cent, among which average household size fell almost 10 per cent.
All this is happening even as Malaysia is expected to become a high-income nation in three years time.
The report said the current inequality level means that the high-income prosperity is not yet within the reach of many people in the country.
At 39, Malaysia's Gini index, a measure of the distribution of income across a population, is higher than that of both economies that recently achieved high-income status (mean of 31) and established high-income countries (mean of 30).
Among regional peers, Malaysia has the third-highest Gini after the Philippines and Thailand.
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