Malaysian labor markets under structural adjustment

Malaysia's sustained growth in the 1970s was boosted by windfall gains during two oil price hikes plus a commodity boom. Oil and commodity prices fell in the 1980s and Malaysia, an oil exporter, bungled into a rather severe depression in 1985-86. But it recovered quickly, to the surprise of some - and growth resumed in 1987. The events that led to the recession and quick turnaround are a Southeast Asia prototype. The author analyzes the key relationships in this cyclical behavior. He then focuses on long-term labor market issues of interest during the economy's 20-year transformation. It was found that the real exchange rate appreciated because of the inflow of foreign capital to support the government's budget deficit. And the increase in average wages in the period leading up to the recession was not corrected with the rise in the domestic exchange rate in a fully employed economy. Wages increased more than labor productivity did at a time when employment growth had slowed and the rate of unemployment had risen. The author also concluded that rising labor costs were only part of the problem of rising costs before the recession. The whole package of fiscal, monetary, and exchange rate policies - together with the labor market behavior - led to the recession.