THE Employment Insurance System (EIS), to be implemented next year, is said to benefit about 6.5 million local employees (current count) in the private sector.
However, one hears concerns among many quarters.
Among the questions frequently asked include: why do we need EIS when Malaysia has retrenchment benefits and the Human Resources Development Fund (HRDF)?
EIS will add to the cost of doing business and be an added burden to the workers.
Is this the right time to introduce labour market reform when our economy is challenged on many fronts?
Why fix it if it ain’t broken?
As a backdrop, several years ago, a group of wise individuals were assembled to diagnose the economy that experienced a step-down in the growth trajectory post the 1997 Asian Financial Crisis (AFC).
Although growing, Malaysia was losing its competitiveness compared with its peers.
Among the main problems identified had to do with labour productivity.
Upgrading production and innovative services and getting into more value-added activities required some changes in the labour market.
Yet the phenomenon in Malaysia since the late 1980s was the reverse.
On the supply side, workers were not inclined to upgrade their skills because there were not enough skilled jobs created.
The industry, on the other hand, preferred the current business structure and was reluctant to upgrade into higher value-added activities or to venture into new business areas which involved hiring new and skilled workers.
Two main reasons were identifiable. Firstly, due to the supply of cheaper foreign labour, business as usual is still profitable and, secondly, the high dismissal costs of local workers.
Consequently, we were stuck in the low value-added production, less efficient and less innovative services and low wage regime.
Our problem is both with the workforce and the workplace.
The level of education and, more specifically, technical, vocational education and training (TVET) were low and not meeting industry’s requirement.
At the workplace, labour law with regard to dismissal is not so simple and does not function effectively compared with other countries in the region.
When companies want to restructure or upgrade technology, it may involve dismissing workers. But, in our case, business seems to hold back because of the cumbersome dismissal processes when firing workers.
The notice period for redundancy dismissal in Malaysia is equivalent to 6.7 weeks compared with only three weeks in Singapore.
Malaysian employers have to pay severance settlement for redundancy dismissal equivalent to 17.2 weeks of salary, whereas the Singaporean counterparts have no cost of firing. In addition, our working hours, in general, are inflexible.
Since Merdeka, we pride ourselves on being an inclusive, compassionate and caring society, and yet, we have a narrow and fragmented social safety net.
The structural economic transformation will involve people losing jobs and the reform to protect workers in the formal economy was missing.
The EIS is the social insurance for the unemployed, to protect against the risks associated with economic distress and it will provide the flexibility for business to restructure to attain higher productivity.
Retrenchment benefits under the Employment (Termination and Layoff Benefits) introduced in 1980 stipulated that benefits upon termination or retrenchment must be made by the employer to the employee no later than seven days after the relevant date.
The payment of benefits is based on the length of completed service. It is a cost to the employer and no cost to the employee.
However, when a company goes bankrupt, employees are not in the top list of recipients of proceeds from liquidated assets. Some workers are fortunate to have responsible employers but others might not be as lucky.
Employers can actually abscond without even paying the last wage, and the retrenchment benefits only cover those earning RM2,000 and below.
A tripartite responsibility of the government, employers and employees is better than placing the responsibility solely on one party, in the case of retrenchment benefits, on the employers.
EIS is a contributory scheme from all three parties — both employers and employees have to contribute to the fund and the government will contribute RM70 million.
This is on top of the RM52 million granted to the Social Security Organisation (Socso) in 2011 for the same purpose.
The amount is a boost to the fund and thereby reduces the burden on employers and employees.
EIS is a combination of an active component of labour market policy which involves training and retraining of retrenched workers.
It has to be accompanied by an efficient labour market exchange, making job search easier for both employers and employees.
In some countries, a relocation allowance is provided. Hopefully, it will become part of our EIS.
The other element is the allowance paid to someone who loses a job (unemployment benefits) for a maximum of six months while actively seeking employment.
To safeguard against abuse, the system requires proof that one is actively seeking employment and not refusing suitable job placement. It was designed to function in times of economic distress when companies have to scale down operations.
In the current economic transformation climate and global competition, where a change in the industrial structure may involve firing workers, EIS acts as a stabiliser/cushion and the training and the retraining elements will improve the employability of workers.
Socso was chosen to administer the fund, which will be self-
sustaining, financed from the profits earned from investments made.
The investment panel includes representatives from the Finance Ministry and Bank Negara Malaysia.
Socso’s track record speaks for itself.
Employers are also paying to the HRDF, whose purpose is to improve skills for the workforce as part of an effort to accelerate economic growth.
Employers pay a Human Resource Development levy for each working employee at the rate of one per cent of the monthly wages of the employees.
Maybe, there is a way of looking into EIS and better utilisation of the HRDF, working synergistically. After all, the agencies are all under the Human Resources Ministry.
It will be in the interest of the economy for the ministry to review laws and regulations on hiring and firing.
While certain regulations are necessary, it will reduce the cost of doing business if rules are made simpler and clearer.
To sum up , the answer to my earlier question is, there are a lot of issues with our labour market, and the way forward is for us to fix them.
The writer is professor and director of the Social Security Research Centre, Faculty of Economics and Administration, Universiti Malaya.