Discussion Paper

No. 2011-51 | December 02, 2011
A Counterfactual Decomposition Analysis of Immigrants-natives Earnings in Malaysia


Economics of discrimination has been the topic of interest of many in the last decade or two. Human capital theory describes wage determination as a function of labour human capital and should be determined based on marginal productivity theorem of labour economics. Islamic theology also dictates paying labour well in time and equal to their productivity not based on his colour, race, gender, nationality health status and other non-economic factors. The current study analyses the immigrants-natives wage gap to find the extent of potential discrimination against the immigrants. Using employees’ level data from the Enterprise Surveys by the World Bank in 2007, standard Oaxaca–Blinder technique and Machado–Mata counterfactual decomposition is applied. Findings indicate an existence of earning's differential in favour of natives or the Malaysian citizens and immigrants have a disadvantage. On the other hand, the differential increases until the middle of income distribution and the start declining. It suggests higher-income groups have a low level of discriminatory disadvantage. Labour market productivity could be increased if this differential is reduced, which motivates the employees.

JEL Classification:

J, J7, J1, J3


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Cite As

Muhammad Anees, Muhammad Sajjad, and Ishfaq Ahmed (2011). A Counterfactual Decomposition Analysis of Immigrants-natives Earnings in Malaysia. Economics Discussion Papers, No 2011-51, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2011-51

Comments and Questions

Anonymous - Invited Reader Comment
December 12, 2011 - 08:59

see attached file

Muhammad Anees - First Response to Referee Report
December 18, 2011 - 08:01

Appreciating the valuable input to improve the language to make it more understandable along with other comments. As a matter of interest, the major objective of the paper is to report the wage differential across the two groups (natives and immigrants), which is not possible by poolability of the data. ...[more]

... As a fact, the decomposition techniques require the two groups/samples to be identified at a priory. Other input is also recognised worth and a little time would be needed to complete the first revision. I again thank the referee for the vauable comments, which will definitely improve the paper.

Muhammad Anees - Responding to the First Referee Report
December 20, 2011 - 16:06

Thanking the referee for the valuable comments, I am pleased to respond in detail to the observations, taking each point in turn. I welcome more comments indicated to improve ours article. Thanks also to the editor to facilitate the discussion.

(1). The referee identified wordiness in the language, which ...[more]

... we have tried to overcome, but still there would be a feel of such issues, which we assume would be due to the technicality used in the paper for decomposition analysis.

(2). the referee further suggests using the Chow test for checking if pooling is appropriate. We take the stand that decomposition techniques require the two groups to be identified a priori. Out selection of the models section is desired only to describe what models would be better to capture the effects of human capital across the two groups, whether separately or pooled models would be suitable. The use of information criteria is deems to select the good of models. The discussion follows the lines taken in (Hunt, 2008) and others.

(3). Our modelling strategy is expected to be self-explanatory and relies on standard tools which takes standard hypothesis from the literature in Labour Economics. It is assumed that standard definitions of the hypothesis should have been skipped as the main objective of the paper was to capture the differentials across the immigrants and natives in our case, and only relevant human capital determinants are included which explain their contributions in terms of increasing or decreasing the wage gap.

(4) In introduction, a new paragraph has been added to summarise the labour market conditions in Malaysia.

Anonymous - Referee Report 1
January 11, 2012 - 10:25

see attached file

Anonymous - Referee Report 2
January 16, 2012 - 08:50

see attached file

Akihito Tokuhara - Invited Reader Comment
January 16, 2012 - 09:15

see attached file

Muhammad Anees - Revision with the suggestions
January 16, 2012 - 09:56

Thanks to all the referees and readers for their valuable comments and review of my paper. As a young researcher, I would learn a lot to follow these comments and suggestions. I will come back with a more refined and updated draft in a short time.