except for the agriculture and the mining sector (see Table 7 and Figure 9). In this period, employment growth was highest for the construction and the manufacturing sectors, with average annual growth rates of 9.8 percent and 9.4 percent, respectively. After 1997, employment growth was relatively modest. In the period between 1997 and 2007, aggregate employment growth was 2.1 percent and the services sector experienced the highest employment growth, averaging 3.6 percent per year. This contrasted with the manufacturing sector, which experienced stagnating employment. In the following period between 2007 and 2018, the services sector continued to experience a relatively high rate of employment growth, averaging 4.1 percent per year. In contrast, employment in the manufacturing sector grew at a relatively more modest rate, with an average growth rate of 2.3 percent per year. Overall employment growth amounted to 3.1 percent per year

# **3.3. Labor Productivity Growth**

In addition to growth associated with changes in employment rates and changes in the working age population as a share of the total population, growth associated with changes in output per worker is a third fundamental component of growth in output per capita. Thus, this subsection focuses on how output per workers has evolved in Malaysia both in the aggregate and across sectors. Besides, the section looks at the relationship between structural change and labor productivity growth. For this purpose, it assesses whether there has been a positive correlation between sectors’ initial productivity and subsequent changes in their employment shares.

Between 1987 and 2018, Malaysia’s aggregate output per worker – that is, labor productivity – more than doubled in real terms, from RM 41,370 to RM 91,074 (see Table 8). At an average annual rate of 4.8 percent (excluding the mining sector), the overall growth rate in output per worker was highest in the period from 1987 to 1997 (see Table 9). After 1997, output per worker continued to grow, but at a much slower pace. The growth rate in output per worker was 2.4 percent for the period from 1997to 2007, and then declined further to 2.1 percent for the period from 2007 to 2018. For the entire period from 1987 to 2018, the average annual growth rate in output per worker was 2.8 percent. When the years of economic crisis caused by the Asian Financial Crisis, the burst of the United States technology bubble, and the Global Financial Crisis are excluded, the average annual growth rate in output per worker for the period from 1987 to 2018 was significantly higher, at 3.8 percent. However, even if the crises years are excluded the trend decline in the labor productivity growth rate is still apparent.

**Table 8: Output per worker, 1987-2018**

|||**Output per worker (**<br>|**constant 2015 MYR)**<br>||
|---|---|---|---|---|
||**1987**|**1997**|**2007**|**2018**|
|Agriculture|30,100.38|41,749.93|51,665.02|63,344.58|
|Mining|1,884,986.04|2,258,194.59|2,703,543.11|1,135,848.02|
|Manufacturing|37,365.53|63,454.85|102,114.36|121,943.68|
|Construction|28,736.80|41,179.33|29,381.44|52,645.89|
|Trade|21,434.30|50,142.16|52,920.75|67,759.58|
|Transport|50,617.23|84,467.84|115,409.41|141,432.79|
|Business|49,032.70|102,087.52|99,035.22|190,163.04|
|Other|29,823.28|40,417.39|55,222.15|60,091.45|
|_Aggregate_|_41,370.36_|_63,251.20_|_77,165.23_|_91,074.25_|
|_Aggregate excluding mining_|_31,146.60_|_53,345.30_|_67,307.20_|_84,613.40_|

Source: Authors’ calculations based on data from DOSM Figures 10 and 11 show that there are large labor productivity gaps between sectors in Malaysia. In 2018, the productivity gap between the most productive sector (business services) and the least productive sector 14