# **1. Introduction**

**This paper supplements our earlier report (World Bank, 2020), which estimates the number of foreign workers in Malaysia at 2.96 million to 3.26 million in 2017** (of which an estimated 40.8–49.3 percent are irregular foreign workers<sup>†</sup> ) **.** The report has contributed to the literature by spelling out ways to use existing administrative data, including remittance transaction data, in Malaysia to better estimate the total number of foreign workers, encompassing both regular and irregular workers. As an extension of that report, this paper explores another way to use the existing remittance transaction data compiled by the central bank, Bank Negara Malaysia (BNM), to estimate the foreign worker population.

**Malaysia has seen rising inflows of low-skilled foreign workers, supporting jobs of higher-skilled natives.** A rapid expansion of education levels over the past two decades resulted in Malaysians’ job preferences shifting to more skilled jobs, and unemployment rates stayed at a low level owing to rapid economic growth. Inflows of foreign workers, thus, have been responding to domestic labor demand to fill lowskilled, labor-intensive jobs in export-oriented agriculture, manufacturing and domestic service industries (World Bank, 2016). The presence of these workers has led to the creation of higher-skilled jobs for Malaysians and contributed to increased skills premia of Malaysian workers ( _ibid_ ).

**These foreign workers are temporary labor migrants,** primarily low-skilled, regulated under Malaysia’s work permit system. They enter the country with an employment contract and can stay with the same employer for up to 10 years. They are not allowed to change their employers within the country and must return to their home countries after termination of their contract. In principle, therefore, the Ministry of Home Affairs (MOHA), which manages the work permit system, monitors the number of total foreign workers by sector, nationality, and state.

**But not all foreign workers are regular, posing challenges in grasping the actual number of foreign workers residing in Malaysia at a given time and thus in formulating relevant policies.** There exist three channels for a foreigner to become an irregular worker in Malaysia: (i) to enter Malaysia without a valid work permit and undertake paid jobs, (ii) to enter with a valid work permit, but fail the mandatory medical test and remain in Malaysia, or work with an employer who is unrelated to the valid work permit, and (iii) to work with an expired work permit (or overstayers).

**This paper and our earlier report respond to a call for a methodology to estimate the foreign worker population in a systematic and comprehensive manner.** MOHA estimates irregular foreign workers based on its sporadic and ad hoc enforcement activities. The Labour Force Survey (LFS) measures some of the foreign worker population but its underestimation is widely recognized, as the LFS sampling is householdbased and does not reach people in communal housing, which is common among foreign workers. Population census-based data include all people who were not born in Malaysia, but foreign workers are only a subset of the total foreign-born population. These official reports as well as other studies have estimated the number of foreign workers ranging widely from two million to five million. However, the

> † Irregular foreign workers are those who are either (i) undocumented or (ii) documented but whose actual employment is out of compliance with their documentation, such as working for a different employer or working with an expired work permit.

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