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While unemployment remains low and labour force participation is historically high, many workers – particularly tertiary graduates – are employed in jobs below their qualification level, pointing to persistent skills mismatches and limited absorption of high-skilled talent.
Skills-related underemployment is increasingly weakening the link between education, productivity, and wage growth in Malaysia, according to the World Bank Group's recent Malaysia Economic Monitor: Raising the Ceiling, Raising the Floor - The Jobs Agenda as a Productivity Agenda report.
Although the country has continued to expand tertiary education and upgrade workforce capabilities, with an increase from 30.2% in 2015 to around 36.1% in 2024, the creation of high-productivity, high-skill jobs has not kept pace.
As a result, a growing share of tertiary-educated workers are employed in roles below their skill level, limiting the economic returns to education and reducing the contribution of human capital accumulation to productivity growth.
According to the findings, when highly educated workers are absorbed into lower-skilled occupations, they tend to generate less economic value than they would in better-matched roles, which constrains both productivity and earnings.
Excerpts of the report findings are as follows:
There is a very significant wage penalty associated with skill-related underemployment: among tertiary-educated workers
Evidence shows that among tertiary-educated workers, those employed in lower-skill jobs face a substantial wage penalty relative to those in skill-matched employment, with 49.3% less than workers in skill-matched roles. These findings suggest that skill mismatch reduces the economic returns to education both by pushing workers into lower-productivity jobs and by lowering returns with jobs, consistent with partial productivity losses associated with underutilisation of human capital.
Skills-related underemployment is driven both by limited opportunity creation and mismatches or gaps in workforce capabilities
Skills-related underemployment in Malaysia is driven by both limited job opportunities and gaps in workforce capabilities. Demand-side factors appear especially important: although high-skill jobs are increasing and make up a larger share of employment than in many middle-income neighbouring countries, their growth has not kept pace with the rapid rise in tertiary-educated workers. As a result, more graduates are working in jobs below their skill level.
At the same time, supply-side factors also contribute, including poor-quality tertiary education, mismatches between fields of study and job needs, and broader skills gaps reported by employers.
Substantial outward migration of skilled workers point to constraints in domestic absorption of high-skilled talent
More than half of the 1.86mn Malaysians living abroad work in skilled or semi-skilled jobs, mainly in countries such as Singapore, Australia, the UK, and the US. At the same time, most foreign workers in Malaysia are in low-skilled roles, making the country a net exporter of skills.
This points to a bigger issue: Malaysia is producing skilled workers, but not always enough high-productivity or well-paid jobs to keep them at home. Many choose to move to countries where their skills can be better used and better rewarded, underlining the need to create stronger opportunities for tertiary-educated workers within Malaysia.
Skill-related underemployment tends to be higher in economically lagging states
Skills-related underemployment varies widely across Malaysia. In Kelantan, more than half of tertiary-educated workers are employed in jobs below their skill level, while the rate is 40% in Terengganu, Pahang, and Perlis. This is much higher than in more industrialised and knowledge-intensive areas such as W.P. Kuala Lumpur and Pulau Pinang.
In some states, high skills-related underemployment also comes with weak or falling wages, as seen in Sabah and Selangor. This suggests that workers’ skills are not being fully turned into productivity and earnings. By contrast, Negeri Sembilan and Johor show a more positive pattern, with stronger wage growth and lower levels of skills-related underemployment.
Young workers are particularly likely to experience skill-related underemployment, as are women and workers in informal employment
Skills-related underemployment is highest among younger workers. More than 44% of tertiary-educated workers aged 25–29 are in jobs below their skill level, but the rate falls steadily with age. This suggests that the problem is mostly linked to the early years of work, especially the transition from education into employment, rather than something that affects workers equally throughout their careers.
What's notable. is that women are also more likely than men to be underemployed by skill level. About 40% of tertiary-educated women are in jobs that do not fully use their skills, pointing to barriers in job matching, flexible work arrangements, and access to higher-quality employment.
The issue is even more pronounced among informal workers, where 75% are in jobs below their skill level. This suggests that informal work is often used as a fallback when better-paid opportunities are limited. However, informal work is not always low-skilled: with the growth of gig-based work, around 9% of informal jobs are now considered skilled.
Commenting on the report findings in a statement, Ramanan Ramakrishnan, Minister for Human Resources (KESUMA), said they fall in line with the Ministry's commitment to ensure that the country’s employment agenda moves towards the creation of quality jobs driven by better skills, productivity and labour market match.
He affirmed that the report recognises that talent development, AI readiness and the use of accurate labour market information play a key role in ensuring that Malaysia is able to build a more competitive workforce and is prepared to face economic and technological changes.
The Minister also shared that in line with the 13th Malaysia Plan, KESUMA, through TalentCorp, is strengthening the MyMahir ecosystem, including the Future Skills Talent Council (FSTC), the Critical Occupations List (MyCOL), and the AI Readiness Index (AIRI), to better align skills development with current and future industry needs.
“KESUMA will continue to collaborate across ministries with its subordinate agencies and strategic industry partners to ensure that skills development, training and talent interventions are implemented in a more focused, responsive and results-oriented manner," he said.
These would include efforts in improving job matching through MyFutureJobs, strengthening the marketability of local talent and helping more Malaysians access high-value and better-paid jobs.
READ MORE: Malaysia's unemployment rate holds steady at 2.9% in March 2026: DOSM
Lead image and infographics / World Bank Group
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