Labour market reform in Malaysia: The value of co-delivery partnerships in an era of disruption

Malaysia’s latest Pre-Budget Statement has flagged labour market reform as a national priority. With the unemployment rate stabilising at around 3% in July 2025, we see an amplified urgency to improve job quality, resilience, and wage progression as organisations wrestle with how to harness tech advancements for workforce transformation. The upcoming Budget needs to continue advancing the principles of the MADANI Economy—particularly innovation, wellbeing, and human capital—to ensure reforms deliver inclusive growth.

Across the globe, labour market reforms are becoming more decisive and strategic. Singapore has implemented its Progressive Wage Model to link wages with skills upgrading. Spain has tightened rules on temporary contracts to promote stability. The EU has acted on platform work, mandating algorithmic transparency and fairer treatment for gig workers. The lesson for Malaysia is clear: reforms succeed when they are targeted, enforceable, and anchored in continuous skills progression.

Beyond just pushing through reforms: A trifecta to tackle persistent issues

Malaysia’s labour market challenges—wage stagnation at the bottom, over-reliance on low-skilled foreign labour, and persistent skills mismatches—cannot be addressed through singular initiatives. Global experience shows that reforms succeed with this trifecta: when they are precisely targeted at priority workforce segments, enforceable through regulatory levers such as licensing or procurement, and tied to skills progression that promotes upward mobility.  

For Malaysia, this means embedding a progressive wage structure that creates pathways for workers to move from basic entry-level pay toward a living wage by linking wage increases to skills acquisition, tenure, and productivity gains. At the start, workers may earn close to the minimum wage, but as they complete training, gain certifications, and accumulate workplace experience, their wages rise in structured increments. Employers also benefit from higher productivity, lower turnover, and better service quality, which justifies and sustains higher pay.  

Over time, this structured progression ensures that workers do not remain stuck at subsistence-level incomes; instead, they climb steadily toward, and eventually reach or surpass, the living wage threshold. In this way, a well-designed progressive wage system serves as a practical mechanism to close the gap between minimum wages and the income level required for a decent standard of living. This aligns with the MADANI Economy’s emphasis on structural reforms and people empowerment, ensuring citizens not only access jobs but also advance into higher-value roles in tomorrow’s economy. 

From government-led to shared responsibility: Why co-delivery partnerships matter 

While direction is important, execution cannot rest on government alone. Enforcing contract reforms, scaling new training models, and adapting to disruption requires collaboration across business, government, academia, and non-governmental organisations (NGOs). Co-Delivery Partnerships (CDPs) can create that bridge: the government provides enabling regulation and fiscal support, while employers, investors, and NGOs contribute capital, expertise, and grassroots reach. 

This reflects the MADANI Economy’s principle of inclusivity—ensuring the marginalised, rural, and underserved populations are not left behind in Malaysia’s digital and energy transitions. CDP turns labour reform into a shared national project, ensuring reforms are not only designed in a targeted manner but also delivered at scale with measurable impact.

A homegrown example: Energy transition

Malaysia has already demonstrated what CDP-style labour reform can look like in the energy sector. A leading global energy oil player has taken the helm in building new energy talent pipelines, launching an academy to retrain the workforce for lower-carbon roles, and partnering with an energy institute to co-develop transition-ready leadership programmes.

The company is co-developing hydrogen and renewables projects with state-owned companies, universities, and NGOs. HRD Corp’s partnership with the Society of Petroleum Engineers (SPE) further anchors this model by embedding international professional standards into local upskilling. These initiatives embody the MADANI Economy’s focus on collaboration and inclusivity, demonstrating that Malaysia already has the building blocks of CDP for labour reform—ready to scale beyond oil and gas into the wider economy. As a nation, we need to sustain the momentum from co-delivery partnerships to reach sectors that can raise the ceiling of national growth towards high-income status.

Why co-delivery partnerships are critical in a tech-disrupted economy

Evidently, technology disruption—AI, automation, digital platforms, and green technologies—has made labour market reform more urgent. PwC’s 2025 Global AI Jobs Barometer analysed nearly a billion job ads from 24 territories including Malaysia to uncover AI’s global impact on jobs, wages, skills, and productivity. It found that among the different sectors assessed, AI-exposed sectors enjoy faster productivity and wage growth, while demand for new digital skills is accelerating. For Malaysia to transition more workers into high-value, high-growth sectors, human capital investment must be comprehensive—targeting both education quality and future skills development through strong co-delivery partnerships. CDP models can support this by: 

• Shared foresight: Harnessing industry, tech players, and NGOs’ insights through multi-stakeholder dialogue to shape the creation of new skills for social impact
• Co-investment: Funding continuous reskilling ecosystems where the government and private firms share costs and responsibilities
• Outcome-based flexibility: Delivering programmes where payments or incentives are tied to verified outcomes, such as job placement, wage progression, and inclusion of marginalised groups
• Embedding tech players: Leveraging AI-enabled training, digital job matching, and simulation-based learning
• Inclusivity by design: NGOs craft programmes that address the needs of marginalised populations—women returners, people with disabilities, rural youth—as part of the digital transition 

This ensures that CDP doesn’t just future-proof the economy but also strengthens Malaysia’s social cohesion and inclusivity goals. 

What must be prioritised in the upcoming Budget

To embed CDP and safeguard against disruption, Budget 2026 should prioritise:

Institutionalising outcome-based CDP in skills and employment

• Allocating funding for pilot CDP programmes where incentives are tied to placement, retention, and wage growth
• Providing tax incentives, grants or enhanced deductions for private companies and NGOs that co-invest in workforce upskilling

Enhancing progressive wage pathways

• Expanding the Progressive Wage pilot (currently a voluntary incentive-based programme) into mandatory sectoral ladders (making it a mandatory obligation based on defining job ladders by sectors), linking compliance to procurement eligibility (companies that wish to tender for government contracts must demonstrate compliance with the wage ladder in their sector) and licensing
• Offering wage subsidy top-ups for employers who demonstrate measurable productivity and wage gains tied to training

A revamp of the skills and apprenticeship levy

Reforming HRD levy into a more flexible skills and apprenticeship levy involves giving out progression bonuses (providing extra credits or rebates) and inter-firm pooling where, say a cluster of electronics small and medium-sized enterprises (SMEs) could fund shared apprenticeship programmes run jointly with education institutions or NGOs. This could be in the form of:

• Introducing matching grants for NGOs and SMEs participating in apprenticeship or re-skilling programmes
• Upskilling programmes for citizens by allowing a portion of the levy to co-fund individual learning accounts (for example, every Malaysian aged above 18 years old gets ‘skills credit’)

Building a resilient tech skills ecosystem

• Allocating funds to integrate AI, automation, and green energy skills into TVET and higher education
• Providing research and development (R&D) tax credits for firms that invest in training, aligned with new technology adoption

Promoting regulatory readiness

• Strengthening the Ministry of Human Resources’ capacity to regulate platform work, AI governance, and algorithmic transparency
• Incentivising digital grievance redress systems run in partnership with NGOs to protect gig and vulnerable workers

Enhancing data transparency

• Reviewing current labour market analytics systems to keep pace with other market developments such as the implementation of the Tax Identification Number (TIN), ensuring proper linkage between SOCSO (Social Security Organisation), Employees Provident Fund (EPF) and tax records
• Making it a requirement for CDP programmes to publish open dashboards on job outcomes and inclusion metrics

Providing inclusive access

• Allocating targeted funding for programmes serving women, people with disabilities, older workers, and rural youth
• Provide community-based grants for NGOs delivering grassroots digital literacy and job-readiness initiatives

Closing thoughts

Labour market reform in Malaysia is no longer simply about creating jobs—it is about building resilience and inclusivity in the face of disruption. With AI, automation, and the energy transition accelerating, reforms must be targeted, enforceable, and anchored in skills progression.

The upcoming Budget offers an opportunity to institutionalise robust co-delivery partnership models which can catalyse the development of opportunities involving policy makers, industry leaders, educators, and civil society. Together, these stakeholder groups can co-create adaptive lifelong, skills-first ecosystems that reward learning, with a relentless focus on inclusion, access and ensuring technological disruption that amplifies opportunity. If we commit to these roles, responsibilities and collaborations, these co-delivery partnership models can successfully propel citizens towards reinvention and strengthen national competitiveness, while ensuring no one is left behind. This will position Malaysia as a regional leader in tech-enabled and inclusive workforce transformation.