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Effects of Over-Education on Economic Growth



1.1 Introduction

This chapter discusses the research background, problem statement, research objectives and research questions. This study also discusses the contribution in ensuring continuous improvement in economic growth in Malaysia. This section will discuss the importance of education in the formation of human capital and the impact of overeducation to economic growth.

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1.2Background Study

Education in a general sense is a learning system that passed from one generation to another in various forms such as skills and knowledge by a group of people through training, coaching, teaching, research, and others. In terms of economic development, education and social development have a strong relationship. According to Abhijeet Chandra (2011) states that the function of education becomes more important in enhancing human capital. In this modern era, the emphasis is more on knowledge-based economy. Thus, Massey (1988) argues that the education system is the foundation for the development of human resources. Daisi (2011) also argues that human resource development can improve the quality and productivity of labor and lead to economic growth. However, he also stressed that the economic capacity of a country also determines the ability to invest in human resources. Shahar (2008), explains that the labor market caused by productive human resource development is shaped by the quality of the education system and the country’s economic growth will largely depend on him. In addition, education is considered as long-term investments that lead to high production for a country in the future (Ismail (1998)). In fact, economists have argued that the education sector will bring success to the economic and social development of a country. Therefore, most of the developed countries and the developing emphasize the development of the education sector and this has been supported by Dollar and Gatti (1999). Sheehan (1971) has listed some of the benefits of education. These include increasing productivity and labor income, economic growth and an increase in the literacy rate. In addition, education can also improve the efficiency of the distribution of income and labor mobility and transfer it to the demand for trained workers earn. Education can contribute many benefits to a country in order to determine the ability to achieve developed nation status. In the study Ujunwa (2009), he found that education can be seen as an investment that allows individuals to be available knowledge and skills to improve their employability and higher earnings in the future. In addition, Stephen (1997) found that the fundamental difference in living standards between countries is differences in human capital while the main mechanism of growth is the accumulation of human capital or knowledge of a country.

Two main goals of the New Economic Policy (NEP) is to eradicate poverty and restructure society. The role of the Ministry of Education is to help the government achieve its goals in implementing the New Economic Policy, which requires more highly trained academics and education experts as among the public is the most effective tool to eradicate poverty and restructure society and the country’s economy. Report of the New Economic Policy (2012), the Government of Malaysia specified in the second thrust in the Ninth Malaysia Plan in order to develop human capital, high level of mentality and intellectual ability is a major challenge in the country under the Ninth Malaysia Plan. He also said that if the demand for Malaysia to become a knowledge-based economy, a country that developed and maintains a developed country status, priority should be given to the development of human capital. But, in the context of globalization, the quality of human capital has become a key requirement. Three main strategies tailored to the “First Class Mentality” is to increase the number and mastery of knowledge by strengthening national capacity in science, research and development and innovation, and nurture a civilized society which stores the values moral strength.

Human Resource Development Policy also emphasizes the supply of skilled and knowledgeable labour force to assist the development of knowledge-based economy and training. The education system will be reoriented to enable students to acquire the knowledge and thinking skills and entrepreneurship. Educational facilities will be enhanced through the construction of schools based in rural areas and facilities, infrastructure and sufficient trained teachers. The addition of a quality educational facilities and training system is to ensure the supply of labor in line with changes in technology and market demand. Therefore, the school curriculum will be reviewed to generate creativity and independent learning among students, as well as the inclusion of aspects of knowledge and new technologies and innovative teaching methods. With this, the development of human resources is an important element in achieving an increase in the economic growth of a country.

Lucas (1998) in his study explains that the development of human resources in knowledge and skills in Taiwan is the prime mover in the process of economic growth. Therefore, since 1968 Taiwan has continued to invest in education at the school level and the results showed improvements in both human capital accumulation on average in all population.

Number of Labour Force by Higher Certificate obtained, Malaysia :




2009 2010 2011 2012 2013 TOTAL
DIPLOMA 940.9 990.7 1,102.0 1,088.1 1,229.4 5,351.1
DEGREE 1,034.6 1,196.7 1,267.9 1,355.3 1,392.4 6,246.9
Source: Statistics department

Table 1.0

Table 1.0 shows the labor force with academic qualifications at Diploma and Degree of occurrence of continuous improvement for five years starting in 2009 until 2015. This proves that the population is very concerned about education at the tertiary level. According to Labour Force Survey report Malaysia, In 2012, the Labor Force participation rate increased to 65.5 percent from 64.4 percent the previous year. An increase of 1.1 percentage point was contributed by the increase in population in the labor market from 12.68 million in 2011 to 13.12 million people in 2012.

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According to a report from the Department of Statistics and the Labour Force Survey Report Malaysia, showed an increase in the number of labor force participation and achievement in education at the tertiary level. This will cause problems overeducation and undereducation in Malaysia.

Overeducation refers to a situation where the level of education being owned by an employee in excess of the level of education required for a job. Undereducation refers to a situation where the level of education required for the jobs offered exceeded the level of education that is owned by an employee According Rumberger (1981), overeducation can be defined in a variety of purposes. He believes that overeducated can occur when the individual has greater educational level of requirements needed to do a job, and vice versa. Tsang et. al (1991) pointed out in a study that overeducation affects the productivity of an employee for not having satisfaction in the work. Freeman (1976) asserts that the problem overeducated been widely accepted since 1970 when the number of graduates who are educated beyond job requirements offered and given their low salaries. Therefore, this study has been made to meet the gap between overeducation with economic growth. This is because previous studies only showed the influence of overeducation on individuals and firms only, and no comprehensive study done to see the effect of overeducation on economic growth. With this, this study will provide empirical evidence on the effect of overeducation on economic growth in Malaysia.

1.3Problem Statement

With the rapid development of the country over the world, each country has prioritized the education as the important engine to the growth of their economy. Many ASEAN countries especially Malaysia has become the education places for the student all over the world to further their study and Government of Malaysia do not neglect their own human capital to pursue their education from a level to the next. With this, Malaysia government has distributing much budget to afford the education infrastructures besides improve or maintain their own current facilities to develop the Malaysia’s economy. Musai and Barghi (2012) interpret the definition of economic growth is continual increase of per capita national production in a country and considered as a criterion for testing economic performance of a society and increase of its growth rate leads to improvement of social welfare. So, from their perspective, different factors are effective on growth of per capita production. Study on factors of promotion and development in developed countries shows that all of these countries have capable and efficient education. Education is manifested in training of committed, sophisticated, specialized and skillful manpower.

According to Riddell (2006), investments in human capital yield a private return in the form of greater employment opportunities and higher lifetime earnings. Thus, greater employment opportunities and higher lifetime earnings yield to the increase in the total output of goods and services formed. Some researchers argued that return on investment in education can encourage economic growth. Freeman (1967) asserts that the returns to education have declined.

He found some graduate employees underutilized. In addition, he stressed that the returns to education decreased due to modest growth in the supply of educated workers. The complexity of this problem becomes even more critical when the length of time needed to produce a skilled workforce and educated.

According to Murray (2006) The Government has realized the high demand for skilled labor due to an increase in the inflow of foreign workers since the end of 1980. Therefore, in order to meet this demand, the government has decided in the establishment of private sector institutions for technical subjects and provide facility for pre-university and courses at certificate and diploma levels. High growth in education occurs in the state indirectly provides opportunities for students to pursue higher education in local institutions and slowly will reduce the number of students who wish to pursue abroad and help the government to reduce the outflow of foreign trade exchange.

Duncan and Hoffman (1981) argues that overeducation allow problems in income occurred. This can be seen when there are individuals who work in accordance with the level of education does not have a earning problem. According to (Mavromaras, Mcguinness, & Wooden, 2007) there are previous studies showing a correlation between qualifications and skills mismatch and its impact on wages. Overeducation occurs when the level of education obtained by an individual is higher than the level of occupational education. There are two differences in the payment of wages for individuals who are overeducated.

The first difference occurs when these workers receive lower wages compared to other workers who have the same level of education in which they work according to the educational needs of the job. The second difference is seen when workers receive higher wages than workers with low education levels, where employment is low educational needs. These differences in wage rates due to differences in the level of employment. By (Dolton and Vignoles, 2000; Joel et al., 1999) there is evidence to suggest that the phenomenon of overeducation is fixed.

In Malaysia, the establishment of centers of higher education is increasing and increasingly lax admission requirements resulted in increased number of students in higher education institutions. Results of a study conducted by Fatimah et. al (1987) also shows that there is a link between the dumping graduates who do not work with the establishment of institutions of higher education is rapidly increasing. Mismatch problem in the surplus labor supply is among the factors that negatively affect the graduates not being able to work according to their field of study while in the previous higher education institutions. Rahmah (2000) argues that there is an association between certain areas of oversupply and mismatch in labor supply on unemployment occurred among graduates in Malaysia in the 1980s. According to a study made by (Mohd literal, 2003; Siti Hajar et al., 1969; Kamal et al., 1969) pointed out that the gap between the number of students with the needs of the labor market is because of the knowledge and skills in a field that contained in they are too high and not compatible with job offers available in the labor market.

Curriculum studied by students at the Institute of Higher Education (IHE) plays an important role in determining their ability to enter the labor market. If in the curriculum should emphasize communication skills in a variety of languages such as Mandarin and Arabic as a third language makes graduates have the advantage of entering into the labor market. Studies conducted by Yew Lie, Pang and Fadhil Mansur (2009) pointed out that their study of the perceptions of employers of graduates IPT find employers prefer graduates who are able to communicate in a variety of languages. According to the study conducted by the University of Malaya (2009) on the criteria selected by employers who contribute to unemployment among graduates is inconsistency space (spatial mismatch) and inconsistency skills (skills mismatch).

According to Witten (1990) graduates who have more interpersonal skill required by employers to fill job vacancies offered. He also stressed again in kajiaannya that the curriculum in higher education should emphasize soft skills to produce workers who are more innovative and creative. In addition, Wickramasinghe and Perera (2010) in his study stated that the priority given by employers for graduates is not solely based on academic qualifications but must have other skills. He also stressed that the curriculum in higher education should not only focus on theoretical only but should also prioritize the skills to meet the needs of the labor market. The National University of Malaysia (UKM), Ahmad Abd Ibrahim, Mohamed and emery Aza Shahril Safferi (2008) graduated from the Faculty of Engineering capabilities in entering the labor market after graduation. Results showed that the curriculum provided by the students of the Faculty of Engineering IPT highly relevant to the field of work they undertake and have a very high competitiveness in the employment sector.

Li and Huang (2010) suggested the investment in setting up more educational institutions to teach poor in the developing countries can enabled them to equip with more knowledge on keeping a healthy body but also increases the chance of obtaining a job with higher salary. For Malaysia, there is no clear evidence about the net impact and influence of overeducation in Malaysia’s economic growth. This study will deal with this issue by examining the influence of education on Malaysia’s economic growth. Does overeducation leads to Malaysian economic growth?

1.4Objective of Study

The general objective of this study was to investigate the effect of overeducation on economic growth in Malaysia. Then the distinctive objective of this study is:

i.To study the determinants of overeducation in influencing economic growth in Malaysia.

ii.To study the effects of overeducation towards economic growth in Malaysia.

iii.To study the effect of the level of education to economic growth in Malaysia.

1.5 Research Question

In this study, there are several questions that have been developed. These questions relate to the relationship between overeducation and economic growth in Malaysia. The research questions are as follows:

i.Does the determinant overeducation affect economic growth in Malaysia?

ii.Does the overeducation affects economic growth in Malaysia?

iii.Does the level of education affect economic growth in Malaysia?

1.6 Significant of Study

Romer (1990) believes that the formation of new ideas is a direct function of human capital, which manifests in the form of knowledge. As a result, country’s investment in human capital commanded to growth in physical capital which in turn leads to economic growth. Other studies that supported the human capital growth as a source of economic growth include (Barro and Lee, 1993; Romer, 1991; Benhabib and Spiegel, 1994). Some studies have scrutinized various methods through human capital can distress economic growth. In the past, Malaysia government has provided many initiatives to encourage in developing human capital that have better in education. In promoting the quality of education Malaysia, Malaysia government has to maintain a stable economy and high equip facilities for education quality, improves the necessary infrastructures and enhance the protection in intellectual property especially in innovation and creative invention.

In fact, the impact of education on the effects of economic growth in developing countries and developed countries is not clear and may not be similar to previous research. Therefore, this study can contribute additional information on the effect of overeducation to economic growth in Malaysia. Then, we can understand the importance of education in the economy, other factors determining economic growth, while education and recommendations would be used to promote economic growth. Therefore, this study provides empirical studies memngenai overeducation effect on economic growth in Malaysia.


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