African Journal of Business Management Vol. 4(4), pp. 486-495, April 2010 Available online at http://www.academicjournals.org/AJBM ISSN 1993-8233 © 2010 Academic Journals Full Length Research Paper Impact of labour quality on labour productivity and economic growth Idris Jajri 1 * and Rahmah Ismail 2 1 Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia. 2 Faculty of Economics and Business, Universiti Kebangsaan Malaysia. Accepted 18 January, 2010 The growth of the Malaysian economy has gone through several phases and strategies from input- driven to productivity-driven and knowledge-based-driven, which is in line with the world scenario. The knowledge-based-driven of economic growth is crucial as it will raise level of competitiveness of the country, especially in facing the world challenges. This paper attempts to observe to what extent the Malaysian economy has benefited from educational expansion. The production and productivity functions are estimated using the quality of labour together with the capital stock as independent variables. The effective labour and the level of education obtained by the employment are used as indicators to measure quality of labour. The data used for the analysis are gathered from various government agencies and world reports and the coverage is from 1981 to 2007. The study reveals that the capital stock and capital-labour ratio played a major role in contributing to the Malaysian economic growth and labour productivity respectively. The effective labour did play a positive role in determining economic growth but its contribution is less than the physical labour. This paper suggests that the education system must be geared towards producing workforce that can efficiently be used in the labour market. Key words: Human capital, economic growth, labour productivity, effective labour. INTRODUCTION The growth of the Malaysian economy has gone through several phases from emphasizing the role of inputs to the role of productivity and knowledge. In the era of knowledge-based economy, the role of human capital is becoming more important. As suggested by Becker (1964), Schultz (1961) and Mincer (1974), human capital has a direct relationship with workers’ productivity, hence contributing positively to economic growth. Therefore, enhancement in human capital attainment among the population is by means to achieve higher competitive- ness through increasing workers’ efficiency and producing better quality products at cheaper production cost. The government’s commitment to upgrade level of human capital especially education among the population is viewed from its large expenditure allocated to this sector. For example, in 1980 the education and training development expenditure was 14.7% of the total *Corresponding author. E-mail: ibjajri@um.edu.my. government expenditure and was the highest in the category of social services expenditure. This percentage had increased to 18.3% in 1990, 19.1% in 2000 and 23.2% in 2009 (Ministry of Finance). The composition of education also changes towards higher percentage enrolment at higher level of education. For example, in 1975 enrolment at the tertiary level was about 15,000 students increased to 75,000 in 1993, but in 2007, it increased to 382,997. Enrolment at the primary level increased to 97.8% in 2002 but decreased 94.2% in 2007, (Malaysia, 1996, 1998, 2008). As a result of changes in the educational structure, employment by level of education has also changed towards higher percentage of those with higher educational achievement. For example, employment with tertiary qualification increased from 275,900 in 1981 to 1.13 million in 1998 and 2.12 million in 2007 (Department of Statistics, The Labour Force Survey, various years). On the contrary, employment with no formal education and with primary level of education decreased (see Figure 1). This change is consistent with industrial