Why do low-skilled foreign workers have a wage advantage? Evidence from the palm oil plantation sector in Malaysia

Developing countries host more than one third of international migrants. However, research on the labour market outcomes of low-skilled international migrant workers in developing countries is limited. We examine the presence and sources of wage differentials across native and foreign low-skilled workers in the palm oil plantation sector in Malaysia, which hosts a large population of foreign workers. We find that Indonesian foreign workers have a wage advantage over native and Indian workers. Decomposition results suggest that the wage differentials between Indonesian and native workers are largely explained by the higher productivity of Indonesian workers, employers' favouritism towards Indonesian workers, and discrimination towards native workers. Decomposition results also find that the wage differentials between Indonesian and Indian workers are mostly due to their differences in observed characteristics.