Productivity-Wage-Growth Nexus: An Empirical Study of Singapore

Abstract

This paper investigates the empirical relationship between labor productivity, real wages and real GDP in Singapore from 1997 to 2011. The paper begins with a review of productivity, wage and growth situations in Singapore in the past decade and further attempts to uncover the underlying relationship in this nexus using theoretical framework from labor and growth literature. Using the Vector-Autoregressive or Vector-Error Correction Mechanism when cointegration is present, this paper uncovers various causality relations in different industries which conform to economic theory and empirics. An impulse response analysis is also undertaken to understand how specific policy decisions could be framed to provide for higher wages across industries. The empirical results suggest that in the Singapore economy, there exist a bi-directional causality relation between labor productivity and real GDP but that wages seem to be caused by other underlying factors. However, real wages respond positively to positive shocks in the real GDP or labor productivity using cholesky or generalized decomposition. This paper concludes by discussing policies that could be undertaken to promote inclusive growth in the environment of sustained economic growth.