REAL WAGE STAGNANCY: EVIDENCE FROM TAIWAN

Abstract

This study examines how and why the gap between economic growth and real wage growth in Taiwan is widening, a phenomenon that contrasts sharply with South Korea, which has a similar industrial structure to that of Taiwan. We empirically demonstrate that, despite the continued growth of labor productivity, the benefits from economic growth allocated to workers have been falling, and that this process has accelerated following the 2008–2009 financial crisis. The labor market institutional effect contributed partially to the problem. Workers’ purchasing power, measured by the real consumption wage rate, has been declining for a relatively long period, implying significant deterioration of terms-of-trade, and cutting real wage growth by as much as 2.23% per year. The terms-of-trade effect is particularly prominent in the manufacturing sector, which is highly export-oriented. Moreover, we found cash wages to be very sensitive to the rise in the rate of unemployment, and to the changes in output performance of the industry in which the workers are employed. The latter factor significantly reduced the cash wages paid to workers in the manufacturing sector, which highlighted the waning of workers’ bargaining power regarding wages, as well as the negative impact of globalization on the labor market. We therefore conclude that the deterioration of terms-of-trade, increases in the aggregate unemployment rate, the adverse globalization effect and the institutional effect might be the main driving forces for real wage stagnancy in Taiwan.