Wages, Productivity, and Economic Growth

From the 1970s onward, large gains in labor productivity have not only stimulated rapid economic growth and increased employment opportunities, but have also supported a substantial rise in wages; and wage gains have, in turn, spurred a reallocation of productive resources, prompting further increases in labor productivity. It can thus be seen that, in the course of Taiwan's economic growth, wages, productivity, and industrial restructuring have been closely linked and mutually reinforcing parts of a virtuous circle. The growth rate of the real wage rate is equal to the sum of the rate of increase in labor productivity and the rate of increase in labor's share of DFI (domestic factor income). According to the factorial analysis, changes in labor's share of DFI can be ascribed to the effects of changes in the production structure and effects of changes in labor's share of DFI by industry. As for changes in labor productivity, these can be attributed to the pure effects of variations in labor productivity alone (that is, technological progress), to the effects of changes in the employment structure, and to the combined effects of these two variables. Over the period 1971-94, the major source of growth in the real wage rate was gains in labor productivity, of which pure growth in labor productivity was the most prominent component. Structural changes (that is, changes in the industrial and employment structures) exerted small but positive effects, indicating the contribution of structural improvements to real wage gains. The pure labor productivity effect (that is, the effect of technological progress) accounted for 4.1 percentage points of the 6.4% average annual growth in the real wage rate; the effects of changes in the employment structure and the industrial structure contributed 0.9 point and 0.5 point, respectively; the combined effect of pure gains in labor productivity and changes in the employment structure accounted for 0.5 point; and the effect of changes in labor's share of DFI by industry made a contribution of 0.4 point. It is worthwhile to note that labor's share of DFI has had only a limited influence on the rise in the real wage rate. By 1993 labor's share of DFI had settled at two-thirds, with this variable exerting little effect on real wages. The implication is that Taiwan's macroeconomy, after several years of adjustment, has returned to its normal growth path and is approaching maturity; consequently, there is little potential for changes in labor's share of DFI to bring about rapid gains in wages. From now on, growth in real wages will increasingly depend on growth in labor productivity (that is, the effect of technological progress). For all these reasons, Taiwan, in order to ensure a healthy rate of economic growth in the future, must strive to further improve its investment climate, encourage businesses to invest in new plant and equipment, promote continuous technological upgrading and innovation, and raise the quality of labor to increase labor productivity.