Compared with the United States, Japan, Korea, the Philippines, and Singapore, Taiwan has registered a faster rate of increase in manufacturing nominal wage rates than in labor productivity. Consequently, the rate of increase of unit labor cost in manufacturing is higher in Taiwan than in all those other countries. Moreover, this probably is the cause of the deterioration of Taiwan’s foreign trade in recent years and the concomitant slowdown of economic growth.
We conducted an empirical study of manufacturing unit labor cost in Taiwan. Our two main findings are as follows:
(1) Price is the most important determinant of the manufacturing nominal wage rate in Taiwan. Price increases shift both the demand and supply curves of labor upward and thus elevate both the nominal wage rate and employment. These effects are significant enough to raise production costs and to reinforce higher prices at higher levels, which impedes the ability of Taiwan manufactures to compete in foreign markets.
(2) Labor productivity in manufacturing at present is unable to achieve rapid improvement because technological progress has been slowing down.
The achievement of renewed fast economic growth will require the elimination of inflation, and the strengthening of research and development programs and vocational training. If measures can be designed and implemented to meet these requirements, then unit labor cost will decrease and Taiwan’s economy will regain its comparative advantage in exports.
