Foreign direct investment and wage differentials in Taiwan

Abstract

The ease of restrictions on foreign direct investment in China since 1990 has attracted a continuous and dramatic flow of outward investment from Taiwan to the mainland. At the same time, the relative wages for skilled workers in Taiwan have risen mildly despite a rapid increase in the share of educated workers in its labor market. The aim of this paper is to explore the linkage between capital outflows to China and the wage share of skilled workers in Taiwan over the period 1991 – 2001. We find that the pattern of changes in relative wages is consistent with shifts in the relative demand for skilled labor. For the most part, the increases in the relative demand for skilled workers could be attributable to within-industry factors. Findings also indicate that outward direct investment to China has a significantly positive impact on the skilled labor wage share.

Key words:

• Foreign direct investment
• wage differentials
• wage inequality

Acknowledgement

The authors thank an anonymous referee for many valuable comments and suggestions.

Notes

¹ Before the mid‐1980s, Taiwan's exports had concentrated on labor-intensive products, so that the demand for less skilled labor was large and thus the wage of unskilled workers grew faster than that of skilled workers. Since then, the story is quite different, as Taiwan has been losing her comparative advantage in the production of labor-intensive commodities.

² The five major industries include mining and quarrying; manufacturing; electricity, gas, and water; construction; and transportation, storage, and communication.

³ The plant-level data of wages for both skilled and unskilled workers are unavailable in Taiwan. This limitation reduces the degrees of freedom for the regression of the wage share we estimate in the fifth section.

⁴ The calculations of the inner products of changes in relative wages with changes in relative supplies are based on average measures in order to reduce the impact of abnormal changes.

⁵ Since 1987, direct outward investment from Taiwan has been growing, and after the partial release of the prohibition on investment toward China in 1990, the growth pace has accelerated. Accordingly, we choose these two years as the cut-offs of the period in the analysis. As to the other cutting point of 1995, even though it is arbitrarily chosen, it is apparent that the analytic results are insensitive to it.

⁶ For example, in 2002, the domestic firms in Taiwan's manufacturing industry supplied 81% of materials and 75% of intermediate inputs for their foreign plants.

⁷ We use the skilled-labor share of total wages as the dependent variable in order to incorporate the effects of both relative wages and relative employment.