The non-monotonic effect of real wages on labour productivity
Purpose - The aim of this study is to empirically investigate the effect of real wages on labour productivity in Malaysia's manufacturing sector using annual data from 1980 to 2009. Design/methodology/approach - This study uses the Johansen cointegration test to examine the presence of long-run equilibrium relationship between labour productivity and real wages in Malaysia. In addition, the Granger causality test within the vector error-correction model (VECM) is used to ascertain the direction of causality between the variables of interest. Findings - The Johansen test suggests that real wages and labour productivity are cointegrated. Moreover, labour productivity and real wages have a quadratic relationship (i.e. inverted U-shaped curve) instead of linear relationship. Hence, the effect of real wages on labour productivity is non-monotonic. Furthermore, the Granger causality test indicates that real wages and labour productivity are bilateral causality in nature. Research limitations/implications - This study is limited to the labour productivity in the manufacturing sector only. Originality/value - This study demonstrates that the effect of real wages on labour productivity is non-monotonic; hence increase in real wages alone does not always enhance labour productivity. Thus, other incentives should be offered to stimulate long-term labour productivity growth in Malaysia.
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Volume (Year): 39 (2012)
Issue (Month): 6 (July)
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