The long‐run and dynamic behaviors of wages, productivity and employment in Malaysia

Purpose - This paper aims to examine the long‐run and dynamic behaviors of real wage‐employment‐productivity relationship, using Malaysian manufacturing data, and to determine which related labor theories are supported. Design/methodology/approach - Time‐series econometric techniques, which include stationarity and cointegration tests, vector error correction model, impulse response function and variance decomposition, are applied to analyze the relationships of real wages, employment and productivity. Findings - A long run relationship exists between real wages, employment and real productivity, with real wages being the main variable that adjusts to maintain cointegration. The theory that real wages inversely affect employment is not supported, while the performance‐based pay scheme theory, and not the efficiency wage theory, is validated. Research limitations/implications - Although the data used to measure wages and employment account for most of the production in the various manufacturing sectors, they do not include all the manufacturing industries. The analysis is also limited in time span since data for earlier periods are not available. Practical implications - The findings can provide assistance to policy makers in their implementation and evaluation of labor policies. Originality/value - The real wage‐employment‐productivity relationship is examined in the framework of the Malaysian manufacturing sector, and the study includes both the long‐term and short‐run behaviors of the variables.