The Effects of Factors of Production Shocks on Labor Productivity: New Evidence Using Panel VAR Analysis

Labor productivity has an essential role in creating a more sustainable labor market platform, leading to better economic sustainability. However, the sluggish growth in labor productivity in Malaysia could hinder the vision in realizing the status of a high-income nation in the future. Thus, understanding how production shocks affect labor productivity sustainability is crucial for firms in managing their inputs (resources). This paper aims to elucidate how shocks in wage, capital intensity, and human capital may affect the dynamic of labor productivity in the Malaysian manufacturing industry. The study further explains the magnitude of this impact on labor productivity. This study employs the panel vector autoregression (PVAR) model in analyzing the propagation of the shocks through the impulse response function and variance decomposition. The main findings reveal that shocks in production factors have a positive and significant transitional impact on productivity and the cumulative effects are positive over time. The economic impact of wage shock is material, whereas capital intensity shock is moderate and only exerts a minor effect on labor productivity emanating from human capital shock. These findings provide further insights into assisting policymakers in amplifying the current labor market policy for sustainable economic growth.