Changing wages and employment by skill in Taiwan, 1978-1996: The roles of education policy, trade, and immigration

Since the 1970s, Taiwan's labor market has been characterized as a smooth functioning, highly integrated and nearly full employment market, which also enjoying high growth in labor earnings. Unlike most developed countries, the average unemployment rate in Taiwan was under 3 percent over the 1978--1996 period. Unskilled labor shortage problem has forced many industrial companies to move abroad where have cheaper labor costs. In 1990, the government began to invite foreign temporary unskilled workers from the Philippines, Thailand, Malaysia, and Indonesia. Most foreign workers are in manufacturing and construction industries. About the same time, the Taiwan government also has been implementing several major educational reform policies. One policy was to increase the number of two-year and four-year colleges, causing the number of college graduates to increase dramatically since 1990;In this study, the impacts of these two labor supply shocks, i.e. foreign unskilled labor and local skilled labor, on the Taiwan labor market are examined using the 1978--1996 "Survey of Family Income and Expenditure" in Taiwan. The effects of Taiwan's international trade on the relative labor demand shifts are also analyzed. We find there is little effect of imported foreign unskilled workers on employment and wages for both local skilled and unskilled workers. In the long run, foreign unskilled workers tend to be complements for both local skilled and unskilled workers. The increase in number of college graduates has, not surprisingly, reduced the returns to education for the young college graduates but not for the more experienced college graduates, suggesting that the average quality of college education has been declined and the young college graduates and more experienced college graduates are not close substitutes. Women's share in every industry has been dramatically increased and the gender earnings gap in Taiwan was significantly reduced during this period, although wage differentials against women still persist. The lower-educated workers and women were favored in the prediction from the trade effect. However, the trend has been gradually shifted to the higher-educated workers.