International Trade, Productivity Growth, Education and the Wage Differential: A Case Study of Taiwan

The cause of changes in the wage differential between skilled and unskilled labor has been an important subject of debate for several decades. International trade and productivity growth are two main causes that have been suggested from large country studies. Recent research proposes that education is another influence. All three causes have been significantly associated with Taiwan’s economic development. This paper attempts to contribute to the literature by investigating the wage differential in Taiwan, a small open economy. A Dynamic Intertemporal General Equilibrium (DIGE) model is used to perform theoretical simulation. An Error Correction Model (ECM) incorporating both short- and long-run effects is employed to accomplish the empirical examination. That education and international trade are important causes of changes in the wage differential is substantiated by Taiwanese data. Productivity growth has a significant influence on the wage differential in the short run but not in the long run