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The non‐monotonic effect of real wages on labour productivity: New evidence from the manufacturing sector in Malaysia

Chor Foon Tang (Department of Economics, University of Malaya, Kuala Lumpur, Malaysia)

International Journal of Social Economics

ISSN: 0306-8293

Article publication date: 4 May 2012

1502

Abstract

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.

Keywords

Citation

Foon Tang, C. (2012), "The non‐monotonic effect of real wages on labour productivity: New evidence from the manufacturing sector in Malaysia", International Journal of Social Economics, Vol. 39 No. 6, pp. 391-399. https://doi.org/10.1108/03068291211224900

Publisher

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Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited

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