In the view of increased competition resulting from globalization of economics, the Malaysia government has placed much emphasis on the importance of the wage determinant. Wages is define as ‘remuneration or earnings which are payable in virtue of a written or unwritten contract of employment by employer to an employed person’ (International Labour Organization). The government recognized that wage levels must increase in order to improve the standard of living and reduce poverty. However, increase in wages without appropriate policies could put pressures as well as erode the country’s international competitiveness and its attractiveness as a profitable Centre for foreign investment. One of the reasons of the decline in FDI in Malaysia is that the country has been losing its competitiveness due to pressure on wages. Malaysia is no longer a center for cheap labor and low cost production when compared to countries like China, India or Vietnam (Yusof, 2006).
Since wage serves as a vital role in the economy, there are a number of empirical studies concerning wages in Malaysia industries. Ho and Yap (2001) investigated wage formation in the Malaysian Manufacturing industry from 1975 to 1997. They found a big positive significant relationship between wages and productivity where the increase in real wage exceeded the increase in labor productivity in the long run. Nijhar (1976) and Chan (1991) have conducted studies on wage structure but very little attention was paid to explaining the mechanism of wage formation at sectoral levels in the Malaysia economy.
This study analyse both the long-run and short-run dynamics of wage formation in Malaysian manufacturing industry. The determinants are inflation, unemployment rate, foreign direct investment (FDI), productivity, import, export in manufacturing and unemployment.
1.1 Research Background
The global economic crisis has had devastating consequences on...