The ffec of Foreign orker on he Naive age in Taiwan A Dynamic Ineremporal eneral qilibrim Model Hiao-chan Chang Deparmen of conomic The Univeriy of Melborne Abrac A decade ha elaped ince he Taiwanee governmen fir allowed he enry of foreign worker in 1989. A range of problem relaed o foreign worker have emerged and have become crren ie in Taiwan. Thi paper i o foc on he ie of naive wage by inveigaing he wage differenial beween killed and nkilled labor wih imporaion of foreign worker. The main finding i ha foreign worker do affec naive nkilled labor negaively by enlarging he wage differenial in boh he hor- and long-rn. However hi advere effec i no a erio a expeced in he overall wage differenial. The policy raegie of increaing or decreaing he nmber of foreign worker have been examined. In order o preven a frher conribion of foreign worker o he wage differenial he Concil of abor Affair hold conider impoing a policy of no increaing he nmber of foreign worker. J claificaion: C61; C68; D91; J31; J61; J68 1. Inrodcion Taiwan legalized he imporaion of foreign worker in Ocober of 1989. The wo main reaon for he Taiwanee governmen aking hi ep were: fir here wa a horage of naive nkilled labor. Thi iaion impeded he coninaion of he naional Foreen Major Conrcion Projec and he Six-year Naional Developmen Plan. Second he nkilled wage had increaed high enogh o drive firm o look for cheaper worker overea. Thi acceleraed Taiwan oward foreign direc invemen and drained capial o of he conry. The imporaion of foreign worker i expeced o reolve he above problem impelling he Taiwanee economy o move forward. One decade ha elaped ince he fir enry of foreign worker and a range of problem relaed o foreign worker no only economic b alo ocial have emerged and have become very imporan pblic policy ie in Taiwan. Among hoe economic ie naive wage and nemploymen are he wo main concern. However here i a lack of in-deph * Deparmen of conomic The Univeriy of Melborne Vicoria 3010 Aralia. Phone: 61 3 8344 5364. Fax: 61 3 8344 6899. -mail: changh@nimelb.ed.a. I hank S for her excellen aiance in daa collecion and managemen.
reearch on hee ie in he Taiwanee conex. To make he analyi of he wo ie (wage and nemploymen) clear hi paper foce on he ie of naive wage by inveigaing he effec on he wage differenial beween killed and nkilled labor of he imporaion of foreign worker. By aking he ggeion in Borja (1994) ino accon ha we do no nderand he dynamic proce hrogh which naive repond o hee pply hock and reeablih labor marke eqilibrim" hi paper adop a new mehodology dynamic ineremporal general eqilibrim (DI) modeling 1 o dicloe boh hor- and long-rn raniion followed by foreign worker hock. A large amon of reearch inveigaing he effec of immigraion on naive wage ha been nderaken by U.S. and Aralian die. The finding are mixed. One viewpoin i ha here i lile evidence of an advere wage effec of immigraion (Bcher & Card 1991 Heckman e al 1998 and Addion & orwick 00). The oher viewpoin gge ha immigraion adverely affec le-killed naive wage (alonde & Topel 1991 Alonji & Card 1991 Khn & ooon 1991 Borja e al 199 Borja e al 1996 and Friedberg & Hn 1995). The empirical die ing a paial correlaion approach have prodced a confing array of rel (Borja 1999). Sbanial effor on he mehodology innovaion have been made. Alonji & Card (1991) and Schoeni (1997) e inrmenal variable eimaion however hey end wih very differen eimae (Borja 1999). Heckman e al (1998) and Khn & ooon (1991) e a dynamic and he aic general eqilibrim approach repecively o look a he ie of wage ineqaliy and naive wage. Differen conclion rel from heir model. In conra o hee exiing general eqilibrim model hi paper conrc a relaively comprehenive dynamic framework in which governmen play he imporan role of pplying edcaion and wage are deermined by labor pply and demand. By calibraing hi heoreical model wih Taiwanee daa he imlaion rel provide empirical implicaion and hee can be compared o exiing lierare from die in oher conrie. Secion provide he heoreical framework of he model ecion 3 preen he calibraion of he model ecion 4 how he imlaion rel and ecion 5 mmarize he conclion.. The Model A framework wih one-good wo-labor (killed and nkilled) and hree-agen (firm hoehold and governmen) i eablihed a follow. The whole economy i reaed a one aggregae eniy. Firm prodce he good by hiring phyical capial killed labor and nkilled labor hey hen ell hi good o he hoehold for conmpion o he governmen for edcaion capial invemen and o hemelve for phyical capial invemen. The objecive of each firm i o maximize i ineremporal profi nder 1 The model follow he general approach of he -Cbed model (McKibbin and ilcoxen (1999)). The endogenized kill formaion and edcaion prodcion follow he model in Chang (1999) wih he fir-ime applicaion on he migraion ie of Taiwan die. The paial correlaion i he relaionhip beween labor marke ocome in a localiy and he exen of immigran peneraion. The ign of he relevan coefficien change erraically over ime.
conrain of capial accmlaion and of invemen wih an adjmen co. The ownerhip of firm belong o hoehold. Hoehold pply nkilled labor o firm and killed labor o boh firm and he governmen in order o earn wage ogeher wih he dividend from rening phyical capial o firm o finance he prchae of he good and edcaion. eire i conmed by hoehold wih an opporniy co of no working. The objecive of hoehold i o maximize iliy by an opimal diribion of conmpion beween he good and leire nder heir bdge and ime conrain and he choice of invemen on edcaion wih an adjmen co o pgrade heir kill. The governmen by he good from he firm and ranform i ino edcaion capial. Thi capial i combined wih killed labor hired by he governmen o prodce edcaion. The role of governmen a an edcaion pplier i eenial. Thi model capre he realiy of governmen pplying edcaion in conideraion of he aociaed beneficial exernaliie. The governmen balance i bdge by collecing labor income ax and elling edcaion o hoehold 3. The accmlaion of phyical capial kill formaion edcaion capial and financial ae drive he dynamic evolion of he economy over ime. The role of foreign worker in hi economy i characerized a follow. Foreign worker caegorized a nkilled labor join prodcion of he good wih naive and are amed o be homogeneo o naive nkilled labor in prodciviy. However hey receive a lower paymen han naive 4. In conideraion of he demand ide of foreign worker hi model explicily capre he foreign worker conmpion of good 5. By o doing he domeic hoehold conmpion in he iliy fncion carrie a fracion variable by which he proporion of domeic conribion o he prodcion of good i meared. Thi fracion variable i defined a he oal domeic labor force divided by he oal labor force inclding he foreign worker in he economy. Therefore before he enry of foreign worker he fracion variable i eqal o one. In each period he nmber of domeic killed and nkilled labor are endogenized hence hi fracion variable i alo endogenized. Foreign worker are amed o pay he ame ax rae a naive and no o join he aciviie in he financial marke. Cobb-Dogla fncional form are ed for good prodcion edcaion prodcion and iliy fncion o ai in he imlaion of hi empirical daa calibraed model. The fll model and i eady ae are preened in Appendix 1. 3. Calibraion of he Model All daa are from he official orce inclding he Direcorae-eneral of Bdge Acconing and Saiic (DBAS) Miniry of dcaion (MO) he Concil of abor Affair (CA) and he Concil for conomic Planning and Developmen (CPD). The monhly average wage daa by edcaion aainmen i from he Manpower Uilizaion 3 To avoid nneceary complexiie a bidy rae on invemen and a ax rae on financial dividend i amed o be balanced o. 4 Foreign worker are proeced nder he abor Sandard aw in Taiwan and mo are paid he reglaed minimm wage. On average foreign worker wage are beween 50% o 60% of naive. 5 Foreign worker in Taiwan have no conmpion on edcaion. 3
Srvey which i pblihed by DBAS. The real wage i he nominal wage deflaed by he conmer price index (CPI) meared wih 1991 a he bae year. Following he convenion in he lierare worker who have a degree of college or above are deignaed a killed labor and he re are nkilled labor. To maniplae he raw daa which inclde everal caegorie in he grop of nkilled labor 6 he weighed average monhly wage i applied wih he weigh a he poplaion proporion of each caegory in he grop. Since he rericion of imporaion of foreign worker in Taiwan wa lifed from Ocober 1989 and he official daa of nmber of foreign worker commenced in 1991 he bae year for he calibraion i 1990 7. The only excepion i he hare of killed labor and nkilled labor in he prodcion fncion which are eimaed by rnning ordinary lea qare (OS) on relaed daa from 1978 o 000. A deailed calibraion i lied in Appendix. 4. Simlaion Rel and Realiy Foreign worker are allowed o ay in Taiwan for a maximm period of wo year. A one-year exenion i available only once. An addiional ix-monh exenion migh be graned nder pecial circmance for foreign worker engaged in major conrcion projec. For each foreign worker he ay in Taiwan i emporary. However from he andpoin of he Taiwanee economy o conine recriing new foreign worker i anamon o a permanen ay of foreign worker. The magnide of hock are he recaled nmber of foreign worker baed on he imlaion rel in he eady ae. The imlaion i nderaken wih a permanen foreign worker hock wih a zero growh rae afer year 000. Policie ch a an increaing or decreaing growh rae of he imporaion of foreign worker can be eed and hee policy implicaion are preened in he nex ecion. The imlaion rel of hi DI model for Taiwan how ha he wage differenial beween killed and nkilled labor increae in he hor rn defined a he fir period afer he hock by 1.06% and in he long rn by 3.09%. Thi ae ha he imporaion of foreign worker woren he relaive a of naive nkilled labor o killed labor. The worening a deeriorae in he long rn if a non-decreaing nmber of foreign worker keep working in Taiwan. The main raniion i a follow. Tha foreign worker join he prodcion of good by receiving a lower pay moivae firm o hire more foreign worker in he fre. The hrea o local worker cae he nkilled wage o decreae. Thi encorage local o pgrade heir kill by aking edcaion. By o doing an increaed demand for killed labor in edcaion ecor boo he killed wage. An inereing phenomenon i ha he imporaion of foreign worker moivae local o pre a higher edcaion degree and bring o a more propero edcaion ecor. 6 They are illierae elf-edcaed primary chool jnior high (inclding jnior vocaional) chool enior high chool vocaional chool and jnior college. 7 Foreign worker were nmbered mch le before 199 han afer and before 199 all of hem were working for he governmen major conrcion projec. 4
Thi imlaion rel how lile connecion o he empirical daa a illraed in Figre 1. Before 1995 he wage differenial in Taiwan followed a decreaing rend. No complain regarding he imporaion of foreign worker were heard noiceably dring ha ime. Afer 1995 he wage differenial acally rend pward. Foreign worker have been blamed for he deerioraion of he nkilled wage ince hen. Foreign worker do ake ome reponibiliy for he worening a of naive nkilled labor and alo conribe o a beer a of naive killed labor. However heir reponibiliy i no explicily hown by he Taiwanee empirical daa. The wage differenial from 1991 o 000 acally decreae in comparion wih ha in 1990 when foreign worker began coming in. Thi demonrae ha foreign worker have a limied impac on he overall wage differenial. The imlaion rel gge he exience of anoher facor or facor which dominaed he decreaed rend before 1995. Afer 1995 he decreaed rend revere wih a poible diappearance of hi nveiled facor(). Taiwanee pblic blame foreign worker for he wrong reaon. 5. Policy Implicaion [Iner Figre 1 Here] Recen dipe over he negaive impac of foreign worker on naive nkilled labor have rged he overnmen o redce he nmber of foreign worker. Meanwhile he local employer arge ha foreign worker engage in hoe job in which he naive how lile inere herefore hey demand more cheaper foreign worker. Simlaion wih an acending 5% and a decending 5% of nmber of foreign worker afer 000 have been done o provide policy ggeion o he Concil of abor Affair. The rel how ha imporing more foreign worker enlarge he wage differenial more ha i he relaive a of naive nkilled labor deeriorae over ime. In order o preven a frher ecalaion of he wage differenial he Concil of abor Affair hold conider impoing a non-increaing nmber of foreign worker policy. Figre how hi comparion. 6. Conclion [Iner Figre Here] Thi paper conrc a dynamic ineremporal general eqilibrim model and calibrae hi heoreical model by Taiwanee daa o inveigae he impac of foreign worker on naive wage. The rel how ha foreign worker do affec naive nkilled labor negaively by enlarging he wage differenial in boh he hor- and long-rn. In comparion wih exiing lierare hi paper ppor he view ha immigraion adverely affec lekilled naive wage. However hi i no explicily hown by he Taiwanee empirical daa. The imlaion dynamic wih a conien increae in he wage differenial ill reaching he new eady ae how lile connecion o he real daa epecially prior o 1995. mpirical daa how ha 1995 i he year of a rning poin for wage differenial 5
from a decreaing o an increaing rend. Thi demonrae ha he effec from foreign worker play a mall role in he overall wage differenial and gge he exience of ome facor() by which he wage differenial i dominaed. A change in direcion of he wage differenial migh be caed by a diappearance of hi nveiled facor(). Thi i beyond he cope of hi paper. hile he Taiwanee pblic aw he increaing rend of he wage differenial afer 1995 and blamed hi on foreign worker hi paper wold gge heir conclion wa erroneo. A comparion of differen policie wih more or le foreign worker provide he principle ha he recrimen of more foreign worker in he fre raie a larger wage differenial. Therefore if he Taiwanee governmen wan o make re he naive nkilled labor no worening frher he Concil of abor Affair hold conider a policy of no increaing he nmber of foreign worker. A menioned above ha he effec of foreign worker play a mall role in he overall wage differenial. The main ak for boh of he Taiwanee governmen and he fre reearch i o nveil he dominan facor() no capred in he model. 6
Figre 1. Foreign orker and age Differenial in Taiwan 4 0 - -4-6 -8 1990 1995 000 005 010 / (%; Simlaion) / (% ; Acal) Figre. Policy Implicaion: Foreign orker and age Differenial in Taiwan 10 8 6 4 0 1990 1995 000 005 010 015 00 0 Annal rowh Rae 5% Up Annal Rae 5% Down Annal Rae 7
Reference Addion Thoma. and orwick Chriopher (00). The Impac of Immigraion on he arning of Naive: vidence from Aralian Micro Daa conomic Record Vol. 78 (March) I. 40 p. 68-78. Alonji Joeph. and Card David (1991). The ffec of Immigraion on he abor Marke Ocome of e-killed Naive Immigraion Trade and he abor Marke. died by John M. Abowd and Richard B. Freeman. The Univeriy of Chicago Pre. Borja eorge J (1999). The conomic Analyi of Immigraion in Handbook of abor conomic Vol. 3A. died by Orley Ahenfeler and David Card. levier Science B.V. Borja eorge J (1994). The conomic of Immigraion Jornal of conomic ierare Vol. 3 (December) p. 1667-1717. Borja eorge J Freeman Richard B and Kaz awrence F (199). On he abor Marke ffec of Immigraion and Trade Immigraion and he ork Force. died by eorge J. Borja and Richard B. Freeman. The Univeriy of Chicago Pre. Borja eorge J Freeman Richard B and Kaz awrence F (1996). Searching for he ffec of Immigraion on he abor Marke American conomic Review 86 () p. 46-51. Bcher Kriin. and Card David (1991). Immigraion and age: vidence from he 1980 American conomic Review 81 () p. 9-96. Chang Hiao-Chan. (1999). age Differenial Trade Prodciviy rowh and dcaion orking Paper in Trade and Developmen No. 000/1 The Aralian Naional Univeriy. Friedberg Rachel M. and Hn Jennifer (1995). The Impac of Immigran on Ho Conry wage mploymen and rowh Jornal of conomic Perpecive Vol. 9 No. p. 3-44. Heckman Jame J ochner ance. And Taber Chriopher (1998). xplaining Riing age Ineqaliy: xploraion wih a Dynamic eneral qilibrim Model of abor arning wih Heerogeneo Agen NBR orking Paper No. 6384. Khn Peer. and ooon Ian (1991). Immigraion Inernaional Trade and he age of Naive orker Immigraion Trade and he abor Marke. died by John M. Abowd and Richard B. Freeman. The Univeriy of Chicago Pre. aonde Rober J. and Topel Rober H (1991). abor Marke Adjmen o Increaed Immigraion Immigraion Trade and he abor Marke. died by John M. Abowd and Richard B. Freeman. The Univeriy of Chicago Pre. 8
McKibbin arwick J. and ilcoxen Peer J (1999). The Theoreical and mpirical Srcre of he -Cbed Model conomic Modelling 16 p.13-48. 9
10 Appendix 1 The Model Firm: Max. d e I Q r m F ] [ 0 η Sbjec o (1) J K d dk δ () ] [1 K J J I φ (3) β α β α 1 ) ( m F K Q Hoehold: Max. 0 ) ( d e l C U θ Sbjec o (4) S P C V F r d df ) ( ) 1 ( τ (5) d d J - δ (6) ) (1 J J S Φ (7) T l (8) K F λ (9) r l C l C U 1 ) ( γ overnmen: (10) ) ( K f S ξ ξ 1 K (11) d dk K I δ (1) m S P I )] ( [ η τ.
Model in he Seady Sae qaion Q F α β 1α β ( m ) K J δ K I J ( 1 δ φ / ) Q P Q / / P λ 1 φ δ Q K ( r δ ) λ φ δ / 0 F (1 τ ) ( ) V C P V ) /( ) r S ( m J δ F λ K S (1 Φ δ J l T U C U µ 1 µ (1 ) / ) 1 τ µ µ P (1 Φ δ ) 1 r U θ S I ( θ δ ) µ µ [(1 τ ) F 1 ξ ξ ξ ) ( K δ K P Φ δ 1 / ] I τ [ ( η m )] P S Q C I I Noaion: Q: Prodcion; F : Skilled labor hired by firm; : Toal killed labor; : Unkilled labor; m : Skilled labor hired by governmen; : Foreign orker; K: Capial; J: Fixed capial formaion; I: Capial invemen; : Skilled wage; : Unkilled wage; P: ood price (defined a 1); F: Financial ae; C: Conmpion; l: eire; S : Amon of edcaion bying; J : Fixed kill formaion; T: Time conrain; I : Hoehold edcaion invemen; U Z : Marginal iliy of Z; P : Price of edcaion; r: Inere rae; K : dcaion capial; I : overnmen edcaion invemen; τ: Tax rae; α β: Inp hare in good prodcion fncion; λ: Shadow price of capial; 11
δ: Depreciaion rae of capial; φ: Adjmen co parameer of capial invemen; Φ: Skill adjmen co parameer; µ 1 : hadow price of financial ae; µ : hadow price of kill; η: age proporion of foreign worker o local nkilled wage; θ: Rae of ime preference; ξ: Inp hare in edcaion prodcion fncion; δ : Depreciaion rae of edcaion capial; δ : Depreciaion rae of kill. 1
Appendix T 8760; τ 0.01; I 6; α 0.53; β 0.6; δ 0.; δ 0.094; δ 0.; φ 0.3; θ 0.0775; ξ 0.3061; γ 0.5; Φ 60.5; η 0.5; Noe: 1. The hare of killed labor (α) and nkilled labor (β) in he prodcion fncion are eimaed by rnning ordinary lea qare (OS) ing daa from 1978-000.. The depreciaion rae of kill (δ ) i eimaed by ing daa of killed labor of 1990 and of 1991 and gradae from niveriy or above (J ) in 1990. 3. The adjmen co of kill formaion i eimaed by relaed daa in 1990. The relaed daa inclde: den in eriary edcaion expendire on edcaion killed labor and gradae from niveriy or above (J ). 4. Inere rae (θ) i he inere rae for he bank 3-monh erm depoi. 6. Tax rae τ i he ax brden in Table 9-9 of Taiwan Saiical Daa Book 001. 7 Time (T) i meared by he nmber of hor in one year. 8 The depreciaion rae of phyical capial δ and δ are baed on he 5-year depreciaion ime frame. 9 The hare of conmpion good (γ) and leire (1-γ) are amed eqal. Daa Sorce: 1. Direcorae-eneral of Bdge Acconing and Saiic R.O.C.. Miniry of dcaion R.O.C. 3. Taiwan Saiical Daa Book 001 Concil for conomic Planning and Developmen R.O.C. 4. Saiical Yearbook of he Repblic of China 000. 5. Yearbook of abor Saiic Repblic of China 1999. 6. Deparmen of Saiic he Concil of abor Affair R.O.C. 13