Labor Market Flexibility in East Asia: Lessons from Taiwan

Abstract

Recent turbulence in East Asian financial markets has already spilled over into the region's real economy, with significant effects on growth and unemployment. The ability of East Asian economies to adjust to the crisis depends critically on labor market flexibility. Specifically, a decline in real wages may dampen the increase in unemployment that results as firms restructure in response to changing market conditions. Thus, all being equal, an economy in which real wages are flexible downward should experience a lower employment rate than an economy with downward-sticky real wages. Limited downward flexibility of real wages may exacerbate the effect of the current crisis on unemployment.

Keywords: East Asian financial markets, economic growth, unemployment