The Effect of Foreign Labor on Labor Market

Transcription

1 The Effect of Foreign Labor on Labor Market Labor Economics Eason Wu, Allen Wang, Chloe Chen, Ken Yang, Debbie Lee 2012/7/13

2 Content Content... 1 I. Introduction Motivation and Background Objectives Hypothesis... 3 II. Methodology Literature Review... 3 Foreign Labor Policy in Taiwan... 3 Minimum Wage Policy in Taiwan... 6 Controversial Issue Related to Foreign labor Hypothesis Test... 9 Regression Model... 9 Controversial Issue III. Conclusion Review of Research Findings Possible Explanations for the Results Recommendations for Future Research IV. References

3 I. Introduction 1.1 Motivation and Background Labor allocation is absolutely the most concerned issue among governments around the world, and Taiwan is no exception. For the last two decades, Taiwan has been experiencing both fast growing period and recessional period. On the other hand, the higher level of education in average changes the physiological recognition of job and wage for workers in Taiwan. Confronted with such a massive challenge, the supply and demand in labor market were forced turned into a confusing situation. In other words, the shortage in the low level labor force and the oversupply in the high level labor force exist at the same time. However, the enactment of importing foreign labor can be traced back to early 1980s. With all the changes we have mentioned, we want to know whether the purpose and laws are suitable for the current situation. According to the annual data from 2004 to2009 on the website of Executive Yuan, Taiwan, an unreasonable phenomenon occurred. As the unemployment rate rose, the number of foreign labor in Taiwan increased to a historical high at the same time. (Graph 1 and 2) However, the original purpose of importing foreign labor is to implement the shortage of domestic labor and ease the heavy burden in domestic labor market. If the growing quantity of foreign labor would increase the unemployment rate, is it still necessary to import so much foreign labor nowaday? On the other side, as Taiwan confronted with the global recessional situation, what s the best reaction for our government to do the in-time reaction on the foreign labor policy? Graph 1: Unemployment Rate Graph 2: Number of Foreign Labor ( ) ( ) 2

4 1.2 Objectives Our goal is to figure out the relationship between foreign labor and the domestic labor market, and make further discussion to the relation and the original purpose of the law. Therefore, unemployment rate is used as the single measurement. We want to figure out if there is a significant relationship between the quantity of foreign labor and domestic unemployment rate. Data from each city in Taiwan are taken into consideration both individually and in total. In the end, we want to know if foreign labor a substitute for domestic labor. 1.3 Hypothesis According to the observation we ve mentioned, we assume foreign labor and domestic labor are substitute. If the quantity of foreign labor increases, the unemployment rate would rise up correspondingly II. Methodology 2.1 Literature Review Foreign Labor Policy in Taiwan Until 1989, in Taiwan, the importation of low-skilled labor was forbidden and importation of other types of foreign workers was strictly restricted (Hwang 2010). However, because of the rapid development and changes in industry structure, Taiwan faced the labor shortage problem. It was a big influence especially for labor intense industry. So after government initiated foreign labor for 14 major infrastructure projects in 1984, the first batch of foreign low-skilled labor was hired. In 1990, import of foreign labor was officially allowed (Hwang 2010). The main reason was Taiwan government expected to make good use of foreign labor to promote the employment of nationals, increase country s competitiveness, and use foreign labor source to implement the shortage of domestic labor force on certain industry. According to this original purpose, the government adopted the policy based on implement principle. In 2001, Taiwan joined WTO and it was necessary to follow the related regulations and international conventions of importing foreign labor. It was imperative for the government to ensure fair treatment and basic rights such as 3

5 equality for foreign labor in order to earn the respect of other members in WTO. Until 2011, the total number of legal foreign labor in Taiwan was approximately 4,256,000. It soared dramatically about 1,400 times than in Table 1 provides a concise overview of the number of foreign labor in each industry in Taiwan. We can find that there are three major industries importing foreign labor. Table 1: Overview of foreign labor employment in Taiwan (Industry) 2004 to 2010 (unit: persons) Source: Council of Labor Affairs (2010). Three major industries are manufacturing, nursing, and public constructions. First, manufacturing expects to get flexible to adjust the foreign labor regulation. The qualifications for manufacturing enterprises are complicated. Those industries of specific production procedures categorized as abnormal temperature operation, dust operation, poisoned gas operation, organic solvent operation, chemical processing, non-automatic operation and other specific production procedures have been verified by the competent authorities for other purposes at the central government level or the administration of the free trade port areas to be complied with the specifications in the attached Chart Two of the Standards. And those industries of specific timeframe categorized as within the timeframe from ten o clock in the evening till six o clock in the morning, production operation work hours last at least one hour have been verified by the competent authorities for other purposes at the central government level or the administration of the free trade port areas to be complied with the specifications in the attached Chart Three of the Standards. Second, Taiwan imports foreign nursing labor to assist the development of domestic long-term care system. The nursing industry is composed of family 4

6 caretaker and institutional nursing jobs. For foreign labor being hired to perform family caring tasks, the persons under their care shall have one of the following qualifications: (i) persons with one of items listed in the specially grave physical or mental diseases; (ii) after professional evaluation conducted by medical institution through team method, persons are determined as requiring 24 hours care. Moreover, the employers and the persons under their care shall have one of the following relative relationships: (i) spouses; (ii) direct blood relatives; (iii) collateral blood relations in third degree; (iv) marriage relations in first degree; (v) grandparents and grand-daughters-in-law or grandparents and grand-sons-in-law. The sanatoriums request enough human resources for nursing jobs to correspond to regulations. So the institutions face heavy pressure to recruit abundant employee. In that case, importing foreign labor to those institutions will assist them to operate more smoothly and to build up completed domestic long-term care system for the coming aging society. There are some qualifications to ensure the policy can be settled down. For foreigners hired to perform the institutional caring tasks, the employers shall have one of the following qualifications: (i) long-term nursing institutions, caring institutions, caring institutions, or social welfare organizations for receiving and caring middle-range physically or mentally disable persons, mentally disturbed persons, or persons suffering from dementia; (ii) nursing and caring family institutions, hospitals for chronical illness patients or general hospitals, ordinary hospitals or specialized hospitals with wards for chronical illness patients or respiratory disease wards. The number of foreign labor would be limited, which is based on the scale of institution. Last, in order to implement the expansion of domestic demand of employment on public constructions, we also import adequate number of foreign labor. For example, major public construction projects under the Twelve Major Infrastructure Programs controlled and audited by the Executive Yuan, or any national economic construction projects approved and registered by the Executive Yuan, and their total amount of construction exceeds 100 million New Taiwan Dollar. Other construction projects initiated by governmental authorities outside the preceding item, their total amount of construction exceeds 200 million New Taiwan Dollar, and the duration of construction is over five hundred and forty-seven calendar days. Generally, if the public-enterprise construction projects cost exceeding certain amount and the duration of construction taking over certain period, the employer can import foreign labor for the projects. 5

7 Table 2: Overview of foreign worker employment in Taiwan (Nationality) 2004 to 2010 (Persons) 6 Source: Council of Labor Affairs (2010). From Table2, we can found that most Taiwan s foreign labor comes from Indonesia, Vietnam, the Philippines and Thailand. Although Taiwan permitted importing labor from Mongolia in 2004, there were only 1 Mongolian labors in Taiwan in The Taiwan Council of Labor Affairs (CLA) allocates quotas for imports of foreign labor based on the percentage of foreign labor in each industry in Taiwan. Originally, the maximum percentage of foreign labor allowed was 15 per cent, 18 per cent and 20 per cent of the total numbers of employees, in different industry sectors. The restraints were restructured to five brackets of 10 per cent, 15 per cent, 20 per cent, 25 per cent and 35 per cent in 2011, implying foreign labor can account for as much as 35 per cent of the workforce in some qualified enterprises (Hwang 2010). The reason for changes of percentage of foreign labor is that enterprises argue that the previous regulation didn t fit their needs. According to the past regulation, they cannot hire enough number of foreign labor to assist the production. Consequently, instead of facilitating industry developing, the policy stops the enterprises strengthening competitiveness by importing foreign labor. Minimum Wage Policy in Taiwan In order to ensure that labors earn enough to cover their basic living expenses, the government promulgated the Temporary Minimum Wage Procedure in 1968 and set the domestic minimum wage at NT$600 per month (Hwang 2010). Taiwan

8 experienced a ten-year golden era of economic boom from With the rapid growth in economy, the minimum wage was also adjusted upwards irregularly. By 1997, minimum wage in Taiwan had reached NT$15,840 per month. Since then, the minimum wage stayed at that figure in the following decade. Until 2007, the government began to increase the minimum wage more frequently. From table 3, we can see the process of adjustments from the beginning of adopting minimum wage policy. This year, 2012, the minimum wage was raised again to NT$18,780 per month or NT$103 per hour. It is about an increase of 5 per cent from last standard which was carried out just last year, 2011(Council of Labor Affairs). Table 3: Overview of minimum wage adjusting in Taiwan Source: National Statistic, R.O.C.(Taiwan) (2010). Existing regulations carried out by Labor Standards Act in Taiwan prescribe that the minimum wage should apply to both local and foreign labor and there should be the same minimum wage everywhere inside the country. Furthermore, for Taiwan is the member of WTO, Taiwan has to obey the National Treatment Principle to give equal treatment between domestic and foreign labor. Due to the fair treatment, enterprises which employ relatively more foreign labor cannot get the benefit from it. It even constitutes a substantial financial burden on enterprises. The sudden surge in wage costs means a significant pressure on the profitability of employers. In the other hand, foreign labor is protected by the regulations to be paid by minimum wage when they work in Taiwan. Actually, the payment is higher than the other countries surrounding Taiwan. In that case, the foreign labor gets the benefit and it causes a strong pull force for attracting more and more foreign labor to come to Taiwan for work. 7

9 Controversial Issue Related to Foreign labor It has been 20 years since the foreign labor officially imported into Taiwan, we need to reflect whether the suitability of importing foreign labor still exists or not. At the beginning, government expected to get the benefit through importing foreign labor to get adequate human resources. The implement principle was the concept as the policies were made. However, according to table 4, the labor shortage ratio in manufacturing decreased year by year. It makes us to think again the issue: whether we should adjust the foreign labor policy to protect domestic labor from supplanting by foreign labor or not. Table 4: The labor shortage in Taiwan ( ) Source: National Statistic, R.O.C.(Taiwan) (2010). Another controversial issue of foreign labor is whether we should decouple the minimum wage between domestic and foreign labor. In recent years, owing to factors such as sluggishness in the Taiwanese economy and extremely competitive international markets and the hike in the minimum wage in Taiwan, some business enterprises and scholars have advocated decoupling of foreign labor wages from the minimum wage. In their opinion, higher cost of foreign labor will accelerate the labor-intense industry to move out so that the competitiveness of Taiwanese manufacturing will drop. In the long term, it will affect investment and generation of new employment opportunities in Taiwan. The experts claim that decoupling the minimum wage would encourage companies that have relocated their units elsewhere to return to Taiwan. However, this section involves many different aspects and the government should cautiously considerate. 8

10 2.2 Hypothesis Test Regression Model Since we have made a substitute hypothesis in the beginning, we are now going to use the regression model to test whether our hypothesis is true. We have made regression three times due to some amendment in need. Regression 1 First, we take deseasonalized monthly data from 2004 to 2009 as resource. We introduce unemployment rate as dependent variable and numbers of foreign worker as independent variable, as it shows in Table 5 and 6, and then we find that the correlation coefficient between these two variable is only For such an insignificant result, we decide to introduce more independent variable to make an amendment. Table 5: Deseasonalized Monthly Unemployment Rate (unit: %) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Table 6: Monthly Numbers of Foreign Workers (unit: person) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 299, , , , , 309, 304, 302, , 331, 332, 333, , 341, 345, 346, , 362, 364, 366, , 348, 342, 343, , , , , , 300, 303, 309, , 336, 336, 336, , 350, 350, 351, , 371, 373, 372, , 341, 342, 344, , , , , , 320, 322, 327, , 336, 337, 338, , 356, 357, 357, , 372, 372, 364, , 347, 348, 350,

11 Regression 2 We still hold unemployment rate as our dependent variable and numbers of foreign worker as independent variable, but we add three more variables in Regression 2, making a multiregression model. First is the minimum wage. We found that there is a drastic escalation in minimum wage in July 2007, from $66 per hour to $95 per hour. We believe that there might be an effect from this variable, but there are two different calculations in minimum wage, hourly and monthly; thus, in order to make the result unbiased, we change the variable into dummy variable form, as it shows in Table 7. Table 7: Minimum Wage (dummy variable form) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Second is deseasonalized GDP growth rate. Considering every possible factor that might affect the unemployment rate, we introduce the most important economic index, GDP. Some research, like Okun s law, they pointed out that there is a relationship between GDP and unemployment rate, and in order to make our explanation unbiased and make it strongly connected between each period, we introduce GDP growth rate as our second independent variable, as it shows in Table 8. Table 8: Deseasonalized GDP Growth Rate (unit: %) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Third is CPI. Considering every possible factor that might affect the unemployment rate, we introduce CPI as an inflation factor into our regression model, as it shows in Table 9. 10

12 Table 9: CPI Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Table 10 shows the result of Regression 2: Table 10: Result of Regression 2 Y: Unemployment Rate ß1: Minimum Wage ß2: Numbers of Foreign Worker E-05 ß3: GDP Growth Rate ß4: CPI ß: coefficient of variable X As the result shows above, we find a negative relation between unemployment rate and numbers of foreign worker, which conflicts our hypothesis, but we also notice that the number of foreign worker has huge differences among counties. Thus, we change our regression resource from general data to individual county data, in order to get rid of the bias resulted from regional difference. Regression 3 In order to get rid of regional effect, we change the scale of our resource, from general to individual counties, but the form of variables remains the same. Table 11 shows the result. Table 11: Result of Regression 3 ß1: Minimum Wage ß2: Numbers of Foreign ß3: GDP Growth Rate ß4: CPI Worker Keelung City Taipei City New Taipei City Ilan County Taoyuan County

13 Hsinchu City Hsinchu County Miaoli County Taichung City Taichung County Changhua County Nantou County Yunlin County Chiayi City Chiayi County Tainan City Tainan County Kaohsiung City Kaohsiung County Pintung County Penghu County Hualian County Taitung County In Regression 3, we find that there is a significant positive relation between unemployment, minimum wage and GDP, but the relation between unemployment and the number of foreign worker is ambiguous. After analyze the ambiguous result, we find an interesting phenomenon. In those foreign labor abundant counties, where foreign workers above 10,000, six out of eight counties show significant negative relation: New Taipei City, Taoyuan County, Hsinchu County, Taichung City, Taichung County, Changhua County, Tainan County, Kaohsiung City. In those foreign workers scarce counties, where foreign workers below 10,000, five out of seven counties show significant positive relation: Keelung City, Ilan County, Hsinchu City, Hsinchu County, Nantou County, Yunlin County, Penghu County. (When P-value is below 0.05, we call it significant) In brief, there is a significant negative relation between unemployment and numbers of foreign workers in foreign labor abundant counties, and significant positive relation in foreign labor scarce counties. We conclude that foreign and domestic labor are complement in foreign-labor abundant county and substitute in foreign-labor scarce county. (2010 Hwang) 12

14 Possible Reason For the regression model somehow contradict to our hypothesis, we find out some possible reasons to explain this situation. We conclude two reasons: one is industry structure, the other is government policy. First, due to industry structure differences among counties, the relation between foreign and domestic labor might be different. Some industries need a lot of basic labor, which is foreign labor, and therefore need more leaders or managers, which are domestic labor, but some industries do not; thus, the difference results in different situation among counties. Second, the government might outsource some project, like construction, to company, and those project needs a lot of basic labor; thus, the construction company needs much more foreign labor, but still, the situation is different among each county. Policy Recommendation Due to the regional difference, we recommend the government apply different policy in different counties to intervene the labor market in order to maximize social profit. Conclusion To unemployment rate, the number of foreign labor is not a significant factor. The effects of GDP and the minimum wage on unemployment are much more significant. Thus, the positive relationship between unemployment rate and number of foreign labor from the observation is a coincidence. They happened to change correspondingly, but have no significant relation in regression model. Controversial Issue A. Necessity of the foreign labor in labor market As we know, job vacancies are finite, and continuously importing foreign labor definitely hurts domestic labor a lot. So, regardless of practicability in law, should we stop importing foreign labor or set quotas for them? In the very start, we import foreign labor to recruit labor force. In late 1980s, because the economy was booming, job vacancies increased a lot. Taiwan is short of labor force then. Therefore, the government decided to begin importation of foreign labor to solve the problem. That is, the reason we began official importation of foreign labor is shortage of total labor force. However, the situation is totally different nowadays. As the industries structure changes, economic development and education level progresses, and domestic labor seeks for a higher level of work, which cause low-end jobs lack candidates. Therefore, foreign labor is indispensable now because they do those low-end jobs that domestic labor would not like to do. 13

15 Graph 3: Labor Shortage Ratio from 1997 to 2011 (unit: %) 工業 Industry 礦業及土石採取業 Mining 製造業 Manufacturing 水電燃氣業 Water, electricity and gas 營造業 Construction Graph 3 presents the labor shortage ratio of industry from 1997 to The red, blue and green lines represent industry, constructing and manufacturing respectively, which are industries with abundant foreign labor. From this graph, we can see that the trends of these three lines are declining, which is the evidence that importation of foreign labor effectively filled shortage of unskilled labor. As industrial transformation happening in the last twenty years, the role of foreign labor really changed a lot and is now indispensable in our society, for they do low-end jobs that domestic labor are not willing to do. The necessity of foreign labor is clear and it is hard to reduce or stop employing foreign labor at all. B. Decoupling of minimum wages Graph 4: Number of Foreign Labor Graph 5: Minimum Wage Graph 4 shows the total amount of foreign labor from 2004 to 2011, and Graph 5 shows minimum monthly salary from 2004 to The minimum wage and 14

16 quantity of foreign labor are both increasing in the past eight years. When the minimum wage and the number of foreign labor are increasing, firms in Taiwan suffer from increasing operating cost and try to cost down, such as moving out to China and asking government to decouple the minimum wage. What if we decouple the minimum wage of foreign labor with that of domestic labor? Following are pros and cons: Pros: 1) Lower cost and higher competitiveness of firms The labor intensive industry is especially affected. After decoupling, the wage of foreign labor goes down; therefore firms can lower their price of products to enhance their competitiveness. 2) Attracting Taiwanese firms in China back to Taiwan If government carries out the decoupling policy, Taiwanese factories would move back. The demand for diet, transportation, finance and livelihood can prosper local economy. Cons: 1) Worse international impressions Taiwan has international labor conventions with other countries. If Taiwan decoupled minimum wage, other members would take some reprisal measures, like trade sanctions. 2) Less job vacancies for vulnerable domestic labor If the wage of foreign labor goes down after decoupled, it will be harder for disadvantaged labor to find jobs (because the minimum wage of domestic labor is higher than the wage of foreign labor). 3) Possible boycott of foreign labor s home countries Because decoupling makes foreign labor get less pay, it may irritate some home countries of foreign labor. They may stop exporting foreign labor for revenge. So far, decoupling is only beneficial for firms but harmful to many aspects of Taiwan. That is, though decoupling is somewhat favorable in some aspects, it may bring much more terrible and unpredictable results. In the government s view point, whether in law field, human-right field or moral field, the decoupling is not feasible at all. And the fact is that, there is no country decoupling the minimum wage of foreign labor with that of domestic labor now. Firms must find other ways to cost down, or try to value up. 15

17 III. Conclusion 3.1 Review of Research Findings According to the research results, we found that the results in general and in counties level are different, and even converse. With general data, it shows that when the number of foreign labor rises, the unemployment rate decreases. It means that instead of damaging our domestic job market, the increasing amount of foreign labor even help more domestic labor to get a job. On the other hand, in counties level, there are two aspects of the results. If it is a county with abundant foreign labor, the unemployment rate would decrease when foreign labor is increasing. There are complementary with each other. Nevertheless, if it is the county with scarce foreign labor, the relationship between them is substituted. 3.2 Possible Explanations for the Results The possible explanations for the result may be that when foreign labor keeps being imported to Taiwan, they not only get a job but also create additional job, such as management vacancies. Because the employers would need more people to manage the increasing number of foreign labor, then it would boot the demand of domestic labor. Moreover, this phenomenon will be more obvious in the counties with abundant foreign labor. 3.3 Recommendations for Future Research Since the introduction of foreign labor did not damage our job market. We should corporate with them. In other words, we can encourage the domestic labor to move to higher management level and hire foreign labor to fill up the basic level job. Also, Based on previous discussion, it is not appropriate for decoupling in the future for there are still a lot of non-economic controversies, such as human rights, politics and international law. 16

18 IV. References Essay and Periodical 1. Hart, Vivien Bound by our Constitution: women, workers, and the minimum wage. New Jersey: Princeton University Press. 2. Starr, Gerald Minimum Wage Fixing: An International Review of Practices and Problems. Geneva: ILO. 3. Jen-Te Hwang, Chieh-Hsuan Wang, and Chien-Ping Chung Is it Possible to Decouple Foreign Workers Wages from the Minimum Wage in Taiwan? The Economic and Labour Relations Review Vol.22 No.2: 盧其宏 (2009), 外籍勞工雇用對廠商生產力及薪資之影響 台灣製造業之實證研究, 國立臺灣大學經濟所碩士論文 5. 江美玲 單驥 (1987), 基本工資的制定對勞動市場的影響, 國立政治大學經濟研究所碩士論文 6. 吳惠林 (1999), 台灣工資結構與經濟發展之關係, 國立台灣大學經濟研究所博士論文 7. 戴肇洋 (2006), 適度放寬傳統產業外勞申請標準之芻議, 全球台商 e 焦點, 第 47 期 8. 廖華玉 (1999), 外勞對我國製造業發展的利與弊, 臺灣經濟研究月刊, 第 22 卷, 第 10 期, 頁 黃仁德 (1995), 臺灣地區基本工資對勞動市場的衝擊效果評估, 勞資關係論叢, 第 3 期, 頁 江豐富 劉克智 (1999), 臺灣縣市失業率的長期追蹤研究: , 人口學刊, 第 31 期, 頁 江豐富 羅紀瓊 (1999), 企業與受雇者對全民健保的因應措施 -- 從企業勞動成本結構分析, 自由中國之工業, 第 89:1 期, 頁 江豐富 (2003), Occupational Segregation and Gender Earnings Differentials: A Case Study in Taiwan, 臺灣經濟論衡, 第 1:3 期, 頁 江豐富 (2005), 外勞對本國勞工就業及職業選擇的影響-- 理論分析與實證探討, 就業安全, 第 4:2 期, 頁 江豐富 (2007), 2007 年基本工資調整對經濟影響之初探, 台灣勞工 季刊, 第 8 期, 頁

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