Effects of Wages and Global Financial Crisis on Labour Productivity - Does Size Matters?

Efficiency theory states that employers who pay more wages to their employees will motivate the latter to increase their productivity. In the past decade, evidence has shown that increase in wages was found to be relatively lower than the increase in labour productivity. While studies reveal that wages and labour productivity have significant causal relationship, they have yet to be observed by their firms’ relative sizes. This paper examines the effect of wages and global financial crisis on labour productivity of the manufacturing industries in Malaysia based on their relative sizes. The study analyses the industries by their relative sizes, that is, small industries (SIs), small and medium industries (SMIs) and large industries (LIs). Using panel data analysis with fixed effects on monthly data from Jan 2003 until August 2011, the study finds that wages have positively affected labour productivity of firms at all sizes. However, the changes in wages affect the labour productivity in smaller firms more than they do in the large firms. This may be due to the fact that there are increasingly more SMIs implementing performance-based remuneration system to remain competitive. Furthermore, as wage level of labours in LIs is generally known to be higher than those in SMIs, hence, the increase in wages of labours in the LIs may seem relatively lower than those in SMIs. The global financial crisis seems to have a positive effect on the small and medium industries but negative effect on the large industries.