Returns to Human Capital and Wage Inequality: The Case of Taiwan

Abstract

To compare with the literature on Taiwan study of wage inequality by the turn of Twenty-First Century, using Taiwani¯s 1978-2003 Manpower Utilization Survey data, this paper estimates the trends of returns to education and experience and investigates the relationship between returns to human capital, ability, and wage inequality. Over the period, return to higher education has an increasing trend while the wage inequality reveals a declining tendency, a phenomenon also contradicted to existing literature, e.g., Castello-Climent and Domenech (2014). Using quantile regression, we further discover the relations between human capital accumulation and unobserved ability, i.e., education and ability are substitutes while experience and ability tend to complement each other. Education enables those less able people to improve upon their disadvantages and thus improve wage inequality. Moreover, wage inequality is lower in females than in males for every educational level and more experienced groups. Contrary to the existing literature, Taiwani¯s empirical study demonstrates that the increasing employment share of more educated workers and/or females will improve instead of worsen wage inequality. Policy implications are also discussed based on Taiwani¯s experience.