Education, development, and wage inequality: The case of Taiwan

Abstract

The primary contributions of this article are twofold. First, this article presents, and applies to Taiwan, a multiple-stage Theil decomposition that easily nests multiple explanations for the time path of wage inequality over time. The advantage of this method is that it does not require a correctly specified regression equation to consistently estimate the relative contribution of each. The limitation is that, unlike a well-specified regression mode - where changes in the exogenous, right-hand-side variables can be thought to cause changes in the dependent variable - the Theil decomposition simply summarizes features of the data and says nothing about the direction o causality. An additionbal point is that the results from this decompositon can change depending on which variables are included; the results for any particular variable must be interpreted in light of others present. Multivariate inequality decompositions in the literature so far have focused on the regression approach virtually exclusively. Second, this article sheds new light on the debate on wage inequality for Taiwan itself. It is no secret that Taiwan's development experience has been exceptional, and Taiwan is certainly not an example of a typical developing country. However, the presence of a large number of potential explanations for changes in Taiwan's wage structure has prevented consensus as to which of these explanations ate the most important. © 2005 by The University of Chicago. All rights reserved.