The effect of real wages and inflation on labour productivity in Malaysia

This study examines the relationship between labour productivity, real wages and inflation in Malaysia using the bounds testing approach to cointegration and also the Granger causality test. The findings of this study suggest that inflation is negatively related to labour productivity. However, the effect of real wages on labour productivity is non-linear and the two have an inverted-U shape relationship. From a policy viewpoint, the Granger causality test shows that real wages Granger-cause labour productivity, but there is no evidence of reversal causation. Hence, the Malaysian dataset supports the claims by the efficiency wage theory. Moreover, we find that inflation and labour productivity in Malaysia have bilateral causality in the short- and the long-run.