Motivated by the importance of labour migration within the Asian region, this thesis explores the relationship between labour migration and internal competitiveness, focusing specifically on the mechanism through which migration may affect the real exchange rate, as measured by the relative price of non-traded goods. Taiwan is chosen as a case study reflecting the island's deliberate, albeit reluctant, strategy of using international labour migration to address domestic labour shortages. The role migrants have played as a source of unskilled labour in the labour-intensive non-traded goods sector is assessed within the Balassa-Samuelson model of exchange rate determination.
The Balassa-Samuelson model posits that changes in the real exchange rate are directly related to the differential rate of labour productivity growth in the traded and non-traded goods sectors. Accordingly, the model predicts that sustained growth in labour productivity in the traded goods sector relative to the non-traded goods sector will lead to a trend appreciation in economy's real exchange rate, implying a loss of internal competitiveness. However, this postulate rests significantly on the model's Classical labour market assumptions of intersectoral wage equalisation, but importantly, full internal labour mobility.
To accommodate unskilled labour migration, the Balassa-Samuelson model is modified allowing for the presence of a segmented labour market, where migrants supply the secondary labour market. Under this alternative labour market framework, the assumption of full internal labour mobility is not valid and a modified model is constructed to include a sectoral wage differential in the determination of the real exchange rate.
This thesis demonstrates that relaxing the Balassa-Samuelson model's Classical labour market assumptions of wage equalisation and labour mobility has significant implications for the theoretical postulates of the model and the determination of internal competitiveness. It is shown that a segmented labour market, where migration supplies the secondary labour market and contains wages growth in the non-traded goods sector vis-a-vis the traded goods sector, may assist in maintaining an economy's internal competitiveness against a widening divide in sectoral labour productivity growth.
Although a strong theoretical case is made for migration to affect the determination of the real exchange rate through the operation of a segmented labour market, the empirical analysis, which draws on the experience of Taiwan, fails to find a statistically significant long-run relationship between relative wages and the real exchange rate. Instead, econometric analysis finds some evidence of a cointegrating relationship between the real exchange rate and relative productivity, providing empirical support for the conventional Balassa-Samuelson model in the case of Taiwan.