Real wages and real exchange rates in the Philippines, 1956-78

The standard trade-theoretic Stolper-Samuelson-Rybczynski model is used in an attempt to explain movements of real wages in the Philippines. In view of the factor intensities in the Philippines, commodities are aggregated into two composite goods, traded and non-traded. The relative price, or real exchange rate, of these goods is shown to have been an important determinant, with changes in relative factor supplies of less importance in determining real wages. A conventional two-sector model is set out, which distinguishes between the short- and long-run effects in terms of the quasi-fixity of sector specific capital. A simple regression model is estimated and seems to provide a fairly good explanation of what has hitherto appeared to be a puzzling feature of post-war Philippines economic performance: high growth rates of output and employment accompanied by declining real wages, in turn being associated with a rising incidence of poverty, in at least two periods. The final section of the paper briefly outlines the sources of the movements in the real exchange rate, leading to these real wage movements, and draws some tentative conclusions for economic policy.