Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

The source of changes in the wage differential between skilled and unskilled labor has been an important subject of debate for several decades. International trade and productivity growth are two main causes that have been suggested from large country studies. Recent research proposes education as another influence. All three causes have been significantly associated with Taiwan's economic development. This paper attempts to contribute to the literature by investigating wage differentials of Taiwan, a small open economy with a paucity of study on the issue of trade and wages. An Error Correction Model (ECM) incorporating both short and long term run effects is employed.

Education and international trade are found to be important arguments for raising wage differentials in Taiwan. Productivity growth has a significant influence on wage differentials in the short but not in the long run.