The main question of this study is: what has been the role of the KMT regime in regulating Taiwan's labor relations? Has the role of the state been changed before and after the lifting of Martial Law in 1978 when labor movement began to challenge the state and capital? We use a realist approachin analyzing this transformation. The main argument of this study is as followed: the KMT regime had retained a contradictory policy towards labor relations before 1987. But after the mobilization of the labor during 1987 and 1989, the state decided in 1990 to ally itself with the capital as to modify labor laws intending to discipline the labor and restricting labor's capability from mobilization. We argue that because of the weakness of the movement, together with the economic recession of 1989 and 1990 whence the capitalists gave tremendous pressure to the state, the labor has lost its momentum to fight against the state-capital coalition.