Minimum Wage: How Did Taiwan Fall Behind S. Korea?

Minimum Wage: How Did Taiwan Fall Behind S. Korea?
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What you need to know

Taiwan’s Minimum Wage Review Committee needs to make a long overdue decision to increase minimum wage in 2020.

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Taiwan’s Minimum Wage Review Committee will be meeting on August 14 to discuss increasing minimum wage for Taiwanese workers in 2020.

In view of the upcoming discussion, let’s compare the state of minimum wage and economic conditions between Taiwan and South Korea, since both had followed similar developmental pathways in the past decades.

Taiwan’s Reluctance to Increase Minimum Wage

Taiwanese businesses have refused to increase minimum wage claiming that this would result in higher unemployment, but in fact they are in fear of losing their profits. In July, Nelson Chang (張安平), chairman of Taiwan Cement Corporation, opposed the government’s minimum wage increase proposal and said that wages should be linked to productivity.

According to the Conference Board, Taiwan shows a stronger output per hour worked than South Korea, but the productivity is rewarded by neither wage increase nor proportional GDP growth. In other words, Taiwanese workers are grossly underpaid if their wages were really measured by productivity. The low wages in Taiwan also lower consumer spending capabilities, therefore contributing even further to the stagnant economy.

An Overview of Minimum Wage Growth in Taiwan and South Korea

Prior to 2004, Taiwan’s minimum wage was higher than that of South Korea’s as illustrated in the chart below. But in August 2004, South Korea increased its minimum monthly wage to 567,260 won (approximately NT$16,553), surpassing Taiwan’s NT$15,840 at the time. From then on, South Korea’s minimum wage has increased threefold while Taiwan’s minimum wage growth has mostly remained stagnant.

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For the three decades after the end of the martial law period, Taiwan’s minimum wage has seen minimal growth, sometimes staying unchanged for long stretches of time. The NT$15,840 minimum wage persisted from 1998 to 2007; a slight increase to NT$17,280 was then immediately followed by another three-year period of stasis until 2010.

In 2016, the ruling Kuomintang (KMT) government did not increase the minimum wage and subsequently lost the presidential election the same year.

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While Taiwan struggled to maintain its status quo, South Korea has outgrown Taiwan by leaps and bounds in terms of minimum wage and GDP per capita. Today, South Korea’s minimum wage more than doubles that of Taiwan’s.

Does Increasing Minimum Wages Lead to a Higher Unemployment Rate?

An oft-cited criticism about increasing the minimum wage is that it would result in higher unemployment.

While there are ongoing debates about South Korea’s extravagant minimum wage increase, the country has seen similar rates of minimum wage growth in the 1990s and 2000s. The growth itself is not unique, neither are the complaints from businesses.

Not only are South Korean workers getting paid more on average, but the country’s GDP per capita has also far outgrown that of Taiwan’s. Since 1989, South Korea’s GDP per capita has grown more than 6.5 times, almost double that of Taiwan’s economic growth, outperforming Taiwan.

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South Korea serves as an example for Taiwan that increasing the minimum wage would not automatically lead to higher unemployment, especially when the economy has spare capacity to absorb the impact brought by higher wages.

1997 Financial Crisis — The Turning Point — How Did Taiwan Fail to Catch Up?

After the 1997 financial crisis, the higher wages had pushed South Korea to “change its industrial structure to become more high-tech oriented” and kickstart the need for economic restructuring. As a result, the economic growth procured from a higher-tech economy helped boost profits, and thereby wages, allowing the continuance of a healthy economic cycle. Labor unions also tapped on the opportunity to negotiate for higher wages.

Meanwhile, Taiwan’s wage share has only kept declining over the past 30 years.

The question, then, is whether Taiwan can replicate South Korea’s success. Taiwan started off on the same footing as South Korea, and in fact, with more initial advantages in terms of higher wages and GDP. Both are recognized high-tech hubs in Asia, though South Korea’s reputation has exploded internationally while Taiwan languished.

The key difference is that South Korea has shown the courage to restructure when necessary.

Lee Kyu-sung, South Korea’s minister for finance and economy from 1998 to 1999, even said that the financial crisis was “a blessing in disguise” because it pushed South Korea to undergo a much-needed restructuring. The government quickly cleaned up its banking system and South Koreans rallied behind the economic recovery to increase both productivity and savings.

Immediately after the 1997 financial crisis, South Korea’s wage flexibility allowed businesses to cut overtime payments and bonuses, but in 1999 labor unions negotiated for the highest minimum wage increase ever at the time. By 2004, South Korea’s minimum wage, GDP per capita and profits per capita all caught up with Taiwan, and it has never looked back since.

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Meanwhile, Taiwan went with a conservative approach after 1997 and kept the minimum wage at the same rate for 10 years. Taiwanese politicians were often willing to cater to the interests of business owners and continue to sustain a low-cost environment.

Many Taiwanese companies, instead of retaining their operations in Taiwan, started moving them to China en masse, thus further contributing to a stagnant growth in local wages and economy. As a result, Taiwan lost two decades of potential growth and slowly lost its relevance, only being able to hold on to certain industries, such as the semiconductor industry.

Business owners in Taiwan often lack the farsightedness to see that Taiwan has the technical expertise and educational capabilities to grow bigger. Fears of failures have caused them to look inward and yield satisfaction in local competition, and then blame the youths for their lack of growth when businesses should actually be taking bolder risks.

While Taiwanese businesses have been too insulated by government policies, resulting in their risk aversion, South Korea has left Taiwan in the dust in some high-tech aspects and it is catching up to Japan.

The Silver Lining: Tsai Ing-wen’s Progressive Outlook on Taiwanese Economy

The current U.S.-China trade war is an impetus for Taiwan to restructure.

President Tsai Ing-wen (蔡英文) has put a heavy emphasis on new technologies such as artificial intelligence and the Internet of Things, allowing Taiwan to finally develop new niches in the digital transformation. Companies returning to Taiwan have also been required to invest in higher-value products and pay their workers at least NT$30,000 if they wanted government funding.

Under the Tsai administration, Taiwan has seen the highest consecutive minimum wage increases in the past three years. The backsliding in wage share seems to have finally stopped, coinciding with the lowest unemployment rate in two decades, proving that Taiwan can also go on a similar path as South Korea.

If Taiwanese businesses don’t catch up, then Taiwan can forget about the glory it once had. Even when investing in China, Taiwanese and South Korean businesses show different investment behaviors. South Korean businesses recognize that higher wages can bring higher production value, while Taiwanese businesses are still focused on the race to the bottom.

President Tsai should make it her campaign promise to increase minimum wage to NT$30,000 within the next three years, and even then it will only be scratching the bare minimum. Taiwanese workers have suffered from depressed wages for 20 years; while their productivity is as high as those of the world's wealthiest countries, their wages have instead been kept far below average.

Taiwan still has time to catch up. To do so, the government needs to stop indulging in businesses’ willfulness, and start investing in the Taiwanese people instead.


TNL Editor: Daphne K. Lee (@thenewslensintl)

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