Taiwan’s Rigged Economy Dampens Innovation

 Taiwan’s Rigged Economy Dampens Innovation
Photo Credit: CNA
What you need to know

Taiwan’s workers have taken the lowest share of GDP among comparable countries for the past two decades.

Taiwan’s Ministry of Labor announced this week that the monthly minimum wage will increase to NT$24,000 in 2021. This is only a NT$200 increase from the current minimum wage.

In previous articles, we compared Taiwan with other advanced countries with similar GDPs per capita showing how low Taiwan’s wages really are. Also, while wages in comparable countries have leaped, Taiwan’s wage growth has remained almost flat for the last two decades. 

Below, we’ll compare Taiwan’s income from labor and profits with OECD countries with similar GDPs per capita. Among countries within a range of about US$5,000 of Taiwan’s GDP per capita, Taiwan ranks third-highest. 

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Sources: Taiwan; Other countries

When comparing the share of GDP that goes to labor income, Taiwan’s workers have taken the lowest share for the past two decades — at least. In fact, Taiwan’s labor income share is one of the lowest among all the advanced, OECD countries. 

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Sources for Labor Share: Taiwan; Other countries

Conversely, Taiwan’s businesses therefore earn the highest profit share. 

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We next look at what labor income and profit share mean, in terms of the countries’ GDPs per capita.

In the chart below, we can see that Taiwan’s GDP per capita (red line) has grown to the third highest in the group of its close relatives. South Korea’s GDP per capita (blue line) was in 2004 at about the same level as Taiwan, but it has since surpassed all these countries to reach the first place. 

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When comparing the GDP per capita of these countries in terms of their labor income, we see that South Korea’s workers have caught up to those in Spain. 

But while Taiwan’s overall GDP per capita is third highest, the labor income of the GDP falls to being the second-lowest. Taiwan’s labor income is only 80% that of Slovenia, even though both countries have virtually equal GDPs per capita. 

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But when we compare the GDPs per capita in terms of profit, Taiwan becomes the second highest — just below South Korea. South Korea and Taiwan have both left the other countries behind. In fact, Taiwan’s GDP per capita that goes to business profits is almost as high as South Korea. 

In other words, Taiwan’s businesses are making the lion’s share of the country’s GDP, while workers are not adequately compensated for their contributions to the economy. 

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When we compare Taiwan and South Korea, we see that while the profits per capita of both countries have grown in tandem, the labor income per capita is a vastly different story. In fact, the labor income per capita is about 50% higher in South Korea than in Taiwan. 

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Will Taiwan choose innovation-based growth or profits from depressed wages?

While Taiwan believes it needs to adopt a low-cost model to stay competitive, by paying its workers low wages, South Korea’s example has shown that it is possible to pay higher wages while maintaining the same profit per capita.

South Korea has achieved this by building renowned international brands and higher-value innovation while Taiwan is still stuck at lower-value innovation and manufacturing.

South Korea’s reputation for innovation comes in part from the pay its workers receive — research has shown that workers who are paid higher wages have a higher impetus to innovate. Taiwan’s government might believe that throwing money at lead researchers will suffice, but a top-down model will not work unless workers at every rung are paid fairly.

We’ve seen that Taiwan’s businesses are able to earn relatively high profits off the depressed wages of workers. What this means is that there is simply little impetus to invest innovation, if businesses can thrive off of keeping costs low. 

Taiwan has reached a point of reckoning — if the country’s political leadership continues on a low-cost and low-wage system, then Taiwan’s innovation ambitions will be curtailed. If Taiwan wants to catch up with the rest of the world, then it is time for policies that change the way businesses think and work. One place to start is to implement a higher minimum wage and increase wages for all workers. 

READ NEXT: Taiwan's Minimum Wage Increase Doesn't Go Far Enough

TNL Editor: Nicholas Haggerty (@thenewslensintl)

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