Raise Minimum Wage Now to Fix Taiwan’s Lopsided Economy

Raise Minimum Wage Now to Fix Taiwan’s Lopsided Economy
Photo Credit: CNA

What you need to know

Taiwan has lost 20 to 30 years to transition to a higher-value innovation-led economy. If it wants to be strong, it is time to increase wages significantly.

Taiwan’s Minimum Wage Review Committee will be meeting this month to discuss whether and how much to increase the minimum wage in 2022.

Given Taiwan’s economic performance, it seems timely to raise the minimum wage for workers. Despite the pandemic, Taiwan’s GDP per capita has now grown to be on par with its closest competitor, South Korea, following 13 months of consecutive export growth to a record high of US$37.95 billion. (June’s growth was also the second highest in Taiwan’s history)

Globally, Taiwan’s GDP grew by 2.98% in 2020, making it one of the strongest performing economies during the pandemic. The economy is expected to grow by a further 5.88% this year, which will be the highest growth since 2010.

Taiwan’s minimum wage grew by just NT$200 last year despite the growth. But there are concerns that the Ministry of Labor might want to freeze the minimum wage. Minister Hsu Ming-chun said last week she “hoped it would grow more than NT$200.” But the General Chamber of Commerce representing businesses has also called for the minimum wage to remain unchanged.

Taiwan’s minimum wage — and wages as a whole — have been severely depressed over the last two to three decades in spite of years of high export and profit growth. Not increasing the minimum wage will violate workers’ rights and place an unfair burden on their livelihoods.

In this article, I compare Taiwan’s minimum wages with its exports and profits of local businesses over the last 20 to 30 years, to look at how Taiwan’s economy has become severely lopsided. I also compare Taiwan with South Korea to look at how the once-similar economies took divergent paths, with South Korea ending up becoming one of the most powerful countries today.

Taiwan used to have a higher GDP per capita than South Korea. However, it has been left behind since 2003. It is only in the last two years under current President Tsai Ing-wen that Taiwan’s GDP per capita is finally catching back up.

One reason why South Korea overtook Taiwan is because Taiwan’s economy went through a period of stagnation after the 1997 economic crisis.

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Due to the financial crisis Taiwan’s government allowed its GDP per capita to stagnate for years, and so did the wages.

After the 1997 economic crisis, Taiwan’s minimum wage also flatlined for a period lasting a decade from 1997 to 2007.

Taiwan used to have a higher minimum wage than South Korea’s, but this changed after 2005, when Taiwan’s wages stagnated to such an extent that it could no longer keep up with South Korea.

In fact, Taiwan’s minimum wage was twice as high as South Korea from the late-1980s through to the mid-1990s, but the situation has reversed today where South Korea’s minimum wage is now double that of Taiwan’s.

Taiwan’s GDP per capita has been growing at the same time, but the growth is meaningless when evaluated in terms of improvements to the livelihoods and wages of its workers.

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Since 1998, Taiwan’s minimum wage has tripled, but by comparison, South Korea’s minimum wage has grown by 16 times.

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The approach to dealing with the fallout of the economic crisis set the two countries on different paths. Whereas South Korea decided to transform its economy by significantly increasing the minimum wage after the crisis, Taiwan kept it low for years under the presidencies of Chen Shui-bian and Ma Ying-jeou, leading to today’s low-wage conundrum.

Given that Taiwan is seeing its fastest export growth in recent years, it is timely for the government to significantly raise its minimum wage to keep pace with economic growth. Compared with South Korea, it is apparent that Taiwan has been unwilling to direct a fair share of economic growth to its workers.

As the chart below shows, South Korea’s exports have grown from being on par with Taiwan’s up until the mid-1990s, to being twice as high as Taiwan’s.

Both Taiwan and South Korea are both export-driven economies. Export growth drives up wages in export industries, which leads to price growth for goods and services. Meanwhile, wages in other sectors should therefore be increased to catch up, but this has not happened in Taiwan.

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And unlike South Korea, whose minimum wage has largely grown in tandem with exports after the 1997 economic crisis, Taiwan’s minimum wage has been kept at a low level as exports tripled.

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But it is not just exports. Taiwan’s minimum wage has also lagged behind profits (or operating surpluses) since the 1997 economic crisis, while South Korea’s minimum wage has been growing faster than profits.

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In turn, as Taiwan’s business owners earned excessive profits (from not returning them adequately to wages), they began pumping their excess profits into housing as a means to store and grow their wealth.

Indeed, Taiwan’s housing prices have escalated much faster than profits from businesses. Since 2001, they have more than tripled while profits have doubled. By contrast, South Korea’s housing prices have largely kept pace with profit growth.

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In Taiwan, housing speculation has become so (unproductively) profitable that those who owned more than 10 houses found themselves holding 18.74% of all unoccupied units. Similarly, companies which owned more than 10 houses held 33.47% of all empty business-owned housing.

Buying a house is unattainable for many Taiwanese. The minimum wage has remained low as housing prices have soared. South Korea, by comparison, has kept minimum wage growth above housing price increases since the turn of the century.

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In Taiwan, housing prices have also grown much faster than those in South Korea. They have more than tripled as South Korea’s only about doubled since 2001.

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Today, the housing price-to-income ratio has grown to 15.54 in Taipei, second only to Hong Kong. And Taiwan has done little to alleviate the escalating housing cost pressures on workers.

Such a situation has created a lopsided economy and is untenable in the longer term. It should be a surprise that Taiwan has managed to last this long on such a lopsided economic structure. Experts say a housing bubble might have been brewing over the last few years.

In fact, Taiwan also has one of the highest housing prices in the world. Even though South Korea’s and Japan’s housing prices are high as well, their minimum wages are twice that of Taiwan. The city of Geneva in Switzerland also has a minimum wage five times as high as Taiwan’s, of 3,772 Swiss francs (NT$116,201).

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There is similar discussion about a possible housing bubble in South Korea , but Taiwan’s workers have lesser financial capacity to cushion the risks with lower wages and purchasing powers.

Taiwan’s lopsided economy stems from a set of wrong priorities. When comparing the two countries, it becomes clear that South Korea’s workers are benefiting more than Taiwan’s from their country’s economic growth. Taiwan’s businesses benefit disproportionately from the growth at the expense of workers.

In other words, South Korea’s minimum wage has kept up with exports and profits, while Taiwan’s have fallen behind exports and profits. The excess profits in Taiwan (that should have been paid into wages) is being invested in housing, thereby escalating housing prices and resulting in a lopsided economy.

Comparing the figures prior to the economic crisis growth in 1997 gives a clearer picture of how lopsided Taiwan’s economy has become.

Prior to the crisis, minimum wage in Taiwan actually kept pace with exports, just as it did in South Korea.

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Comparing profits, this trend is even clearer — pre-economic crisis, Taiwan’s minimum wage was closely following the growth in corporate profits, as it was in South Korea.

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Things started to fall apart in Taiwan after the 1997 economic crisis.

Taiwan’s minimum wage has stopped growing in tandem with exports in the aftermath of the economic crisis.

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Taiwan’s minimum wage has also stopped growing in tandem with profits since 1997 — in other words, Taiwan’s government and businesses stopped returning the economic gains in the country back to workers in a fair manner.

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How wage stagnation in Taiwan has stifled innovation

There are consequences to the lopsided economic growth in Taiwan.

From 1999 to 2019, the research and development (R&D) expenditure in the enterprise sector has risen by 8.5 times in South Korea (by 2019), while it has only risen by four times in Taiwan.

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South Korean companies have grown much faster in profitability than their Taiwanese counterparts, so have their investments in research and development.

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Studies have shown how low wages stifle innovation, while higher wages reduce reliance on low-wage labor and push companies to take on higher risks to innovate — as South Korea’s example has clearly exemplified.

Taiwan’s wage stagnation has resulted in innovations with one of the lowest breakthrough potentials. It continues to do well in lower-value upstream electronics production, but ranks poorly in terms of its ability for higher-value downstream production. The domestic value added in Taiwan’s electronics exports is also lower than that in South Korea and other higher-income advanced economies. Taiwan is known for its role as a contract manufacturer of semiconductors, while multiple South Korean companies have become global brand manufacturers in their own right.

Taiwan’s struggle to innovate was laid bare two years ago when Japan imposed trade restrictions on South Korea’s technology exports. Taiwanese analysts said local businesses did not have the technological expertise to develop the high-end technologies that South Korea did.

Taiwan’s slower export and profit growth (compared with South Korea’s) following the economic crisis in 1997, coupled with the low-wage situation, have demotivated higher-value innovation, dampening the country’s potential for higher economic growth.

While Taiwan has invested less in research and development, Taiwanese businesses, accumulating large profits, have been making unproductive investments like real estates, thereby driving up Taiwan’s housing prices to being one of the most expensive globally.

One problem is that Taiwan’s employers have become addicted to cheap labor, and the government has not implemented any policy to wean them off it. Taiwan’s low wage situation is thus a result of Taiwan’s business people’s exploitation and the politicians benefiting from their connections with business interests.

Taiwan’s wealth inequality is huge

The average salary of board directors at Taiwan’s listed companies has grown from NT$1.5 million in 2008 (when data was first made available) to NT$2.7 million last year.

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While director salary has nearly doubled over the last 12 years, Taiwan’s minimum wage has not even grown by fourth-tenths.

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Taiwan’s distribution of wealth is uneven and unequal, and it continues to be so. Taiwan has only half the minimum wage of South Korea, but the country instead has a higher proportion of people with over US$1 million in wealth (3.1%) than South Korea (2.5%).

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Taiwan needs to raise minimum wage to NT$40,000

Taiwan’s minimum wage is therefore in severe need of correction.

Taiwan tends to emulate Singapore’s policies to avoid losing out, but even Singapore, which has one of the highest income and wealth inequality among advanced economies, has recognized that workers’ wages have been severely depressed by instituting a plan to increase the minimum wage for a small group of workers.

Singapore’s decades-long ruling People’s Action Party has stood firmly against a national minimum wage. The party, after rejecting the proposal to implement one in 2015, introduced a minimum wage for resident outsourced cleaners. The wage set then was only S$1,000 (NT$20,620), in comparison to the minimum wage of NT$19,273 in Taiwan at that time.

Nonetheless, in June, Singapore’s government accepted a proposal to gradually increase the minimum wage for cleaning workers over a period of six years, to S$2,420 (NT$50,765) by 2028 (see dotted pink line in chart below). It seems to be a giant step, but the amount would still only be enough to match South Korea’s minimum wage in 2022, at 1,914,440 won (NT$49,406).

Today, Taiwan’s national minimum wage (NT$24,000) is kept at a similar level as that for Singapore’s cleaners.

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If Taiwan’s minimum wage had kept pace with its exports and profits over the last few decades — as it has South Korea’s, it would have grown to over NT$40,000 today. If the minimum wage had kept pace with housing prices, it would have been above NT$50,000 today.

If Taiwan had been as innovative as it had been until the mid-1990s, it could have also enjoyed higher growth in exports and corporates in profits, propelling further growth in minimum wage.

I have also previously written that if Taiwan’s minimum wage is to be pegged to its cost of living, as per other advanced countries, then it should be about NT$40,000 as well.

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Taiwan needs to implement a similar plan to increase minimum wage to NT$40,000 to NT$50,000, as Singapore has done for its cleaning workers (note that by the time this amount is reached, the amount will need to be even higher in order to account for inflation). Taiwan’s government could achieve this by increasing the minimum wage by only NT$4,000 to NT$5,000 annually for the next four years, a paltry figure considering how low wages have been depressed.

A report reveals Taiwanese workers saw their annual wages increase by 0.7%, or NT$5,000 last year. Insignificant as it is, the increment should also be reflected in the minimum wage, which will benefit low- and lower-middle income workers, and honor their contributions to society and the economy .

Taiwan should also introduce legislation to automatically increase minimum wage according to cost of living, as several countries like Luxembourg. The Ministry of Labor has said a draft bill to do so was sent to Taiwan’s cabinet at the end of 2018, and President Tsai also promised in the same year to “promote a minimum wage act [to provide] a legal basis to set the minimum wage”, but there has been no updates on this front since then.

Behind Taiwan’s ​​façade of economic growth

Taiwan’s minimum wage is severely depressed due to a low-cost economic structure favoring businesses. This has created a lopsided economy, causing innovation to stagnate as businesses hoard profits and invest unproductively.

Taiwan’s GDP growth serves as a façade of how unevenly its economic gains have been distributed. The trend is driven by an unhealthy reliance on individual profit maximization intertwined with excessive real estate speculation, while sacrificing wages and worker livelihoods, and in the process, innovation.

Taiwan’s businesses have no valid reason to block stronger wage increases — not when they have robbed Taiwan of its innovation and growth potential and perpetuated an unhealthy economic structure by accumulating personal gains. Politicians are complicit for receiving donations from private companies to help dampen wages and deny fair rights to workers.

Taiwan ranks 10th on the crony capitalism index among 22 countries, making it the developed country with the second highest level of cronyism on the ranking. (South Korea ranks 20th) It indicates that the economy encourages rent-seeking behavior, and many companies thrive not as a result of the free market, but their ties to politicians.

Taiwan needs to reverse the structural damage in its economy to achieve the potential it could have had 25 years ago. Until then, it could start to catch up with South Korea and other advanced economies in terms of human capital and innovation potential. To do so, Taiwan needs to increase wages.

No excuses to deny workers an increase in their wages

Some economists urge the government to wait until the last quarter of the year to “discuss” lifting the minimum wage, saying that rushing through the policy harms the small and medium-sized businesses hardest hit by the recent Covid-19 outbreak.

However, the wave of Covid-19 infections should not be an excuse to postpone increasing the minimum wage. As it is, Taiwan’s minimum wage has already been suppressed for more than two decades, and further depression should not be tolerated or allowed. Most other advanced countries are facing worse outbreaks than Taiwan, but have decided to increase their minimum wages this year. Despite the pandemic, Taiwanese businesses can afford to pay their workers more, given the profits they earned last year. Don’t forget — Taiwan was one of the best performing economies in 2020.

The same economists also cited rising unemployment as a reason not to raise the minimum wage. But Taiwan’s unemployment rate stood at 4.53% in July, one of the lowest among advanced economies. Even if unemployment is a concern, the government should be able to support workers by increasing their unemployment benefits and providing wage subsidies given how much it has collected in tax recently. The government saw a new record in tax revenue last month, including in corporate tax income, which jumped 77.7% to NT$230.6 billion.

Taiwan’s government is determined to support businesses during the pandemic, including semiconductor manufacturers, which drive the country’s economy. But it has not shown the same determination to help workers. Not only is this unjustifiable, it also calls into question President Tsai’s resolution in advancing a pro-worker agenda. She has promised in election campaigns to introduce legislation that requires the minimum wage to be pegged to cost of living.

Taiwan’s bosses tend to accuse workers of being lazy, like former PX Mart president Hsu Chung-jen, who said that Taiwan’s young people should “tolerate rather than complain about low pay,” but it is them who have been lazy by relying on low-cost labor to grow their businesses. If innovation and profits do not grow fast enough, it is because Taiwan’s bosses have been sabotaging themselves and Taiwan’s economy by resisting treating workers fairly.

Labor exploitation has lasted too long in Taiwan. It begs the question of whether this has cascaded into a pervasive culture of exploitation: low-income migrant workers are abused by their employers, or local employees are forced to take paid leave to work from home during the pandemic. Decades of exploitation has led to an erosion of ethics and basic decency.

Raise minimum wage now!

Despite an increasing demand for labor in the semiconductor industry, workers in these companies earn an average of only NT$52,483, which is at the level of South Korea’s minimum wage. It does beg the question whether the low cost structure is over-fueling an extravagant level of profit that works against the interest of Taiwan — when this goes against workers, innovation, and overall growth potential.

The data above and in previous articles I’ve written are more than enough to push back against businesses which resist increases in minimum wage to continue profiting off cheap labor, and for the government to phase in these increases regardless of how businesses react.

By giving in once again to businesses, Taiwan’s government would show the public how it is complicit in exploiting workers and undermining the country’s potential for innovation.

Taiwan has lost 20 to 30 years to transition to a higher-value innovation-led economy. If it wants to be strong, it is time to increase wages significantly.

It is time to abandon this broken economic model based on selfish self-profiteering for a new one built on social solidarity working in the interest of citizens, workers and the country, in order to allow Taiwan and Taiwanese to have the capacity and strength to face new challenges in the coming years.

Taiwan needs to increase wages to return the lost wages to workers for a start, and then implement a stronger plan to restrain housing prices, so as to fund innovation for a productive economy.

READ NEXT: On Minimum Wages, Singapore Is Playing Catch Up

TNL Editor: Bryan Chou (@thenewslensintl)

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