Taiwan’s Wages Are So Low Because Business Profits Are Too High

Taiwan’s Wages Are So Low Because Business Profits Are Too High
Photo Credit: CNA

What you need to know

It is time for Taiwan to restore balance in the economy by lifting the minimum wage significantly. If the government does not do so, it is like asking workers to sacrifice as they struggle to afford the cost of living.

Taiwan’s minimum wage has stagnated for such a long time that the government needs to raise it by two to three times to meet the cost of living or catch up with other advanced economies, including the 27 European Union (EU27) countries.

Taiwan’s Ministry of Labor has said it hopes the Minimum Wage Review Committee, which will convene in early October, will propose a larger wage increase than the 0.84% in 2021. It is expected that minimum wage could at least increase by 5%, from NT$24,000 a month to NT$25,200 in 2021.

But Taiwan’s labor unions are calling for an even bigger increase, to at least NT$26,000, which will compensate for their lost income in 2021 as a result of the negligible increase of NT$200. In a rally earlier this month, they reminded President Tsai Ing-wen of her promise to increase the minimum wage to NT$30,000 during her term.

Their proposal is far from ambitious. Even if the government agrees, NT26,000 still barely meets Taiwan’s basic living expenses. It is urgent for the committee to implement a plan to gradually increase the minimum wage over the next few years.

In the last article, I compared Taiwan with South Korea to show how Taiwan’s minimum wage stagnation has led to a lopsided economy. In South Korea, minimum wage has kept pace with exports and even surged ahead of corporate profits and housing prices, but it has been the other way round in Taiwan. The minimum wage has lagged behind exports, profits, and housing prices, leading to a lopsided economy — wages across all industries have become too low to catch up with the sky-high housing prices.

In this article, I will compare Taiwan with the 27 EU countries, to illustrate the same situation. Taiwan’s wages have similarly fallen behind its European counterparts.

The chart below shows that the total wages (or compensation of employees) in these countries have consistently been higher than their total profits (or gross operating surpluses) since 1995 (from when the earliest data can be obtained).

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In Taiwan, total wages used to be higher than total profits, but this changed in 2002, when profits surpassed wages — this is in large part due to the fact that Taiwan’s minimum wage had flatlined since 1997 (mainly under the Chen Shui-bian and Ma Ying-jeou presidencies), leading to wages falling behind profits, even as profits continued to grow.

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Similarly, the wage share of GDP, the proportion of GDP that goes into wages, in the EU27 countries has consistently been higher than the profit share, the proportion of GDP that goes into profits.

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However, this is not the case in Taiwan. The profit share has instead surpassed the wage share since 2002.

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In fact, the EU27’s wage share of 48.81% in 2020 had grown to be even higher than the wage share of 48.41% in 1995. While the economic returns in the EU27 countries are being returned to workers’ wages in greater parity, the situation is the other way around in Taiwan, where businesses have allowed their profits to take precedence, while allowing workers’ wages to languish.

In these EU countries, wages have generally grown in tandem with profits.

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In Taiwan, since 1995, the growth in profits has instead shot ahead of wage growth.

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But it was not always like this. Prior to 1995, wage growth in Taiwan had kept pace with profit growth.

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In Taiwan, wage share was also higher than the profit share for some time, but it has instead dwindled to only about 45% in the last two decades.

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But it is shown that wage share has hovered at about 50% to 55% in Denmark, France, Finland and Norway, the EU countries where data is available, for the past three decades.

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In other words, while workers in these EU countries have been compensated fairly, Taiwan’s businesses have retained much more profits for themselves.

What if Taiwan’s wages grew at the rate of the EU countries or on par with profits?

As seen above, the EU27’s wage share today is higher than the level in 1995. If Taiwan’s wage share in 2019 could at least be at the same level as it was in 1995 (50.15%) instead of lower, then Taiwan’s total wages would have grown by an additional NT$1,173.1 billion (US$42 billion).

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In 2019, there were 8.129 million private sector workers in Taiwan. If the NT$1,173.1 billion were to be returned to these workers, each worker would on average receive an additional NT$7,981 (US$289). The amount would raise the minimum wage of NT$23,100 in 2019 by a third to NT$31,081.

If total wages had grown at the rate of profits, they would have grown by an additional NT$1,389.1 billion (US$50 billion). It means each worker could have earned an additional NT$26,639, which would more than double the minimum wage to NT$49,739. In other words, on a monthly basis, Taiwan's workers are denied a full month's of their wage.

This constitutes wage theft, a failure to pay the wages that workers are entitled to. Taiwan’s businesses seemed to have gained a free pass to underpay their employees because of years of government inaction on minimum wage.

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To sum up, if Taiwan’s minimum wage had kept pace over the last two to three decades, or grown at the pace of profits, it could have been twice as high as it is today — or on par with South Korea’s minimum wage in 2022, at 1,914,440 won (NT$49,406).

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More than half of Taiwan’s workers are employed in sectors in which profit share is higher than wage share. It suggests that they are underpaid and there is room for a pay raise.

Wage share tends to be higher than profit share in finance and professional, scientific, and technical activities, but workers in these sectors also enjoy a higher salary, at an average of NT$63,726 and NT53,359 in 2020, respectively, which are much higher than the minimum wage.

The trend holds true for workers in service sectors that are not generally seen as profit-making in Taiwan, such as public administration, healthcare, education and the arts — but it does not mean they are well-paid. Their salaries tend to be lower, and are dependent on the general trend in wage growth.

Among the more than half of the sectors where profit share is higher than wage share, the gap is narrowing in the wholesale and retail trade, and the information and communications (ICT) sectors. While average salary is relatively high in the ICT sector, at NT$60,807 in 2020, it is only NT$41,678 in the wholesale and retail trade sector. Now, the wage share in the wholesale and retail trade sector is only 44.46%, as compared to the 53.15% profit share, which clearly shows room for profits to be channeled into wages.

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Wage share has stagnated over the last decade in most other sectors, including the mining and quarrying, manufacturing, and the transportation and storage sectors. Average wage in these sectors is relatively low as well (in comparison to the cost of living in Taiwan) at NT$39,557, NT$44,491, and NT$42,740, respectively. Their corresponding wage shares are only 48.05%, 41.90%, and 31.42%, which again means there is a lot of room for wages to grow by reducing profits.

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The disparity between wage share and profit share is the widest in the real estate, agriculture, electricity and gas, and the water supply and remediation sectors. The wage share ranges from 5.49% in the real estate sector to 29.96% in the water supply and remediation sector. Again, the average salaries are relatively low in these sectors — it is only NT$42,740 in the real estate sector and NT$36,669 in the water supply and remediation sector. (In the chart below, the shares of the electricity and gas supply sector in some years saw negative growth, and is removed from the chart for ease of comparison.)

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In addition to the gap between wage share and profit share, there is one more important reason why the minimum wage should be increased. The chart below shows that sectors with higher regular salaries are also more likely to have higher bonuses. Giving bonuses might seem like a way to increase wages, but this laissez faire approach will continue exacerbating income inequality. For low-income workers, bonuses are meager, meaning they receive weak to non-existent support in improving their wage situation.

Indeed, Taiwan’s income inequality has widened over the last year during the Covid-19 pandemic. Lower-income workers were forced to take pay cuts or unpaid leave, while higher-income office workers were more unscathed by being able to transit to work-from-home.

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Taiwan has to raise the minimum wage to ensure that the economic gains are evenly distributed, and to allow all workers to move up the income ladder together.

Increase wages for profit growth

But Taiwanese businesses are standing in the way of change. Unlike their EU counterparts, they are used to keeping profits predominantly for themselves, instead of sharing them with workers.

With Taiwan’s recent economic growth, Taiwanese businesses have been making more money for themselves. Taiwan’s GDP grew by an impressive 9.27% in the first quarter of this year, 7.43% in the second quarter, and 8.34% in the third quarter. It is also expected to grow by 5.88% for the whole of this year — which would be the highest since 2010.

Listed firms saw their revenue grow by 11.97% to NT$3.145 trillion in August. Taiwan’s industrial production has also risen for the 18th consecutive month in July, and manufacturing sales reached a record high in the second quarter of this year, rising 23.9% to NT$7.9 billion, while the revenue at Taiwan’s science parks and technology industrial parks grew to record highs of NT$1.7 trillion and NT$216.1 billion in the first half of this year, respectively, by between 11.48% and 38%. Many companies in these industrial sectors earn higher profit shares than they pay in wage share.

With the excessive build-up of profits over the last two to three decades, most businesses in Taiwan would have accumulated more than enough profits to tide through the increase in minimum wage, despite the fallout of the Covid-19 pandemic. A report released this month highlighted that Taiwan’s top 50 corporations would see their profitability grow by 16.2%, the highest in a decade.

Many Taiwanese businesses earn profits by exporting their products to the world, bringing in foreign exchange reserves for the economy. Since 1984, Taiwan’s reserves have grown by a whopping 31 times, but the minimum wage has been raised by less than four times.

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Taiwan has the fifth highest forex reserves in the world, and it rose to a record high in August. But it is unusual, given the country’s GDP per capita and wages remain far lower than those in other advanced economies.

The growth of Taiwan’s forex reserves, relying on bonds issued by the central bank, illustrates how lopsided Taiwan’s economy has become. (In the previous article, I argue that Taiwan’s economy has become lopsided due to years of wage stagnation. As wages are depressed, businesses are allowed to accumulate an excessive amount of profits, widening the wealth gap.)

Taiwan’s central bank Governor Yang Chin-long has acknowledged recently that Taiwan’s economic growth is “uneven,” but his solution is to introduce “consumption vouchers” rather than address the root cause of the longstanding problem: wage stagnation

The vouchers,worth only NT$5,000 (US$180), are a short term one-off measure to boost domestic consumption during Covid-19.They are not a solution to Taiwan’s lopsided economy.

A reordering of Taiwan’s economy is long overdue. Given the level of profit share, it is time for Taiwan to restore balance in the economy by lifting the minimum wage significantly. If the government does not do so, it is like asking workers to sacrifice as they struggle to afford the cost of living and allowing businesses to rake it in.

Instead of depressing wages for profit growth, Taiwan should push for wage growth, which will foster innovation and make the country’s products more competitive in the global market. Then, Taiwan’s economy will expand into higher-value sectors and see greater profit growth.

As Bloomberg’s Lisa Abramowicz explained, “The more money the wealthiest individuals have, the less likely they are to recirculate it and help fuel the velocity of money that’s critical to growth.

It is time for Taiwan’s policymakers and businesses to overhaul their mindset if they want to continue growing their profits.

READ NEXT: Raise Minimum Wage Now to Fix Taiwan’s Lopsided Economy

TNL Editor: Bryan Chou (@thenewslensintl)

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