Taiwan’s Minimum Wage Is Not Catching Up With Consumer Prices

Taiwan’s Minimum Wage Is Not Catching Up With Consumer Prices
Photo Credit: CNA

What you need to know

Taiwan’s workers need to be aware that it is not the increases in wages that are causing prices to rise. Businesses are increasing prices whether wages increase.

Taiwan’s business groups have been fearmongering about how raising the minimum wage will lead to higher prices. But data tells a different story.

Since 2016, Taiwan’s monthly minimum wage has increased by 19.95% (green line), but consumer prices have increased by only 3.95% (yellow line). Prices of a basket of 17 household necessities increased by 8.38% (pink line). (The basket comprises rice, flour, pork, chicken, eggs, soy sauce, sugar, cooking oil, fresh milk, milk powder, instant noodles, bread, detergent, shampoo, bath soap, toothpaste, and toilet paper.) 

On an annual basis, minimum wage has increased by an average of 3.71%, but consumer prices have increased by only 0.78%. Prices of 17 household necessities only increased by an average of 1.62% every year. 

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In terms of percentage growth, the chart below shows that while minimum wage grew by an average growth of 4.31% a year (green line), consumer prices grew by only 0.74% (yellow line) and prices of the basket only grew by 1.31% (pink line).

In other words, despite the growth of consumer prices, a bigger growth of the minimum wage makes it negligible. 

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Many people in Taiwan have forgotten that there was a time when Taiwan’s minimum wage was growing by more than 10% or nearly 20% a year because it had stagnated for at least 16 years, under President Chen Shui-bian (2000-2008) and Ma Ying-jeou (2008-2016).

Do they remember that under President Lee Teng-hui, Taiwan’s minimum wage grew by as much as 17.83% in one year, and minimum wage also grew by more than 10% in four years under Lee (in 1989, 1991, 1992 and 1993)? 

Due to the fearmongering of Taiwan’s business groups today, they might think that consumer prices must have been escalating dramatically in the 90s’ because of the rapid growth of minimum wage.

But the truth is, even though the minimum wage increased by 115.65% from 1989 to 1996, consumer prices grew by only 34.76% and the prices of the 17 household necessities grew by only 24.85%.On average, minimum wage grew by 10.08% annually, while consumer prices and the prices of the 17 household necessities grew by only 3.80% and 2.81%. 

In other words, the growth of the minimum wage was enough to compensate for the increase in prices. 

In fact, the chart below shows that regardless of the minimum wage growth, the increase in consumer prices in general has held steady over the years, of between 3% and 4.5% (yellow line). This holds true in a long-term view.

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In the chart below, the thick yellow and pink lines show the seven-day moving average for consumer prices in general and prices of the basket of 17 household necessities, respectively. Since 1982, both have not crossed the 4% mark. In other words, prices generally have not increased by more than 4% a year averaged out.

And since 1982, consumer prices have only grown by an average growth of only 1.52% and prices of the basket of 17 necessities have grown by only 1.62%. From 2000, consumer prices grew by only 0.93% annually while the consumer prices for the basket of 17 necessities grew by only 1.94%. 

In other words, the average growth in consumer prices has been lower than 2% a year.

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It is clear that regardless of the growth of minimum wage, consumer prices have still been growing.

Although minimum wage did not grow at all in most of the years under President Chen Shui-bian (from 2000 to 2006) and largely stagnated under Ma Ying-jeou (from 2008 to 2015) (green line), consumer prices (yellow and pink lines) were still growing. 

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Looking at seven-year moving averages, one can see that the minimum wage has grown at a faster rate than consumer prices, including those of 17 household necessities, in most years from 1984 to 1997, indicating an increase in purchasing power. 

But from 1998 to 2010, that did not happen. The slower growth (or sometimes, stagnation) prevented wages from catching up with prices. 

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In fact, things are worse than they seem.

Since 2000, the consumer prices for the 17 household necessities suddenly had been escalating by as high as 4% every year until the last decade. The minimum wage, which had been stagnating since the 1997 economic crisis until 2015 (green line), could not catch up with these prices during this period.

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There is not a clear pattern or relationship between the changes in the minimum wage and consumer prices.

The chart below shows the correlation between the two variables. The dots of 1989 to 1996 and 2008 are in the upper right quadrant, and those of the rest in the lower left quadrant. In both clusters, there is little correlation.

In the upper quadrant, despite the relatively high growth of minimum wage — from 5% to 18%, , consumer prices increased within a small range of only 3% to 4.5%. 

In the lower quadrant, there was relatively little growth in the minimum wage, but consumer prices did not stop growing. Notably, in the years when the minimum wage did not grow at all, consumer prices still increased.

In the early 1990s, the minimum wage grew by an average of 10.03% a year, but consumer prices increased by an average of 3.77%. 

Similarly, in the subsequent years in the lower left quadrant, minimum wage grew by an average of 1.70% a year but even so, consumer prices increased by a lower 0.81%.

If there is a clear pattern, it is that in the years when the minimum wage saw higher growth, Taiwan’s workers were allowed to maintain or even grow their purchasing powers — because they can afford the living costs.

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The pattern is even clearer between the changes in the minimum wage and consumer prices of the basket of 17 household necessities. After adjusting for the anomalies in 2008 and 1989 where price increases fell out of the regular range, the chart below shows that there is again little correlation between the two variables.

In other words, the prices of household necessities have increased no matter whether and how much the minimum wage has grown

Taiwan’s minimum wage has increased over the years, but it only compensates for the rise in prices when increased at a higher rate — mostly above 5%.

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Despite the lack of relationship between changes in the prices of household necessities and those in minimum wage, a pattern emerges in terms of how the prices of these necessities have been changing.

The chart below shows that over the last four decades, the prices of these household necessities have spiked by about 4% every three years or so. 

In other words, the prices of these household necessities kept going up even in the years minimum wage did not grow — this is a clear pattern over the last 40 years. 

With the knowledge that prices would go up anyway, the minimum wage should have been lifted to a level higher than the change in consumer prices — to ensure workers can afford the cost of living. 

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However, this largely did not happen over the last two decades, especially in the years under the Chen and Ma administrations, when minimum wage either did not grow at all or grew little.

In fact, since the early 2000s, the growth of consumer prices of the 17 household necessities (pink line) have grown faster than that of the minimum wage (green line), according to the chart below. 

It is only in the last few years since President Tsai Ing-wen took office in 2016, that the gap has begun to close up. 

The consumer prices for these 17 household necessities have been growing faster than minimum wage growth has been able to catch up in the last two decades or so. These necessities have therefore become more and more expensive for Taiwan’s workers. 

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In October, Huang Wei-chen, the deputy director of Department of Labor Standards and Equal Employment under the Ministry of Labor, acknowledged that research by the ministry points out how raising the minimum wage will have only a limited impact on prices, because price increases are affected by various other factors, such as import prices. 

Indeed, since 2000, changes in Taiwan’s consumer prices have followed that of the United States and China, on which the country relies much in imported goods. China, Japan, and the U.S., in order, are Taiwan’s main import partners.

Based on the logic of Taiwan’s business groups, should the government ban imports to prevent prices from rising?

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Not only that, there is a very close relationship between the change in consumer prices and the change in profits, more so than with the change in wages, based on a comparison of the prices of household necessities against those of profits in the agricultural, forestry, and fishing and animal husbandry sectors. This suggests that consumer prices of these necessities are rising because companies in the agricultural sector are increasing prices for more profits. The 17 household necessities include rice, flour, pork, chicken, eggs, and fresh milk.

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In the wholesale sector, there is a very close relationship between the changes in the prices of 17 household necessities and in profits in the last ten years. The chart below shows that changes in profits follow those of consumer prices in the preceding year. This again suggests that consumer price increases in Taiwan are strongly related to the rising prices and profits in Taiwan’s supermarkets.. 

In this context, the growing monopoly of supermarket chains like PX Mart, which has recently bought RT-Mart, is therefore dangerous as it leads to a lack of price competition. 

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Similarly, the changes in the consumer prices also show a strong relationship with those in profits in the food product manufacturing and prepared animal feeds sector. Profits tend to follow two years after changes in consumer prices. 

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From the comparison above, it is clear that consumer prices and changes in wages have very little relationship. However, changes in consumer prices are closely tied to those in prices in importing countries, including China and the U.S., and profits being earned in related sectors. 

The phenomenon suggests that consumer price increases benefit businesses across the supply chain the most, and that consumer price increases are therefore more highly correlated with the increasing profits of businesses than with wage changes. It is a cycle of profit and price growth.

If business groups are so concerned about the increases in consumer prices, shouldn’t they advocate for reducing profits?

In other words, it is the deregulated manner of economic management that has created a lopsided economy, in which businesses prioritize profiting at the expense of workers. Furthermore, for lower increases in consumer prices, Taiwan’s government will need to impose price controls and restrain the profitability of companies. 

Taiwan hasone of the highest grocery prices in the world, as a result of the profitability of businesses across the supply chain. Today, it has the second highest milk prices, the fourth highest prices of rice, and the fifth highest prices of potatoes and apples.

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Taiwan’s business groups are scapegoating increases in minimum wage for rising consumer prices. But they have been able to earn higher and higher profits for themselves, while depressing the wages of Taiwan’s workers and exploiting their labor. 

In fact, as I previously wrote, unlike in Taiwan, workers in other countries with a similar GDP per capita (of between US$20,000 and US$50,000) generally earn a minimum wage that meets their cost of living (as shown in the correlational chart below). 

Taiwan’s minimum wage of NT$24,000 this year, only at the level of other high-income countries with consumer prices 20% to 30% lower, (red dot) makes it an outlier. Pegged to the cost of living similar to that of these countries, it should be at about NT$40,000 (US$1,438).

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The same pattern emerges when it comes to grocery prices. The minimum wage in most other high-income countries allow workers to better meet their grocery needs.

However, in Taiwan, the minimum wage falls far behind the adequate level that will allow workers to do so. It is now at the level of countries with grocery prices only about half that of Taiwan’s.

Pegged to grocery prices similar to that of these other countries, Taiwan’s minimum wage should be at about NT$52,500 ($1,888).

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Taiwan’s business groups keep agitating against the rise in wages. But one needs to really question — if business owners are paying wages as low as some European countries but are charging double for groceries, how come they keep complaining about the decline in profits? Are they so incapable compared to their European counterparts?

In comparison with those in someEuropean countries, Taiwan’s businesses are making a handsome profit. The question therefore isn't about their profitability. Rather, the question we should be asking is —— are they extracting profits at the expense of workers? 

But it is not just consumer and grocery prices. The growth of Taiwan’s housing prices have also surged ahead of the growth of minimum wage.

According to a previous article since 2000, Taiwan’s minimum wage has grown by only about 1.5 times, but housing prices have instead grown by close to 3.5 times. This was also highlighted in a recent article by Apple Daily. The surge over the two decades has pushed the prices to such a high that few countries have seen.

Taiwan’s minimum wage would have been more than NT$50,000 (US$1,798) if it had caught up with the level of growth of housing prices.

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Another previous article also argues that Taiwan’s minimum wage, pegged to housing prices similar to that of other European Union countries, should be at about NT$92,000 (US$3,308).

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To sum up, the problem is how grocery and housing prices have grown to such a high — one of the highest in the world — , while wages have been so depressed.

As such, Taiwan’s business groups have been fearmongering about bigger increases in prices being a result of a rise in the minimum wage, but the data in this article shows that they are not painting an accurate picture.

The fact is, whether or not the minimum wage increases, prices are bound to rise.

While it might be tempting to think that the higher minimum wage increases led to higher consumer price changes, researchers have identified more relevant factors. 

In the United States for the last half of the century, consumer price increases have been largely stable, except for a period from the mid-1960s to early-1980s. In the early-1970s, the Nixon administration thought that implementing wage controls could ease inflationary pressures, but inflation continued to rise after a while. Eventually, the Federal Reserve realized that it was higher interest rates and slower reserve growth that helped control inflation. 

In his research, Harvey Rosenblum, the former senior vice president and director of research at the Federal Reserve Bank of Dallas, also found that more so than wages, the factors associated with inflation are immigration, expanded trade and globalization, the availability of capital to businesses, and private sector applications of new technologies.

The comparison in this article points to the same conclusion as well — that minimum wage has little correlation with prices.

Also, one can see that when the minimum wage grew faster than consumer prices, workers would not feel their living expenses increased.

Business groups have used increasing prices as an excuse not to increase the minimum wage, but they are the ones who have been increasing prices while calling for a halt in increasing the minimum wage. In fact, they make a handsome profit as wages are depressed. 

Taiwan’s government should consider how to ensure higher purchasing powers for workers by raising the minimum wage, given how prices increase anyway.

Since the 1997 economic crisis, Taiwan’s minimum wage has not grown fast enough especially under the presidencies of Chen and Ma, which allowed the purchasing powers of workers to be eroded. 

During these years, prices kept growing, but minimum wage was not raised high enough to catch up with the increase in prices.

If the minimum wage had grown at higher levels under the two presidents , it could have been able to grow fast enough to catch up with the cost of living, pushing up purchasing powers. 

If the government had lifted it by 5% every year — or by one percentage point more than the peak of 4% that prices could rise to — then it would have been more thanNT$50,000 today.

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Businesses are spreading misconceptions about the growth of minimum wage, but there is hard data available to make informed decisions.

As Taiwan’s Labor Minister Hsu pointed out, there are various variables that influence the growth in prices. In fact, the consumer prices of the 17 household necessities have been seeing regular increases every three years or so over the last four decades — even when minimum wage was not growing. 

A mindset change about minimum wage is required in Taiwan. One has to recognize that if prices are going to grow anyway, the minimum wage (and wages in general) need to grow at a higher level to catch up — so that the purchasing powers of Taiwan’s workers can be maintained. 

Taiwan’s workers need to be aware of this. It is not the increases in wages that are causing prices to rise. Businesses are increasing prices whether wages increase.

Instead, it is the sluggish growth of their wages that makes it seem like prices are increasing too fast for them to afford. 

In its place, Taiwan needs to develop and implement a clear plan to ensure that minimum wage can grow to a level that can cover the cost of living here.

READ NEXT: Business Groups Are Campaigning Against Taiwan’s Minimum Wage Increase. Don’t Let Them Succeed.  

TNL Editor: Bryan Chou (@thenewslensintl)

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