Taiwan’s Lost Growth (Part 2): How Stagnant Wages are Throttling the Economy

Taiwan’s Lost Growth (Part 2): How Stagnant Wages are Throttling the Economy
Photo Credit: CNA

What you need to know

Taiwan has one of the lowest GDP growths since 1995 among emerging economies. This is not going to change if wages don’t grow.

The growth of Taiwan’s economy has slowed down drastically after the 1997 and 2008 economic crises but has not picked back up to pre-1997 levels. The trends are appalling in comparison with those in other high-income economies like South Korea and Poland.

In this article, I will explain how the lost growth is related to the stagnation of the minimum wage and overall wages.

Since 1995, Taiwan’s and South Korea’s minimum wages have increased by 1.7 and 7.2 times, respectively. In South Korea, the hike in minimum wage has been accompanied by a faster growth in household expenditure.

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By 2018, South Korea’s household expenditure has grown by 3.5 times. Taiwan’s household expenditure has grown by only 2.2 times by the same year.

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South Korea’s and Taiwan’s business profits had been growing at a similar rate since 1995. This changed in 2000 when the latter suffered a decline due to two economic crises.

As a result, South Korea’s profits grew by 3.9 times by 2018. Taiwan’s profits grew by only 2.7 times by the same year.

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From 1995 to 2000, South Korea’s and Taiwan’s GDP per capita were also growing at a similar rate. But by 2018, South Korea’s GDP per capita grew by 3.8 times, while Taiwan’s grew by only 2.2 times.

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When we compare Taiwan and Slovenia, an economy with a similar GDP per capita, the same pattern can be seen.

Taiwan’s and Slovenia’s GDP per capita were once growing at a similar rate, but Taiwan has fallen behind since 2000.

Despite a downturn after the 2008 economic crisis, Slovenia’s economic growth has recovered. Its GDP per capita has grown from 78% of Taiwan’s in 1995 to a level on par with Taiwan (96%).

The same pattern can be seen with profits. Taiwan and Slovenia once enjoyed the same rate of growth in profits, but since 2000, Taiwan’s growth has fallen behind. As a result, Taiwan’s profit per capita, which was 60% higher than Slovenia’s in 1995, was only about 35% higher than the European economy in 2019.

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Data source: OECD

Taiwan’s and Slovenia’s household expenditure had also been growing at the same rate since 1995, but Slovenia overtook Taiwan in the early 2000s. By 2019, Slovenia’s household expenditure per capita grew from only 85% of Taiwan’s in 1995 to a level on par with Taiwan (97%).

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Data source: OECD

Slovenia’s high economic and profit growths are also a result of rapid increases in the minimum wage. Since 1995, Slovenia has lifted the minimum wage by 5.7 times.

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Data source: OECD

In comparison with other European economies at a similar stage of economic growth, Taiwan’s economy followed a similar trend.

From 1995 to 2019, Taiwan’s GDP per capita grew by only 2.3 times, while Estonia, Latvia, Poland, and the Czech Republic saw a growth ranging from 4.8 to 10 times.

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Data source: OECD

In terms of profit per capita, Taiwan grew by only 2.7 times, but the four European countries saw a growth ranging from 4.3 to 10.1 times.

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Data source: OECD

Taiwan’s growth in household expenditure per capita also fell behind the four European economies: when they saw a growth of 4.5 times to 8.8 times, Taiwan’s household expenditure increased by only 2.2 times.

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Data source: OECD

By 2019, Taiwan’s minimum wage grew by only 2.3 times, but the minimum wage in Estonia, Latvia, Poland, and the Czech Republic grew by 6.1 times to 18.8 times.

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Data source: OECD

From the comparison above, we can conclude that countries increasing the minimum wage by a larger percentage tend to enjoy higher growths in household expenditures, profits, and the economy.

Since 1995, Estonia has increased its minimum wage by 18.8 times, and its household expenditure, profits and economy has grown by 8.8 times, 10.1 times, and 10.0 times. Latvia’s minimum wage has increased by 10.8 times and its household expenditure, profits and economy has grown by 8.5 times, 8.1 times, and 9.7 times.

In Poland, the minimum wage has increased by 7.9 times, while its household expenditure, profits, and economy has grown by 5.0 times, 5.1 times, and 4.8 times. The minimum wage in the Czech Republic has increased by 6.1 times, while its household expenditure, profits, and economy has grown by 4.5 times, 4.3 times and 4.8 times.

By contrast, in Taiwan, the minimum wage has grown by only 2.3 times since 1995, and thus its household expenditure, profits and economy grew by only 2.3 times, 2.7 times and 2.3 times. With the lowest growth in minimum wage, Taiwan has experienced the slowest economic growth.

The chart below shows a correlation between the growth in minimum wage and GDP. Among the emerging economies mentioned above, Taiwan reports the lowest growth in both minimum wage and GDP.

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Similarly, countries increasing the minimum wage by a larger percentage also saw a greater growth in profits. Taiwan’s profits have grown the slowest among emerging economies due to a low increase in minimum wage. When the minimum wage grows slowly, household expenditure and the economy stagnates.

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In the correlation charts above, we can also see that South Korea overtook Taiwan in the growth of household expenditure, profits and GDP by increasing the minimum wage by a larger percentage.

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In sum, a higher increase in wages spurred the growth of household incomes and expenditure, as well as the expansion of the economy and business profits.

Taiwan’s wage stagnation has caused businesses to lose the profits they can potentially earn.

As long as wages are depressed, Taiwan’s economy is also going to miss the opportunity to recover to pre-1997 crisis levels and catch up with similar economies like South Korea.

In the next part of this article, I’ll compare Taiwan with other emerging economies to see how its economy has not recovered and explain how increasing wages can help Taiwan become a strong economic power again.

READ NEXT: Taiwan’s Lost Growth (Part 1): How Far Has Taiwan’s Economy Fallen Behind Other Countries Due To Stagnant Wages?

TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)

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