Taiwan’s Slow-Growing Minimum Wage for Manufacturing Labour is Dragging its Economy Behind

Taiwan’s GDP per capita surpassed South Korea this year for the first time in two decades, on the backdrop of the manufacturing sector’s expansion. However, this comes at the cost of the stagnant wages in Taiwan, which resulted in the non-manufacturing sector languished. Here I will compare the growth of Taiwan’s manufacturing and non-manufacturing sectors, to see how depressing wages in favor of the manufacturing sector has adversely impacted Taiwan’s overall economic growth.

Taiwan’s GDP per capita overtook South Korea this year due in large part to the manufacturing sector, which made its GDP rise from 29.1% in 2013 to 34.2% in 2022. Part of Taiwan’s manufacturing sector’s success lies in the government suppressing wage growth after the 1997 economic crisis.
 

Taiwan’s manufacturing profits is growing at the expense of non-manufacturing sector

Indeed, as can be seen from the chart below, after the crisis, from 1999 to 2019, the net per capita profits of Taiwan’s manufacturing sector grew one of the fastest among the advanced countries – Taiwan’s net manufacturing profits (operating surplus) per capita in 2019 grew by NT$42,443 as compared to 1999.

This in itself is not surprising considering that Taiwan’s manufacturing share of GDP is one of the highest globally.

Nonetheless, when we compare the manufacturing profits based on the total number of workers in the manufacturing sector, Taiwan’s net manufacturing profits per worker also grew one of the fastest among the advanced countries during this period. 

Data source for employment in manufacturing: Taiwan, other countries. Manufacturing profits are calculated by dividing total profits with the number of workers employed in the manufacturing sector.

However, while Taiwan’s manufacturing profits are growing fast, its non-manufacturing profits have been stagnant.

When we compare the net profits in the non-manufacturing sector, Taiwan’s profit per capita actually grew one of the slowest among the advanced countries – it only grew by NT$62,739.

A key reason for Taiwan’s stagnant non-manufacturing profits is due to household consumption expenditure stagnating. If households do not have enough to spend, then domestic businesses won’t be able to earn higher revenue from their consumption.

Indeed, just as Taiwan’s non-manufacturing profits grew one of the slowest from 1999 to 2019, Taiwan’s household consumption per capita also grew one of the slowest among the advanced countries. 

Data source: Taiwan, other countries

Household consumption expenditure is dependent on the total wages in an economy, and indeed, due to Taiwan’s total wages (compensation of employees) per capita growing one of the slowest among the advanced countries, its household consumption expenditure therefore grew one of the slowest.

The growth of wages in an economy is dependent on how fast the minimum wage grows, and similarly, Taiwan’s minimum wage has been growing the slowest among the advanced countries.

Taiwan’s monthly minimum wage only grew by an average of NT$363 a year from 1999 to 2019. By contrast, in South Korea, the economy most similar to Taiwan, its minimum wage grew the fastest among the advanced countries, by an average of NT$1,720 a year. New Zealand, which also had a GDP per capita similar to that of Taiwan in the 1990s, also saw its minimum wage grow second fastest, by an average of NT$1,714 a year.

South Korea and New Zealand grew almost 5 times faster than Taiwan. 

Data source: Taiwan, other countries

Given that the wages of the workers at other wage levels are dependent on how fast the minimum wage grows, Taiwan’s median wage has therefore also grown one of the slowest among the advanced countries.

Taiwan’s monthly median wage only grew by an average of NT$509 a year from 1999 to 2019, while it grew by NT$1,525 and NT$1,490 in South Korea and New Zealand respectively, or three times faster than Taiwan.

Data source: Taiwan, other countries. The median wage for other countries is calculated based on their minimum wage to median wage ratio, using the minimum wage data.

It might be assumed that since the profits in the manufacturing sector have been growing one of the fastest among the advanced countries, that the wages of Taiwan’s manufacturing workers must be growing one of the fastest as well.

However, Taiwan’s manufacturing wages per manufacturing worker have on the contrary been growing one of the slowest among the advanced countries.

Just as Taiwan’s overall wages are stagnating, Taiwan’s manufacturing wages are stagnating as well. While the manufacturing companies are growing their profits one of the fastest among the advanced countries, the gains are not being shared fairly with the workers. 

The same can be seen for the median wage, where Taiwan’s median wage was closer to the middle among the advanced countries in 1996.

Taiwan’s median wage was higher than South Korea, and 2 to 3.5 times higher than that of the Czech Republic and Slovakia.

However, Taiwan has since fallen behind. Today, Slovakia has caught up with Taiwan, while the Czech Republic has overtaken Taiwan and South Korea’s median wage has grown to nearly double that of Taiwan.

Taiwan’s minimum and median wages have stagnated so badly that they have become one of the lowest among the advanced countries.

At the current rates of growth, Taiwan’s minimum and median wages would become the lowest among the advanced countries in just the next few years. 

Due to Taiwan’s wages, household consumption expenditure and non-manufacturing profits growing one of the slowest among the advanced countries, and this has resulted in Taiwan’s GDP per capita also growing one of the slowest as well, as the chart below shows.

The key reason why Taiwan’s overall economic growth continues to lag behind other advanced countries in spite of the manufacturing sector’s high profit growth is because the manufacturing sector contributes only a third of Taiwan’s GDP, while the non-manufacturing sector comprises two-thirds of the economy. As such, Taiwan’s economic growth is largely dependent on the performance of the non-manufacturing sector.

However, in the last few decades, while Taiwan’s manufacturing profits have grown faster and faster (as can be seen in the brown line in the chart below), Taiwan’s non-manufacturing profits have instead grown slower and slower (green line).

The following two charts show Taiwan’s growth over the years, and use a 10-year rolling average to allow us to better see the long-term trend.

In the 1980s and early 1990s, Taiwan’s non-manufacturing profits were growing by an average of about 14% a year, but today, it has stagnated by so much that its non-manufacturing profits are only growing by about 2% to 3% a year. In comparison, Taiwan’s manufacturing profits have escalated and are growing by an average of about 10% a year today.

As explained above, wages and household income expenditure are key drivers of Taiwan’s domestic profits and economic growth.

As can be seen in the chart below, the growth of Taiwan’s GDP and non-manufacturing profits follow very closely with that of wages and household consumption expenditure, and as the growth of wages and household consumption expenditure slowed down, Taiwan’s economy and profits also slowed down alongside them.

Today, Taiwan’s total wages, household consumption expenditure, non-manufacturing profits, and economy are only growing by about an average of 3% to 4% a year, compared to a peak of about 12% two to three decades ago.

In other words, the growth in the manufacturing sector is simply not enough to drive Taiwan’s economic growth. The loss in wages due to Taiwan’s misguided wage suppression strategy has resulted in a loss of growth in the non-manufacturing sector, and thus the economy losing steam as a whole.

When comparing using the correlational charts below, the relationship becomes clearer.

Among the advanced countries, we can indeed see a trend where the countries with higher growths in non-manufacturing profits also have higher economic growth.

Yet Taiwan’s non-manufacturing profits per capita have grown one of the slowest among the advanced countries, its GDP per capita has therefore also grown one of the slowest.

Since Taiwan’s household consumption expenditure is growing one of the slowest among the advanced countries, its non-manufacturing profits are therefore growing one of the slowest.

Taiwan’s household consumption expenditure is growing one of the slowest among the advanced countries because its total wages are growing one of the slowest, and its total wages are growing one of the most slowly because its minimum wage is also growing one of the most slowly.

Therefore, due to Taiwan’s minimum wage growing one of the most slowly among the advanced countries, this led to its total wages, household consumption expenditure, and non-manufacturing profits also growing one of the most slowly, and resulting in its economy growing one of the slowest as well.

Taiwan’s government since the 1997 economic crisis have depressed wages in a bid to pursue a ‘low-cost’ system on the belief that this can boost Taiwan’s manufacturing profits. Indeed, Taiwan’s manufacturing profits per capita and per manufacturing worker have been growing one of the fastest among the advanced countries.

However, this has deprived the non-manufacturing sector of the consumption spending needed for faster growth. Taiwan’s economy is therefore experiencing lopsided growth where the profits in the manufacturing sector are growing one of the fastest among the advanced countries, while non-manufacturing profits are growing one of the slowest.

Taiwan’s manufacturing sector is growing at the expense of the non-manufacturing sector.
 

Taiwan’s wage suppression is extreme compared with other advanced countries

Taiwan’s non-manufacturing sector is being robbed of its profits due to wages being suppressed for the sake of the manufacturing sector.

However, Taiwan’s lopsided growth has actually been taken to the extreme. The next few charts illustrate how.

In most other advanced countries, the growth of their manufacturing profits tend to grow in tandem with non-manufacturing profits, as can be seen by the countries which fall along the trend line in the chart below.

Taiwan’s manufacturing profits however fall far away from the trend line of these countries, where its manufacturing profits are growing disproportionately faster than its non-manufacturing profits. Compared with most other advanced countries, Taiwan’s non-manufacturing profits are therefore growing too slowly as compared to its manufacturing profits.

This pattern can be seen among other major manufacturing countries like South Korea, Germany, the Netherlands and Sweden, where they have tended to similarly depress wages to support the manufacturing export sector, relative to countries of similar economic levels as them.

The major reason for Taiwan’s manufacturing profits growing so much more quickly is due to the suppression of wages.

As can be seen in the chart below, Taiwan’s annual manufacturing profits per manufacturing worker is 25 times higher than the monthly minimum wage, which is the second highest among the advanced countries after Ireland.

In other words, due to Taiwan’s wages being so severely depressed, this has allowed Taiwan’s manufacturing sector to earn one of the highest profits among the advanced countries relative to wages.

In fact, this chart indicates that Taiwan’s manufacturing sector is earning much more profits than it needs, when taking other countries into perspective. Even if Taiwan’s wages were to grow much faster, Taiwan’s manufacturing companies would still be earning very high profits, given how high they already are.

Taiwan’s wages are therefore overly depressed.

But when we look at the non-manufacturing sector, its profits per capita as compared to minimum wage is comparatively lower.

In the chart below, we can see that for other advanced countries, both thier manufacturing and non-manufacturing profits relative to minimum wage tend to follow alongside the trend line.

However, Taiwan veers further away from the trend line than other countries – the number of times of its manufacturing profits relative to minimum wage is actually much higher as compared to that of non-manufacturing profits.

This means that while Taiwan’s manufacturing sector is reaping huge profits on the back of the depressed wages, the non-manufacturing sector however is losing profits from not having enough consumption spending.

Taiwan’s manufacturing profits are too high. Like the previous chart, the major manufacturing countries also fall away from the trend line, but this time around, Taiwan falls further away from the trend line that they do, signifying that the problem is worse is in Taiwan.

Even when compared with other manufacturing countries, Taiwan is even more unequal.  

But Taiwan’s situation is not normal – it is not normal for the manufacturing sector to cannibalize the non-manufacturing sector so much that it weakens economic growth so badly.

In the chart below, we can see that among the other advanced countries, countries with higher growths in their manufacturing profits also have higher economic growth.

However, Taiwan stands in stark anomaly, where even though its manufacturing profits per manufacturing worker are growing one of the fastest among the advanced countries (vertical axis), its GDP per capita growth is instead one of the slowest (horizontal axis). Taiwan’s suppressed wages have allowed the manufacturing sector to be immensely enriched but this instead robbed the non-manufacturing sector of growth.

This time around, Taiwan stands isolated. Even as other manufacturing countries suppressed their wages, they have not done it to the extent that Taiwan has, which so severely disrupted Taiwan’s economic growth.

The chart below therefore shows how imbalanced Taiwan’s economic growth has become.It explains why in the earlier part of this article that while Taiwan’s manufacturing profits are growing one of the fastest among the advanced countries, its non-manufacturing profits, wages, household consumption, and the economy as a whole are all growing one of the slowest.

In other words, the severity of Taiwan’s wage suppression has little justification – not only does it hurt the non-manufacturing sector, it hurts the workers earning suppressed wages, but it also hurts Taiwan’s overall economic growth.

In short, Taiwan’s government has taken things too far with suppressing the country’s wages.

READ NEXT: How Should Taiwan Learn From Other Countries in Increasing the Minimum Wage? (Part 1)

TNL Editor: Kim Chan (@thenewslensintl)

If you enjoyed this article and want to receive more story updates in your news feed, please be sure to follow our Facebook.