20 Reasons Why Hiking the Minimum Wage Is Good for Taiwan (Part 1)

The Basic Wage Deliberation Committee under Taiwan’s Ministry of Labor (MOL) will be meeting on September 8th to discuss the magnitude of minimum wage’s growth for the coming year 2024.

Ahead of the annual review, local labor groups have urged MOL to raise Taiwan’s minimum wage to no less than NT$27,600, citing the persistently high Consumer Price Index (CPI) inflation rate hovering around 2.0% each year. Some groups even demanded raising the minimum wage to NT$30,000, a level considered more aligned with Taiwan’s basic cost of living.

In this article, I will outline the 20 reasons why hiking the minimum wage is good for Taiwan’s overall economy, and why not only labor, but all walks of life in Taiwan should support it.

1) Wages for all workers will be raised

Generally, the growth of median wage follows that of minimum wage. When asked for the top three reasons as to why Taiwanese businesses would increase the average wage, 39.8% indicated minimum wage rises as one of them. As such, given that Taiwan’s minimum wage has been stagnant, the median wage has been stagnant as well.

This situation is the same in other advanced countries. As can be seen in the chart below, countries with higher minimum wages also have higher median wages.

In South Korea, because its minimum wage has been increasing rapidly, its median wage has been increasing rapidly as well.

The contrast is more obvious when comparing both Taiwan and South Korea in the same chart – Taiwan’s minimum and median wages have been stagnant while South Korea’s minimum and median wages have been rapidly increasing.

In 2001, South Korea’s median wage was on par with Taiwan’s. Today, it has grown to nearly double that of Taiwan. In 2001, South Korea’s minimum wage was only two-thirds that of Taiwan. Today, it has grown to be even higher than Taiwan’s median wage.

When comparing the change in minimum wage with the change in the total wages in the economy, we can see that during the 1980s and early-1990s, when the minimum wage was increasing at a faster rate, so were the total wages in the economy. As the growth in minimum wage slowed, so did the growth in total wages.

The trend is clearer when we use a 10-year rolling average to illustrate the long-term trends. As can be seen in the chart below, as the growth in minimum wage has slowed down until the mid-2000s, so did the growth of total wages. As minimum wage growth started picking up, total wage growth started trending upwards.

As such, raising the minimum wage more rapidly can enable workers at other wage levels to see higher wage growths as well.

2) Boost domestic consumption

Wages are a key driver of household incomes and household consumption expenditure. As can be seen in the chart below, the change in total wages is closely linked with that of household consumption expenditure.

Again, when using a 10-year rolling average, we can see that as the growth in total wages slowed, so did the growth in household consumption expenditure. And as total wage growth started picking up, so then did household consumption expenditures.

Increasing the minimum wage at a faster rate can therefore lead to domestic consumption increasing faster as well.

3) Domestic profits will grow

Higher domestic consumption means domestic businesses will be able to earn more profits, and vice versa.

As such, while the profit growth of Taiwan’s domestic businesses were higher during the 1980s and early-1990s when minimum wage and household consumption expenditure were growing faster, domestic profit growth has since slowed due to minimum wage and household consumption expenditure growing more slowly.

Again, when seen over the longer-term, the growth of domestic profits declined up until the mid-2000s as the growth in domestic consumption declined, but as profit growth decline was halted thereafter, so did the decline in domestic consumption growth.

Accelerating minimum wage increase can thus help domestic profits regain faster growth.

4) Economic growth will spur at a faster rate

Higher wages lead to higher domestic consumption and profits, which thus leads to higher economic growth. The chart below shows how their growths are intertwined.

Again, the rolling averages show more clearly how the decline in the growth of wages and household consumption expenditure led to economic growth declining, but as the growth of wages and household consumption expenditure started picking up after the mid-2000s, economic growth saw an uptick as well.

Growing the minimum wage at a faster rate can therefore enable the economy to grow faster as well.

5) Unemployment rate will fall

Historically, when Taiwan’s minimum wage increases, it leads to lower unemployment, and vice versa. The chart below charts unemployment rate on an inverted axis to better highlight the trend.

As minimum wage increases, lower-income jobs become more attractive to workers, who will then come out to start looking for employment opportunities again, thereby reducing unemployment.

Again, when using 10-year rolling averages, we can see in the chart below, that as the growth in minimum wage slowed, unemployment started rising, and when minimum wage growth started increasing, Taiwan’s unemployment rate started declining. (The unemployment rate is charted on an inverted axis.)

In Taiwan’s context, growing minimum wage faster therefore reduces unemployment.

6) Strengthen consumer confidence

In the chart below, we can see that when the minimum wage grows faster, consumer confidence also grows, but when the minimum wage grows more slowly, consumer confidence then declines.

Above, we saw that higher minimum wage growths lead to lower unemployment.

Below, we can see that as unemployment declines, consumer confidence rises as well (the consumer confidence is charted on an inverted axis).

As minimum wage increases faster and workers go back into employment, they are more confident in their ability to pay for their basic necessities and bills, which result in consumer confidence increasing. Also, as minimum wage rises, wages at other wage levels also increases which therefore also boosts consumer confidence among other workers as well.

The chart below compares the change in unemployment rate and the change in consumer confidence using 20-month rolling averages, to better highlight the trend. Again, we see that as unemployment declines, consumer confidence increases, and vice versa.

Additionally, higher consumer confidence leads to higher domestic consumption, which again leads to higher domestic profits and economic growth.

7) People’s purchasing powers will increase

After the 1997 economic crisis, Taiwan decided to suppress the minimum wage, but consumer prices were still increasing, which eroded purchasing powers up until the early-2010s. It was worse for food prices, which was increasing at the same rate as the minimum wage or even faster, and further ate into purchasing powers up until the late-2010s. The record food price increases last year further eroded Taiwanese’s purchasing powers.

However, prior to 1997, Taiwan’s minimum wage was growing much more rapidly, and thus even as consumer prices were increasing, purchasing power was still growing.

As such, wages will rise over time, and as long as wages rise, consumer prices will increase. Studies in the United States have shown that increasing the minimum wage by 10% will only increase overall prices by up to 0.4% and food prices by no more than 4%, and thereby boost purchasing power. The same can be seen in Taiwan where consumer prices have been growing by 1% annually or so in the last two decades while food prices have grown by about 3% to 4%, but in years when minimum wage growth was too slow, purchasing power was eroded.

Increasing minimum wage at a faster rate than consumer prices will therefore enable purchasing powers to be maintained or even grow.

What’s more, since 1997, the profits of food industries have grown due to higher food price increases, but the profits of other domestic businesses stagnated due to overall stagnant consumption. Higher purchasing powers among consumers will enable other non-food domestic businesses in Taiwan to grow and contribute to the economy.

8) Revenue from social insurance programs will increase

Taiwan’s social insurance programs such as the National Health Insurance and Labor Insurance have been facing bankruptcy risks due to a slowdown in revenue, which has led to cuts in payouts from these programs.

These insurance programs rely mainly on wages for their source of revenue, and because Taiwan’s wages have been stagnant, the premium payments into these programs have thus also become stagnant.

The chart below shows how the change in the premiums collected under Taiwan’s National Health Insurance follow that of the change in total wages. When total wages rise, the premiums collected also rise, but when total wages fall, the premiums collected fall as well.

As such, increasing the minimum wage at a faster rate will enable wages as a whole to rise, and thereby allow these insurance programs to receive greater revenue and continue to be sustained, thus providing greater social protection for Taiwan’s workers.

9) Taiwan’s economy will become more innovative

After the 1997 economic crisis, Taiwan suppressed wage growth on the thinking that lower costs will benefit the manufacturing export sector. Today, Taiwan’s semiconductor manufacturing export sector has grown to take up such a large chunk of its economy, that Taiwan’s integrated circuit exports alone comprised 36.6% of its economy in 2021.

The net effect however is that due to the almost-singular focus in investing in the chip-making semiconductor industry, this has deprived other sectors of growth. Taiwan’s economy today has become less diversified and technologically complex, and the quality of its patents relative to other advanced countries have also declined.

As such, due to Taiwan over-investing in low-cost manufacturing, this has prevented Taiwan from developing in other higher-value sectors.

In the chart below, we can see that countries with higher minimum wages also tend to have higher technology complexity. As workers earn higher wages, they also become higher-skilled, innovative and productive.

Raising Taiwan’s minimum wage more rapidly can therefore transform Taiwan’s economy.

10) Taiwan can become one the most powerful countries in the world

In recent years, due to Taiwan’s economic stagnation, Taiwan’s policymakers have begun to downplay Taiwan’s economic potential and even started to refer to Taiwan as a “small” country that cannot grow faster.

However, prior to the 1990s, Taiwan’s GDP was actually larger than South Korea, and Taiwan’s GDP was in fact growing as fast as South Korea – we are talking here about the overall GDP, not even the GDP per capita.

In fact, Taiwan has a similar population as Australia, but while Australia’s overall GDP is growing as fast as South Korea, Taiwan has stagnated. Today, South Korea and Australia have become one of the 15 largest and most powerful countries in the world.

If Taiwan had continued to grow alongside South Korea and Australia as it did up until the 1980s, Taiwan could have become one of the most powerful countries in the world today, and would have much greater weight both in international affairs as well as when confronting the national security threats from China.

South Korea and Australia have been able to grow to become so powerful, in large part due to the constant and high wage growths in the last few decades. Today, Australia has one of the highest minimum wages in the world and South Korea’s minimum wage has become the highest in Asia.

On the contrary, Taiwan’s minimum wage stagnated after the 1997 economic crisis, and thus its economy. If Taiwan were to grow its minimum wage more rapidly, it has the potential to grow to become one of the most powerful countries in the world as well.

Increasing Taiwan’s minimum wage more rapidly therefore enables domestic consumption and profits, as well as the economy, to grow faster. It can also reduce unemployment and boost consumer confidence, and contribute to higher consumption and economic growth. Raising wages more quickly can also top up Taiwan’s social insurance programs and ensure their sustainability, as well as enhance innovation and productivity. It could also enable Taiwan’s economy to grow to become one of the most powerful in the world.

In the next part of this article, we detail the other benefits that hiking Taiwan’s minimum wage will do for its society.

TNL Editor: Kim Chan (@thenewslensintl)

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