What you need to know
The contention of Lin Por-fong, chairperson of the Third Wednesday Club, to tie minimum wage growth to GDP growth is criticized. It is argued that Taiwan’s economy can only expand if the minimum wage is raised at a faster pace.
Taiwan’s Basic Wage Deliberation Committee met will be meeting this week to discuss raising the minimum wage for next year, up from this year’s NT$26,400. Prior to the meeting, Lin Por-fong, chairperson of the business group Third Wednesday Club, opined that the minimum wage should not be increased by more than 2% because Taiwan’s GDP is expected to grow by 1.72%. In this article, we look at whether minimum wage growth should be pegged to GDP growth, and whether percentage growth is a good method for comparing growth.
Lin’s logic is unjustifiable. According to the European Central Bank, household consumption expenditure is a driver of economic growth, and household incomes (as such wages) are a key driver of household consumption expenditure. Thus, it is how fast the minimum wage grows that determines how fast the economy can grow, not so much the other way round.
This can be most clearly seen in Taiwan. As can be seen in the chart below, Taiwan stopped growing its minimum wage after the 1997 economic crisis for about a decade, and as a result, Taiwan’s GDP per capita also grew more slowly. If following Lin’s logic, by letting the minimum wage grow as slowly as the economy, this should have miraculously allowed the economy to grow faster, but this did not happen. Instead, because the minimum wage wasn’t growing, the economy couldn’t grow faster as well. It was only when the minimum wage started growing, that the economy started growing faster.
Taiwan’s example is particularly useful to observe because the long-standing lag in minimum wage not growing allows us to see how this results in the economy stagnating, and that it requires the minimum wage to be increased for GDP growth to recover again. The same pattern can be seen in other countries which stopped growing their minimum wage for a long period, like in the Czech Republic which did not grow its minimum wage for seven years from 2007 to 2013, and only saw its economic growth pick up after it started growing its minimum wage again.
Lin’s logic is therefore weird, when he wants to make Taiwan’s minimum wage grow as slowly as the GDP. In effect, Lin is advocating to slow down Taiwan’s economic growth. On the contrary, it is precisely when Taiwan’s economy is slowing down, that the minimum wage should be raised even faster, so as to drive domestic consumption and profits, and enable the economy to expand. Lin’s logic is therefore not data-driven.
Lin’s logic is also awkward when he said the minimum wage should be raised at a similar percentage level as the GDP. Percentage growth is actually not the best indicator to measure economic growth, as we also need to look at the base from which the percentage change is measured. For example, if the per capita GDP grows by NT$10,000 in both Taiwan and Germany, but because Taiwan’s per capita GDP is lower, its percentage growth is going to be higher than Germany, even though both the dollar-value growth is the same in both countries.
A better measure is thus to use dollar-value growth for comparison. Below, we look at how different it is to compare Taiwan’s economic growth with that of other countries, when using percentage growth versus using United States Dollar (US dollar) growth.
In the chart below, when comparing in terms of percentage growth, Taiwan and South Korea’s GDP per capita were rising faster than Australia and New Zealand for most of the last 40 years. But does this mean Taiwan’s economy is growing faster than Australia and New Zealand?
When we compare in terms of US dollar-value growth, we however see that in the mid-1980s to mid-1990s, Taiwan and South Korea’s per capita GDP were only growing on par with Australia and New Zealand, or even more slowly in some years (see the chart on the left below). Taiwan and South Korea weren’t growing faster.
And then, from the mid-2000s onwards, Taiwan’s GDP per capita in fact started growing even more slowly than Australia, New Zealand and South Korea, when measured in dollar-value terms (see chart on the right). On the other hand, South Korea started growing as quickly as Australia and New Zealand.
When using percentage growth, we saw above that Taiwan is growing as quickly as the other countries, but when using dollar-value growth for comparison, we can see more clearly that Taiwan has actually been growing much more slowly over the last two decades. Using percentage growth to compare economic growth is therefore deficient, as it creates the illusion that Taiwan is growing faster or even as quickly as the other advanced countries.
To understand the phenomenon better, we can also compare Taiwan with other countries – the same can be seen. Over the last four decades, when measured in terms of percentage growth, Taiwan and South Korea’s GDP per capita have been growing as quickly as Malaysia and Thailand.
In terms of dollar-value growth however, from the 1980s to early-2000s, Taiwan’s GDP per capita was actually growing faster than Malaysia and Thailand, and also China (see chart on the left below). But from the mid-2000s onwards, Taiwan’s dollar-value growth started slowing down while the other countries started growing faster, leading to Taiwan only growing as slowly as Malaysia, Thailand and China (see chart on the right).
Of note, China used to grow even slower than Malaysia and Thailand prior to the 2000s, but it has in the last two decades instead grown as quickly as they have
On the other hand, South Korea dollar-value growth was as slow as Malaysia in the 1970s up until the early-1980s (left chart below). However, from the mid-1980s onwards, South Korea’s GDP per capita has instead been growing much faster than Malaysia (right chart).
When comparing in terms of percentage growth, these countries are growing similarly. But when comparing in terms of dollar-value growth, we can see more clearly how Taiwan’s economy has slowed down or fallen behind, while South Korea’s economy has expanded even more rapidly.
The bar charts above chart the dollar-value growth on an annual basis, so the longer-term trend cannot be as easily observed. Below, we use a 7-year rolling average to chart out the dollar-value growths to better illustrate the long-term trend. Line charts are also used for clearer comparison across countries.
Accordingly, we can see that from the mid-1980s to mid-1990s, Taiwan’s GDP per capita in terms of dollar-value was at one time growing at the same level as Australia, New Zealand and South Korea (see how their lines are at the same level in the chart below). However, since the 2000s, the other countries have been growing even faster while Taiwan instead grew even slower and stagnated.
Australia has been growing the fastest (as shown by the dark green line), followed by New Zealand (light green line), and then South Korea (blue line). Taiwan has been growing the most slowly (red line).
Comparing in terms of dollar-value growth over the longer-term, it clearly illustrates how slowly Taiwan’s economy is actually growing.
As mentioned, minimum wage growth is a key driver of economic growth, and when we compare in terms of minimum wage growth, we can see the same trend – from the mid-1980s to mid-1990s, Taiwan’s minimum wage on a dollar-value basis was growing as quickly as Australia, New Zealand and South Korea, but thereafter, while the other countries grew their minimum wages even more rapidly from the 2000s, Taiwan’s minimum wage growth however slowed down and stagnated.
Again, Australia grew the fastest, followed by New Zealand and South Korea, with Taiwan being the slowest.
Note how similar both the GDP and minimum wage charts look, which illustrates how their trends follow one another – higher minimum wage growth leads to higher economic growth, and vice versa.
Indeed, when we compare using other indicators, we see the same trend. Higher minimum wages leads to higher average wages, which leads to higher total wages in the economy. And when wages rise faster, household consumption expenditures also rise faster, leading to profits and the economy growing faster as well.
In the charts below, when comparing average wage, total wages, household consumption expenditures and profits, we see the same trend as above where Taiwan was growing at a similar level as Australia, New Zealand and South Korea from the mid-1980s to mid-1990s, but from the 2000s, Taiwan instead grew more slowly, while the other countries grew more rapidly. As above, Australia, New Zealand and South Korea are respectively growing the fastest, followed by Taiwan in the last position.
Again, we see how the charts look very similar to one another, indicating how the growth of average wages, total wages, household consumption expenditures, profits and the economy is predicated on the growth of the minimum wage.
The minimum wage is usually determined in the year before it is raised. As such, the minimum wage is the key determinant as to how an economy grows. Taiwan’s businesses also say that the minimum wage growth is a key criteria they use in deciding on the wage raises for other workers, and we also saw that median wage growth tends to follow minimum wage growth. As such, minimum wage growth (or the lack thereof) is what sets the other drivers in motion, which explains why the other charts trend similarly as the minimum wage.
When looking at the per capita GDP over the years, we can indeed see that from the mid-1980s to 1990s, Taiwan was indeed growing as quickly as Australia, New Zealand and South Korea (see the similar angles in their lines in the chart below). However, from the late-1990s, Taiwan’s economy started to grow more slowly, leading to its GDP per capita stagnating and falling behind South Korea, while the other countries started growing even faster than before.
When using percentages to measure GDP growth, we might not see how badly Taiwan has stagnated as it seems to be growing on par with other countries. But when using dollar-value growth, the poor state of Taiwan’s growth becomes obvious – it has stopped growing as quickly as the other countries in the last two decades.
Thus, instead of using percentages to compare the GDP growth between countries, using dollar-value growth gives a clearer indication of how fast or slow a country is growing, vis-à-vis that of other countries.
Indeed, when comparing Taiwan with Malaysia, Thailand and China, dollar-value growth helps us see more clearly how Taiwan stagnated.
Prior to the 2000s, Taiwan’s minimum wage, average wage, and total wages were growing faster than the other countries (see the three charts in the top row below, where Taiwan’s red line is much higher than the rest), and this led to its household consumption expenditures, profits and GDP per capita growing faster as well (see the three charts in the bottom row).
However, since the late-1990s, Taiwan has been growing more slowly, while Malaysia, Thailand and China started growing faster, which led to Taiwan growing as slowly as these countries.
Again, we can see how the charts trend similarly with one another, which illustrates how each dollar of minimum wage increase has a direct impact on average wage, total wages, household consumption expenditure, profits and the economy.
As such, when we look at the GDP per capita over the years, Taiwan’s GDP per capita in the early-1980s was at a closer level to that of Malaysia, Thailand and China, but when it grew faster from the mid-1980s to 1990s, it started drawing further apart from them. However, since 2000, Taiwan started growing as slowly as the other countries, which led to it stagnating (see the sharp turn of the red line downwards after 2000 in the chart below), and growing as slowly as the other countries (see the similar gradients in Taiwan’s line as compared to the other countries after 2000).
On the other hand, South Korea was growing as slowly as Malaysia up until the early-1980s, but it then started growing more rapidly and has kept doing so ever since.
Indeed, when we compare in terms of dollar-value growth, we can see how South Korea was growing at the same level as Malaysia up until the early-1980s, but then its dollar-value growth started shooting up, which allowed its GDP per capita to expand much faster than Malaysia.
When using dollar-value growth instead of percentage growth, we therefore see how Malaysia’s economy faltered as compared to South Korea.
The same trend can be seen when comparing other countries too. For example, Bangladesh’s economy started growing faster than India and Pakistan after Bangladesh raised its minimum wage more rapidly. Laos’ economy started growing faster than Cambodia after Laos raised its minimum wage faster.
Philippines’ economy started growing slower than Indonesia and Vietnam after it slowed down its minimum wage growth. Japan’s minimum wage has been stagnant, and so its economy has been growing more slowly as compared to Australia and New Zealand, as can be seen in the charts below.
As such, using percentage growth to compare with other countries masks the fact that Taiwan’s economy is stagnating vis-à-vis other economies.
When comparing economic growth in US dollar-value terms, it is clear that Taiwan’s economy has slowed down since the late-1990s.
Taiwan’s economy used to grow as fast as Australia, New Zealand and South Korea, but in the last two decades, it has been instead growing as slowly as Malaysia, Thailand and China.
Thus, it does not make sense for Taiwan’s business groups to say that the minimum wage should grow as slowly as the GDP per capita. Doing so would only result in Taiwan’s economy slowing down.
Instead, Taiwan should be growing its minimum wage more rapidly, in order to grow its economy faster. In the second part of this article, I will look at how the minimum wage can act as an economic multiplier, to enable Taiwan’s economy to expand more quickly.
TNL Editor: Kim Chan (@thenewslensintl)
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