The Basic Wage Deliberation Committee under the Ministry of Labor has decided at the annual meeting yesterday (September 8th), to adjust the minimum wage level from $26,400 to $27,470 for the future year, marking a 4.05% increase. As for the minimum hourly rate, it is suggested to be raised from $176 to $184. The two new changes are still awaiting the Executive Yuan’s approval.

Considering the current cost of living, the new policy change may not be sufficient to ensure a basic living standard for Taiwanese citizens. I would suggest raising the minimum wage to a range of NT$35,000 to NT$40,000, since a higher minimum wage can act as an economic multiplier to enable Taiwan’s economy to grow at a faster pace.

In the first part of this article, I analyzed that a country’s growth is strongly determined by how fast its minimum wage grows. If a country decides to raise its minimum wage faster, the other drivers also grow faster, and vice versa. In this article, I will look further at the extent that each dollar of minimum wage growth can contribute to economic growth.

In the chart below, we can see that in the years when the minimum wage grows at a higher level (dark red line), the other drivers also grow at a higher level. And when the minimum wage grows at a lower level, the other drivers also grow at a lower level. Similar to the first part of this article, the GDP growth in this article is measured in US dollar terms, as they can give a clearer indication of the growth as compared to using percentage growth.

We can also see that generally, total wages and household consumption expenditure tend to grow at a similar level as the minimum wage, profits tend to grow at half the level of the minimum wage, while average wage and the GDP tend to grow at twice the level of the minimum wage. The trend between the indicators is clearer when we compare them on separate charts.

Data source: GDP, average wage, household consumption expenditure, total wages, minimum wage, profits. Note (1): The per capita data is derived by dividing total wages, household consumption expenditure and profits with the population of each country, and is further divided by 12 to illustrate the data on a monthly basis for comparison with the minimum and average wage. Note (2): For the charts illustrating profit growth, non-manufacturing profits are used for comparison in order to better reflect the trend of domestic consumption.

In the chart below, we can see that total wages (dark pink line) and household consumption expenditure (light pink line) tend to grow at about the same dollar-value as the minimum wage (dark red line). For example, in 1995, the minimum wage grew by US$50, and total wages and household consumption expenditures also grew by about US$50 to US$55. (Note that the annual per capita data for total wages, household consumption, profits and GDP are divided by 12 to derive a monthly figure to compare with the minimum and average wage.)

It should be noted however that because the minimum wage did not grow for a decade after 1997, it was not able to pull up domestic consumption, and household consumption expenditure could only be propped up by wages at the higher levels. However, this was still not enough, therefore leading to household consumption expenditure growing at its lowest levels in the last 40 years, and as we can see in the next two charts, also leading to domestic profits and the economy growing at their lowest levels too.

In the chart below, we can see that profits (green line in the chart below) generally grow at about four-tenths to half the level of minimum wage (dark red line). For example, when the minimum wage grew by about NT$75 in 1992, profits grew by NT$30. On the other hand, when minimum wage grows at below zero dollars, profits would also generally decline by about half the level of the minimum wage decline. (Minimum wages exhibit negative growth in some years because this article’s comparison is done in US dollars.)

Average wage (light blue line in the chart below) and GDP per capita (dark blue line) tend to grow at twice the level of minimum wage (or also at twice the level of total wages and household consumption, which follows that of the minimum wage). In 1993 for example, the minimum wage grew by US$30 and the average wage and GDP per capita grew by about US$70.

When the minimum wage declines (grows by less than US$0), average wage and GDP per capita also declines by twice the level of minimum wage decline.

The same trend can be seen across the other countries, for example in the cases of Australia, New Zealand, South Korea and Estonia below – total wages and household consumption expenditures tend to grow at the same level of minimum wage, profits tend to grow at about half that of the level of minimum wage, while average wage and the GDP tend to grow at twice the level of minimum wage.

A study of garment factories in Vietnam made a similar conclusion, and found that every 1% increase in wages lead to 0.6% increase in profits. Another research also found that the faster growth of wages strengthens firm profitability, because it creates a “more favorable macroeconomic environment, which encourages further innovations, stimulates investment, and sustains economic growth.”

Notably, in all cases, we can see that when minimum wage grows faster, profits grow faster as well. Profits only grow more slowly when the minimum wage grows slower. As such, when Taiwan’s business groups claim that lower minimum wage is needed for profits to grow, this logic does not make sense – the economic data doesn’t support such rhetoric. It is when minimum wage increases at a faster pace, which allows wages at other levels to rise, to then expand domestic consumption and thereby profits, and economic growth – this is what the historical data is saying.

Raising the minimum wage therefore has an economic multiplier effect, and is the logical and sensible method to ensure the economy keeps growing.

Data source: GDP (Taiwan, other countries), Average wage (Taiwan, other countries), household consumption expenditure (Taiwan, other countries), total wages (Taiwan, other countries), minimum wage (Taiwan, other countries), profits (Taiwan, other countries)

To better observe the longer-term trend, the charts below are charted using a 7-year rolling average. We can see that the growth of total wages and household consumption expenditures tend to follow the level of minimum wage, profit growth tends to be half that of the minimum wage, while average wage and the GDP tend grow at twice as high.

The trend is even clearer when looking at the other countries where their minimum wages have been growing more consistently – the ability of the minimum wage in these countries to act as an economic multiplier remains a lot more intact than Taiwan.

In Australia, New Zealand, South Korea and Estonia, minimum wage continues to grow at a similar level as total wages and household consumption expenditures (see the red and pink lines in the middle of each chart), profits grow at about half that of the minimum wage (see the green line at the bottom of each chart), and average wage and the GDP per capita tend to grow at twice that of the minimum wage (see the blue lines at the top of each chart).

The fast growth of the minimum wage in these countries thereby enabled their minimum wage to continue to act steadily as an economic multiplier, to expand their economies.

Note: Australia’s data is charted up until 2016 to allow for easier comparison with the other countries.

From the mid-1980s to 1990s, Taiwan’s average wages, total wages, household consumption expenditures, profits and the GDP were therefore rising rapidly due to the rapid minimum wage growth, but from the late-1990s, after the minimum wage stopped growing for a decade and then stagnated, the growth of all the other drivers stagnated alongside the minimum wage as well.

Note however that even though both Taiwan’s wages and profits stagnated, Taiwan’s profits remain relatively high. In the chart on the left below, Taiwan’s total wages per capita have stagnated to become much lower than South Korea and at the level of Estonia. However, Taiwan’s non-manufacturing profits per capita have continued to be higher than South Korea and much higher than Estonia, in spite of it stagnating (chart on the right). Given that Taiwan’s minimum wage is about half that of South Korea’s, this shows that there is a lot of room in Taiwan’s economy to return some of the money to workers in terms of higher wages.

Moreover, as this article shows, higher wages will in turn lead to even higher profits and economic growth, and would be the economically-sensible thing to do for both Taiwan’s businesses and its economy.

Given the fact that the minimum wage has an economic multiplier effect on the economy, raising the minimum wage faster can therefore be used as an effective policy tool to grow the economy more quickly. 
 
From the illustration above, the GDP per capita generally grows at about twice that of the level of minimum wage, while profits tend to grow at half that of the minimum wage. So for example, if the minimum wage is grown by about US$120 (NT$3,840) every year, this could lead to the GDP per capita growing at about US$240 every year (when calculated on a monthly basis), and non-manufacturing profits growing by about US$60 every year.
Taiwan’s minimum wage could grow to US$1,255 (NT$40,165) by 2026 and to US$1,495 (NT$47,845) by 2028, or by 67.0%, and the GDP and profits could grow by as much as 42.5%.

Note: The projected growths are broad estimates, and further studies are needed to determine the actual multiplier effect of the minimum wage on the GDP and profits.

These would also enable Taiwan’s GDP per capita to grow as fast as Estonia, to reach the projected level of France by 2028. In 1993, Estonia’s GDP per capita was only 10% that of Taiwan but it has grown to being almost on par today. Based on Estonia and Taiwan’s current growths, Estonia’s GDP per capita is expected to overtake Taiwan by 2027. Estonia’s economic growth has been rapid due to its minimum wage growing rapidly for the last two decades.

Prior to Taiwan’s minimum wage stagnating, its GDP per capita used to be higher than South Korea.  If Taiwan’s minimum wage is to grow faster, it could enable its economy to regain its former growth, and potentially overtake South Korea.

Note: The projected GDP per capita growths of the other countries (dashed lines) are based on the projected growths calculated by the International Monetary Fund.

If Taiwan is to increase its minimum wage to US$1,495 by 2028, it would enable its minimum wage to recover and grow almost as quickly as South Korea. (Note that even so, Taiwan’s minimum wage was growing close to the level of New Zealand in the early-1990s, so its minimum wage should not only be catching up with South Korea, it should be close to being on par with New Zealand.)

When asked about his thoughts about the minimum wage increase, Vice Premier Cheng Wen-tsan compared Taiwan to the other Asian Tigers and Japan, said that Taiwan’s GDP per capita has been growing faster than the other countries in recent years.

Even so, Taiwan’s minimum wage is actually the lowest among Asian Tiger countries and Japan, which means Taiwan’s workers aren’t benefiting well from the country’s economic growth. Up to last year, Taiwan’s minimum wage (light red line in the chart below) was only growing as slowly as Singapore (dark red line). However, in 2021, Singapore realized that its low minimum wage growth was not sustainable and causing deep economic inequalities in the country, so it decided to implement six-year plans to raise the minimum wage in the country’s various low-income sectors. From 2023 to 2028, the minimum wage of Singapore’s resident cleaning workers (see dashed dark red lines) will therefore grow as fast as South Korea’s growth in the last few years, and catch up with South Korea and Japan by 2028.

Meanwhile, Taiwan’s minimum wage remains low and stagnant. If Taiwan’s minimum wage can grow to US$1,495 by 2028 (dashed light red line), it can enable Taiwan to catch up with the other Asian Tiger countries and Japan.

Data source: South Korea, Japan, Singapore, Taiwan. Note: Singapore does not have an official minimum wage. The minimum wage for Singapore used in this article is based on the minimum wage for resident workers in the cleaning sector, which is the lowest minimum wage set among low-income sectors where minimum wages have been determined.

We can see the economic multiplier effect of the minimum wage working in other developing countries as well. I have written about how the minimum wages of Malaysia and Thailand have been stagnant which led to their economies growing slower than other Eastern European countries.

When comparing them with China, we can also see how they lost momentum. China’s minimum wage, average wage and GDP per capita used to as low as Indonesia in the late-1990s and early-2000s, but it started growing its minimum wage at a faster level, leading to its average wage and GDP per capita growing faster and overtaking Thailand, to reach Malaysia’s level.

Data source: Minimum wage (China, Malaysia, Thailand (1), (2), (3), Indonesia (1), (2)), average wage (China, Malaysia, Thailand (1), (2), Indonesia), GDP

China also used to grow as slowly as Vietnam and Bangladesh up until the early-1990s, but it then decided to grow its minimum wage more rapidly, leading to its average wage, total wages, household consumption expenditures, profits and GDP expanding rapidly and far surpassing Vietnam and Bangladesh today.

Vietnam followed suit in the early-2000s to grow its minimum wage more rapidly, and has thus grown faster than Bangladesh.

China’s wages grew more rapidly after it introduced the minimum wage in 1994, but even so, the minimum wage was considered inadequate, and so in 2004, China implemented new minimum wage regulations which required the minimum wage to be increased at least once every two years, and it was also extended to cover other workers, including self-employed and part-time workers. As a result, China’s minimum wage and economy started growing faster than Vietnam and Bangladesh from after 1994, and they started growing faster than Malaysia and Thailand after 2004.

Vietnam launched a 10-year socio-economic policy to bring in more investments in order to “bring the country out of underdevelopment” in the early-2000s, and saw its minimum wage and GDP similarly grew faster, and then overtaking Bangladesh.

Data source: Minimum wage (China, Vietnam (1), (2), (3), Bangladesh), average wage, total wages (1, 2), household consumption expenditure (1, 2), GDP. Note: The minimum wage in Bangladesh is determined at a sectoral level. The minimum wage used in this comparison is based on the garment sector, as it has a more consistent trend in wage increases as compared to the other sectors, and the garment sector also employs the most workers in the manufacturing sector and is the largest export sector in the country.

Using wage growth as an economic multiplier policy tool can be used as a strategy for Malaysia and Thailand as well. If the average wage of both Malaysia and Thailand grows by US$180 a month, it could enable their GDP per capita to also grow by about US$180 a month, and thereby enable their GDP per capita to grow as fast as the projected growths of the other Eastern European countries.

The Eastern European countries are expected to see strong growths as they have been rapidly increasing their minimum wages in recent years, which led to their economies expanding rapidly.

Note (1): The projected growths for Malaysia and Thailand are broad estimates, and further studies are needed to determine the actual multiplier effect of the minimum wage on the GDP and profits. Note (2): The projected GDP per capita growths of the Eastern European countries (dashed lines) are based on the projected growths calculated by the International Monetary Fund.

It could also enable Malaysia and Thailand’s GDP per capita to gain momentum and grow faster than the projected growth of China, to grow to over US$20,000 and become developed countries by 2028 and 2029, respectively. Given that becoming a developed country is a stated goal of the Malaysian government, raising the minimum wage more rapidly can be an effective method to achieve this goal.

Note: The projected GDP per capita growth of China (dashed line) is based on the projected growths calculated by the International Monetary Fund.

From the data in this article, we can see that raising the minimum wage has an economic multiplier effect on the economy – when the minimum wage grows, it leads to total wages and household consumption expenditures growing at the same level, the average wage and GDP growing by double its level, and profits also growing at half the level of minimum wage growth.

Additionally, raising the minimum wage also has other economic multiplier effects – higher minimum wage leads to higher productivity and motivation among workers, which leads to them contributing new ideas and innovation for their companies. Also, when Taiwan’s minimum wage rises faster, expenditure in research and development also increases, and naturally so, because businesses earn higher profits and are therefore able to allocate more funds for investment and innovation. The greater innovation derived from higher minimum wage growth can thus lead to higher-value products and services, and in turn even higher profits and economic growth for the country.

Data source: GDP per capita, minimum wage, research and development expenditure. Note (1): The per capita data is derived by dividing the GDP and research and development expenditure with the population of each country. Note (2): This chart charts the dollar-value increases using a 7-year rolling average to illustrate the longer-term trend.

Growing the minimum wage is therefore a clear strategy to grow profits and the economy. To ensure the minimum wage can create an optimal impact on the economy, raising the minimum wage to ensure that all individuals in the country can spend to meet all their basic needs will ensure they spend at their most optimal level, and be able to support domestic businesses at their fuller potential.

If sustained economic growth is the objective, the goal should therefore be to ensure the minimum wage can first be raised to a level adequate for basic living, and then increase it every year indexed to inflation.

Based on the current cost of living, Taiwan’s minimum wage would need to be minimally ranging from NT$35,000 to NT$40,000, to ensure a basic standard of living in the country. The proposal by the Basic Wage Deliberation Committee to raise Taiwan’s minimum wage to NT$27,470 is therefore not enough.

Not only will it not enable workers to consume more to support Taiwan’s businesses, it will only lead to Taiwan’s economy continued stagnation.

Instead, given the downturn in the manufacturing sector, it is precisely the time to raise wages, to spur businesses to invest in innovation. Allowing businesses to sit and wait on low wages is counterproductive, as it means to let Taiwan’s businesses be like sitting ducks who are waiting to be fed. Then they will never learn to transform, and Taiwan’s economy will continue to stagnate.

It is time for Taiwan’s government to stop mollycoddling Taiwan’s businesses. It makes them complacent, and Taiwan’s economy stagnant.

Taiwan’s Basic Wage Deliberation Committee has proposed to raise the minimum wage to NT$27,470 next year, and it is now waiting for approval from the Executive Yuan. If Taiwan’s goal is to expand its economy faster, then the Executive Yuan should reject the proposal and ask the Basic Wage Deliberation Committee to calculate a minimum income needed for a basic standard of living, and then propose a multi-year plan to raise the minimum wage to that level.

But if the Executive Yuan wouldn’t do it, then which presidential candidate or political party will propose a clear minimum wage target, and implement a multi-year plan to raise Taiwan's minimum wage to that level, or will there even be any?

READ NEXT: Taiwan’s Stagnant Wages Has Caused Its Economy to Grow As Slowly As Other Developing Countries

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.