What you need to know
Taiwan's minimum wage has become a key issue in the presidential election.Instead of using indicators such as per capita GDP, household consumption, and profits to determine minimum wage, research shows that faster wage growth boosts the macroeconomic environment and firm profitability.
Over the last few weeks, Taiwan’s minimum wage has become a hot topic for the presidential election. Opposition candidate Hou Yu-ih from Kuomintang proposed raising Taiwan’s minimum wage to NT$33,000, forcing the ruling Democratic Progressive Party candidate Lai Ching-te to respond by saying he will enact the minimum wage law if elected. This resulted in criticisms that President Tsai Ing-wen had made a similar promise eight years ago but still has not fulfilled it, leading to questions about whether Lai was also making an empty promise, and taking Taiwan’s voters for granted.
Under pressure, Taiwan’s Executive Yuan moved forward the timeline to review the draft minimum wage law to September 21, 2023. The labor ministry also revealed the 10 indicators which were discussed for inclusion in the law, which can be broadly grouped into the following:
- Macroeconomic performance (national economic development, national income and per capita income, components of the GDP)
- Income growth (average wage growth, wages in the various economic sectors, family income and consumption expenditure)
- Labor productivity growth
- Cost of living (minimum income needed for basic living expenses and consumer price growth)
However, other than the cost of living metrics (i.e. the minimum income needed for basic living expenses and consumer price growth), it does not make sense to include the other indicators in determining the minimum wage. This article analyzes why.
The chart below tracks the annual changes of the various drivers, and uses a 7-year rolling average to better illustrate the overall trend. Up until the mid-1990s, Taiwan’s minimum wage was growing fast, which led to household consumption expenditure, profits and the economy growing fast as well (the curves slope similarly upwards at the far left of the chart). And when Taiwan’s minimum wage stopped growing from 2008 to 2006, household consumption expenditure, profits and the economy grew more slowly (the curves in the middle of the chart all slide downwards). When the minimum wage started rising again from 2007, household consumption expenditure, profits and the GDP started rising as well, but because the minimum wage has still been rising too slowly, it is not strong enough to lift Taiwan’s household consumption expenditure, profits and the economy at a faster rate. Note especially how the lines in the chart follow closely with one another, indicating how the growths of the drivers are dependent on the direction of minimum wage growth.
When minimum wage grows, workers can spend more leading to household consumption expenditure rising, and thereby growing the profits of domestic businesses and the economy. If the minimum wage cannot rise faster, then these other drivers also cannot grow faster, and Taiwan’s economy will only stagnate further. A research published by the Cambridge University Press also explained that faster wage growth strengthens the macroeconomic environment, and thereby boost firm profitability.
As such, it does not make sense to use the per capita GDP, household consumption expenditure or profits as indicators to determine whether the minimum wage should increase. Rather, it is the minimum wage that determines whether the per capita GDP, household consumption or profits can grow.
Do not use average wages to determine minimum wage growth
Indeed, from the mid-1980s to mid-1990s, Taiwan’s minimum wage was growing rapidly, which spurred the fast growth of Taiwan’s overall average wage and the average wages in other economic sectors as well. When Taiwan’s minimum wage stopped growing from 1998 to 2006, average wages also barely grew, especially in the service sector. Again, it was only when the minimum wage started growing again from 2007, that average wage growth started picking up again.
Again, the chart below shows how closely the growth of minimum and average wage follows one another, indicating how average wage growth follows that of minimum wage.
Indeed, Taiwan’s businesses say that when considering whether to increase wages at other wage levels, the minimum wage is the second most important consideration for them. When the minimum wage in the United Kingdom started rising at a faster rate after 2016, a study also found that it spurred firms to raise wages at other income levels to keep the wage structure within the firms intact.
As such, it does not make sense to use average wage to determine minimum wage growth, because whether or not average wage grows is dependent on whether the minimum wage grows, and not the other way around.
Do not use labor productivity to determine minimum wage growth
There is a rhetoric that claims that minimum wage growth should follow the growth of labor productivity.
Below, we compare labor productivity in a snapshot of industrial sectors with their average wages. The data shows that when Taiwan’s average wages in these various sectors were rising faster up until the mid-1990s, their labor productivity was rising faster as well. And when average wages stagnated after the 1997 economic crisis, labor productivity stagnated as well. The same trend can be seen in several other industrial sectors as well.
The reason for this is simple. Labor productivity is calculated by dividing economic output by each hour worked. And as we saw above, after Taiwan’s minimum wage and average wage stagnated, this led to its economic output stagnating. Based on the labor productivity formula, it goes to reason why labor productivity also stalled.
The European Central Bank explains that labor productivity is dependent on investment in productivity-enhancing activities and technologies, such as investment in fixed capital or knowledge.
In the chart below, we see that up until the late-1990s, Taiwan’s gross domestic investment was growing in tandem with gross domestic savings – Taiwan’s firms used to invest a similar level of their savings into boosting productivity and innovation.
However, after Taiwan’s minimum wage stagnated, gross domestic savings continued to rise, but gross domestic investment stagnated – firms began to invest comparatively less and less.
It is clearer when comparing with other countries at similar economic stages – Taiwan’s gross domestic savings have continued rising almost as fast as South Korea and New Zealand, up until today.
But when comparing gross domestic investment, Taiwan’s gross domestic investment has instead severely stagnated since the late-1990s.
South Korea and New Zealand continued investing as much as they save, but Taiwan stopped slowed down its domestic investment.
Gross domestic investment includes the consumption of fixed capital (depreciation). Fixed assets such as buildings and machines are required by manufacturers to produce goods, but they suffer from wear and year, and the consumption of fixed capital is the amount deducted to account for the decline of the value of these fixed assets due to wear and tear. Net domestic investment is the amount left after deducting the consumption of fixed capital from gross domestic investment. When net domestic investment increases, it expands the capital stock and inventories available to produce more goods, and develop new production possibilities.
In the chart below, we can see that while the consumption of fixed capital in Taiwan has been increasing, net domestic investment has however stagnated and this occurred after minimum wage started stagnating. In other words, Taiwan’s businesses have stop increasing their investments to raise their production possibilities. The lower investment in capital stock also explains why productivity has stagnated.
The European Central Bank (ECB) explains that productivity refers to the efficiency in production, and that when financing conditions are easy, it reduces the incentive for firms to reallocate their resources more efficiently to restructure and raise productivity. Economic distortions (such as via the design of taxes) therefore lead to the misallocation of resources. In Taiwan’s case, the suppression of minimum wage acts as a tax reduction for firms which distorts the economy, and the perceived easier financing conditions for firms also disincentivize them to invest and restructure, and become more productive.
Unproductive firms also run the risk of becoming zombie firms, which ECB describes as firms which are financially distressed and non-viable. In Taiwan, the number of such firms on the Taiwan Stock Exchange has risen from 5.9% in 2007 to close to 10% by the late-2010s. Such firms can crowd out resources from healthy firms, and if they do not exit the market, can further drag down productivity growth, ECB explains.
Due to Taiwan’s low and stagnant wages, firms have thus simply relied on cheap labor to profit, but this means they are not investing in the resources needed to raise productivity and innovation, leading to Taiwan’s business environment becoming more uncompetitive.
ECB also highlights the need to invest in education and knowledge to enhance productivity. But similarly, after Taiwan’s minimum wage stagnated, the lower revenue collected by the central government means less can be spent on education, science and culture, resulting in expenditure in this area stagnating.
In sum, Taiwan’s stagnant minimum wage led to economic output stagnating, thus dragging down labor productivity, and the cheap labor also reduces the impetus of firms to invest in the resources needed to grow productivity. The stagnant economic output also reduces the revenue available for the government to invest in improving education.
On the other hand, research shows that higher wages can lead to workers being more well-rested and healthier as they do not need to take on a second job or work overtime in order to make ends meet, and so they have better concentration and become less distracted, which means they become more motivated and engaged, make fewer mistakes and become more productive. Higher wages therefore lead to higher-quality jobs and higher innovation, and higher worker retention, which therefore results in cost-savings for firms. But if workers realize that their higher effort and problem solving is leading to financial gains but these are not shared with them, it leads them to lose motivation, as is the case with Taiwan.
As such, it does not make sense to use labor productivity growth as an indicator to determine minimum wage growth, if the low minimum wage is precisely the reason as to why Taiwan’s in various industrial sectors productivity cannot grow faster. On the contrary, in order to raise labor productivity, minimum wage should be raised faster.
Do not use unemployment rate to determine minimum wage growth
Finally, I have also written many times that historically in Taiwan, higher minimum wage growth leads to lower unemployment because low-income jobs become more attractive to workers. Their reentry into the workforce and the higher consumer demand and domestic consumption then leads to firms having more revenue to expand, and thereby raise employment even further.
Raising the minimum wage can therefore boost employment, more so than the other way around. On the other hand, slower minimum wage growth has historically led to rising unemployment.
As such, it does not make sense to use the indicators above as determinants to decide minimum wage increases, because the minimum wage is the key that drives the growth of the economic drivers above, not so much the other way around.
There are therefore only two indicators that are relevant in the determination of the minimum wage – the minimum income needed for basic living needs, and consumer price increases.
Calculating the minimum income needed for basic living
Above, we saw that higher minimum wage growth can drive domestic consumption and firm profits, and thus economic growth. However, if the minimum wage is inadequate, then it would prevent the minimum wage from having the optimal power of raising domestic consumption and economic growth.
When workers are not paid adequately to afford all their basic needs, then workers will have to forgo some of their consumption, which means that domestic firms will also lose out on the spending in these areas.
Based on Taiwan’s current cost of living, I estimated that at the very minimum, Taiwan’s workers will need about NT$40,000 a month to have enough to spend on all their basic needs, including for housing. Taiwan’s current minimum wage is NT$26,400, which means that each minimum wage worker lacks about NT$14,000 each month to spend. This is also the amount that domestic firms are losing in potential revenue each month from each worker. Moreover, about half of Taiwan’s workers earn less than NT$40,000 each month, which also means that about half of Taiwan’s working population are not earning enough to spend at an optimal level to support domestic businesses. In other words, Taiwan’s domestic firms are being deprived of potential revenue from half of its worker population – this represents a significant profit loss for Taiwan’s domestic economy.
Calculating a minimum income needed for a basic standard of living and then raising the minimum wage to this level, is therefore necessary to restore the equilibrium in Taiwan’s economy, in order to benefit Taiwan’s domestic firms and economy at a more optimal level.
A previous two-part article that I have written on this could be of guidance. For a start, Taiwan can follow in the examples of Singapore, Estonia and Ireland and set an adequate minimum wage target, and then implementing a four- to six-year plan to achieve this target.
Pegging minimum wage growth to consumer price growth
By the same logic, once Taiwan’s minimum wage is raised to a level adequate for the cost of living (i.e. minimally NT$40,000), the next step that needs to be done is to ensure that the minimum wage grows fast enough every year to catch up with consumer price increases, so that purchasing powers to be maintained, and that workers can continue to spend on all their basic needs, and support domestic firms at an optimal level.
However, since Taiwan’s minimum wage stagnated after 1997, its food and housing prices have been growing much faster than minimum wage, leading to workers having to divert their wages into spending more on these necessities, and sacrificing consumption for other necessities. As such, the profits in Taiwan’s food and real estate sectors have been growing, but profits in other domestic sectors like in health, recreation and education have been stagnating.
If minimum wage growth is pegged to consumer price growth, this would ensure that year-on-year, workers will continue to have enough wages to spend on all their basic necessities, and to better spread around their wages to support the growth of domestic businesses.
Using consumer prices as the key indicator to determine minimum wage growth is therefore the logical and sensible approach, and which is why other advanced countries already use such a system to do so. There is no need to reinvent the wheel by incorporating a bunch of indicators which are not meaningful, and would only negatively impact Taiwan’s economy. For example, Taiwan’s economy has been stagnant for the last two to three decades. If Taiwan’s minimum wage should be pegged to stagnant GDP growth, then Taiwan’s minimum wage growth will continue to be low, and in turn its economy will just keep stagnating. Thus, wages need to grow faster to grow the economy.
One country to learn from is Luxembourg. Luxembourg has been using a wage indexation system since 2021, where the minimum wage is adjusted whenever consumer prices rise (or decline) by more than 2.5%. The system automatically kicks in to adjust the minimum wage accordingly when this occurs. Luxembourg’s National Institute of Statistics and Economic Studies (Statec) keeps track of a basket of about 8,000 goods and services across 255 categories (including housing, energy, household appliances and clothing), and calculates the minimum income individuals need to spend on this basket of goods. Together with changes to the consumer price index, this allows Luxembourg to adjust the minimum wage to a level that adequately reflects the basic living needs of workers, and thereby also enables them to have enough spending to support domestic businesses as well.
As a result, Luxembourg’s minimum wage has been growing consistently for the last century, and is just about adequate to cover for the country’s basic standard of living. In Taiwan, the minimum wage is only adequate to cover about half of the basic standard of living in Kaohsiung, and only a third that in Taipei.
Above, we saw how raising the minimum wage results in total wages, household consumption expenditure, profits and the economy growing as well. In a previous article, I wrote that the minimum wage thus acts as an economic multiplier to grow the economy – a US$1 increase in minimum wage can generate an increase in the GDP per capita by US$2 every month. This was the trend in Taiwan up until 1997 as well. However, after Taiwan’s minimum wage stagnated, the economic multiplier effect became distorted, though as minimum wage started growing more consistently after Tsai Ing-wen became president, it has stabilized somewhat.
Since 2017 after Tsai took power, every NT$100 in minimum wage growth has been followed by about a NT$300 increase in the per capita GDP a month.
Every NT$100 increase in the minimum wage also leads to household consumption expenditure growing at a similar level, and about a NT$60 increase in non-manufacturing profits.
This is similar to research done elsewhere – a garment factory in Vietnam found that every 1% increase in wages lead to a 0.6% increase in profits, and it was surmised that while higher wages are added costs, the greater productivity and higher returns more than compensates for the added costs.
Accordingly, if Taiwan’s minimum wage grows to NT$40,000 in four years, it could also enable Taiwan’s GDP per capita to grow to about NT$135,000 a month, and enables Taiwan’s economy to catch up with France.
If there is a need to justify higher minimum wage increases, it is that due to the economic multiplier effect, the faster growth of minimum wage can help expand business profits and Taiwan’s economy even faster.
When President Tsai ran for election in 2016, she promised to enact the minimum wage law. She also promised to raise the minimum wage to NT$30,000. However, in her last year of presidency, the minimum wage would only grow to NT$27,470 next year, a far cry from the promise she made. During this presidential election campaign, Kuomintang candidate Hou Yu-ih proposed raising the minimum wage to NT$33,000 if he wins. In response, the ruling Democratic Progressive Party candidate Lai Ching-te said that he would focus on implementing the minimum wage law instead. However, Lai was both premier and vice-president under Tsai but the law has still not been promulgated after over seven years.
Pressured, Taiwan’s labor ministry said it has revised the draft minimum wage law and sent it to the Executive Yuan, and within a few days, the Executive Yuan passed the law, and sent it to the legislature for debate. The minimum wage law was proposed shortly after Tsai became president and the first draft was submitted to the Executive Yuan in 2019, but it sat there collecting dust until this year when election pressure finally forced the DPP government to act, or be seen as reneging on its promise.
The labor ministry also shared that there were disagreements between business and labor groups as to the indicators that should be included under the minimum wage law for the determination of the minimum wage. However, this article shows that of the ten indicators the labor ministry revealed were included in the discussions, only two made sense – the minimum income needed for a basic standard of living, and consumer price increases, or the ones relating to the cost of living. The ministry also shared that using consumer prices to determine the minimum wage is the only indicator which has received consensus from both business and labor groups, and given that the data supports using consumer prices as the key indicator for doing so, the decision on finalizing the minimum wage law should be an easy one.
For the other indicators, they are not key to influencing minimum wage growth. Rather, it is the minimum wage that influences their growths. It is when the minimum wage grows faster, which spurs wage growth at other income levels; it is when the minimum wage grows more rapidly that enables household income and consumption expenditure to rise faster, and thereby faster profit and economic growth. It is also when the minimum wage is grown faster that allows labor productivity to grow and unemployment to decline. Using these drivers as indicators to determine the minimum wage growth therefore does not make sense, since it is they which are dependent on the minimum wage for growth.
If the goal is to grow the minimum wage, in order that domestic firms can earn profits at a more optimal level, and the economy to reach its fuller potential, then it is necessary to ensure that the minimum wage is grown to a level that can fully meet all the basic needs of a worker.
The way to look at this issue is this – when firms put more money in the hands of workers as wages, workers will pass it along back to firms as spending, and this is how money is put back into the economy to help it grow. When firms do not want to put money into the hands of workers, then workers would not have the money to help domestic firms and the economy grow. Then, Taiwan’s economy stagnates, as it has since 1997 after the minimum wage stagnated.
On an additional note, there is also the question of whether migrant workers should be included under the minimum wage law, but the research we have seen in this article applies as well – higher wages lead to higher productivity and greater innovation, as well as higher domestic consumption, both of which lead to higher profits and economic growth. Excluding migrant workers from the minimum wage law will lead to the same problem of economic stagnation in certain sectors heavily reliant on migrant workers.
Taiwan’s economy has stagnated for long enough, due to its stagnating minimum wage. Taiwan has finally come to a point where it recognizes the need to raise minimum wage faster. But to do so, an evidence-based method needs to be used to raise the minimum wage. As the data shows and as the best practices in other countries show, ensuring the minimum wage is adequate for a basic standard of living indexed to consumer price growth is the logical and sensible approach to raising minimum wage.
TNL Editor: Kim Chan (@thenewslensintl)
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