What you need to know
Despite what you may hear from business interest lobbyists, the historical data shows no clear correlation between a growing minimum wage and a higher unemployment rate.
One of the common talking points you’ll hear from business leaders is that raising the minimum wage will lead to higher unemployment. This is a myth, and we’ll look at the question with data from Taiwan to show that idea is nothing more than baseless fear mongering aimed at suppressing wages.
The short answer is that the historical data shows no clear correlation between a growing minimum wage and a higher unemployment rate. In years with the highest minimum wage growth, the unemployment rate was also the lowest. You can see in the chart below that in the first half of the 1990s, the minimum wage was growing by as much as 10% to 18% under President Lee Teng-hui, but Taiwan’s unemployment rate was at its lowest level in the last 30 years, at about 1.5%.
Under the presidencies of Chen Shui-bian (2000-2008) and Ma Ying-jeou (2008-2016) that followed, the minimum wage either did not grow or stagnated, but unemployment then increased to as high as over 5%. But after President Tsai Ing-wen took over in 2016, the minimum wage has seen higher levels of growth than under Chen or Ma, while the unemployment rate has fallen below 4%.
The picture becomes clearer when we look at the trend in terms of moving averages. The chart below plots the values based on a five year moving average, to even out the trend in the years without minimum wage growth.
You can see that Taiwan’s unemployment rate was actually the lowest when minimum wage growth was the highest. Under President Tsai Ing-wen the minimum wage has grown at a higher level while unemployment also declined.
The correlation chart below reveals the same pattern. Over the last thirty years, when minimum wage growth was the highest, unemployment rate was also the lowest.
In comparison with Taiwan, South Korea has increased its minimum wage (red line) by a larger extent than Taiwan (green line) since 2000 — by nearly 17% in some years, but it’s unemployment rate (dotted red line) has remained at an even lower level than Taiwan’s most years (dotted green line).
It is clear that rising unemployment has very little relationship with minimum wage growth — no matter if a country spikes up its minimum wage or chooses to leave its wages stagnate, unemployment can remain low.
Similarly, many high-income countries with a similar GDP per capita, including South Korea, Czech Republic, Hungary, Poland, and Slovenia grew their minimum wages by a larger percentage since 2014 — by as high as 17% in some years, but all of them have seen declining or low unemployment rates.
These countries have seen some of the highest minimum wage increases and some of the lowest unemployment rates in the last few years.
I’ve pointed out elsewhere that other highly developed economies with unemployment rates below 6% have among the highest minimum wages in the world. (The minimum wage in the city of Geneva is used for Switzerland’s minimum wage while the minimum wage of hospitality workers is used for the Nordic countries.)
Taiwan and South Korea have both seen stable unemployment rates despite different levels of wage growth.
Other wealthy countries have also dramatically increased their minimum wages but saw declining unemployment rates.
It can be argued that higher wages reduce unemployment by incentivizing unemployed workers to return to the workforce. Joseph Politano, a financial management analyst at the United States Bureau of Labor Statistics, has said that based on data in the U.S., “higher prime age employment levels are generally correlated with higher nominal wage growth.”
Economists like to claim that Taiwan’s minimum wage should not be increased because it should be left up to market forces. If this were the case, then in years with higher unemployment, market forces should have adjusted wages upwards to get more people back into the workforce to reduce unemployment. But this did not happen under Chen Shui-bian and Ma Ying-jeou.
Taiwan’s minimum wage did not grow for 10 years after the 1997 economic crisis and continued to stagnate under Ma Ying-jeou. If minimum wage growth kept pace with the rate it’s growing under Tsai currently, increasing by 4.31% every year since 1997, it would reach NT$43,637 next year.
But the minimum wage will only grow to NT$25,250 next year, or NT$18,387 less than the potential level of NT$43,637.
Last month, the Nobel Prize in Economic Sciences was awarded to economists David Card, Joshua Angrist, and Guido Imbens. They conducted a study comparing two similar labor markets New Jersey and Pennsylvania in the U.S. and found that a minimum wage increase in New Jersey not only did not increase unemployment relative to Pennsylvania, which did not increase its minimum wage, it also increased employment in New Jersey’s fast food restaurants by 13%.
The Nobel economists have replicated their studies several times and have found little relationship between raising minimum wage and rising unemployment.
A study in Germany also found that the introduction of a minimum wage in Germany in 2015 also did not reduce unemployment, but did result in workers moving from lower-paying companies to higher-paying ones, and more importantly, from less productive to more productive companies. This suggests that increasing the minimum wage can help in restructuring Taiwan’s economy to a higher-value and more productive one.
In other words, raising the minimum wage makes economic sense.
TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)
If you enjoyed this article and want to receive more story updates in your news feed, please be sure to follow our Facebook.