Taiwan’s labor ministry announced this week that it plans to raise the country’s minimum wage. In a meeting on Wednesday, the ministry’s Basic Wage Deliberation Committee decided to increase Taiwan’s minimum monthly wage by NT$700 next year, from NT$23,100 a month to NT$23,800, or from about US$737 to US$760.
This 3% increase, along with a proposed 5% increase of the minimum hourly wage, will now need to be approved by Taiwan’s Executive Yuan before it goes into law. Premier Su Tseng-chang (蘇貞昌) gave the wage hike his thumbs up on Thursday, although both labor and management representatives have voiced disappointment with the proposal.
Over the past 20 years, however, Taiwan’s wages have been depressed and its economic growth has stagnated—and it is unlikely that this small increase in the country’s minimum wage will help alleviate the livelihoods of low-income Taiwanese.
To put this into context, I compared Taiwan with other Asian and European economies at a similar range of economic development and took a look at the statistics to make a quick comparison based on the data.
I looked at countries with GDPs per capita within a range of about US$8,000 higher or lower than that of Taiwan. The following countries are included in our group: Malta (the highest at US$32,022), South Korea, Spain, Slovenia, Estonia, Portugal, Czech Republic, Greece, Slovakia, Lithuania, Latvia and Hungary (the lowest at US$17,296).
Taiwan’s GDP per capita is currently at US$25,448 (NT$797,490), in between Slovenia and Estonia.
If we compare Taiwan’s minimum wage trend with countries in the top half of this group (with higher GDPs per capita than Taiwan), it is revealing: Taiwan went from having the highest minimum wage of this group in 1989 to the lowest today.
In fact, 30 years ago, in 1989, Taiwan’s minimum wage was between 1.6 and 2 times higher than those of South Korea, Greece and Portugal. It was also higher than Spain’s minimum wage.
Today, however, Taiwan’s minimum wage is lower than all of them.
Taiwan’s minimum wage today is less than half of South Korea’s (48.3%), less than two-thirds of Spain’s (62.9%), three-quarters that of Slovenia (74.5%), and nine-tenths that of Malta (86.7%), Greece (87.1%) and Portugal (94.3%).
But then, from 1997 to 2006, Taiwan’s minimum wage started stagnating. Greece surpassed Taiwan’s minimum wage in 2001, Malta and Spain in 2002, Slovenia and Portugal in 2003 and South Korea in 2004.
In fact, you can see that South Korea has the highest minimum wage growth since 1989, with its minimum wage growing 12 times higher than its 1989 level. The minimum wages of Spain, Greece and Portugal have grown to be four to five times higher than their 1989 levels. Slovenia has managed a similar jump since 1995.
Taiwan’s minimum wage, meanwhile, is only about 2.6 times higher than it was in 1989.
When you compare Taiwan with countries in the bottom half of the group (those with a lower GDP per capita than Taiwan), it shows how much these countries have narrowed what used to be a wide gap with Taiwan.
In 1993, Taiwan’s minimum wage was between five and seven times higher than that of Hungary, Slovakia and Czech Republic, 24 times higher than Latvia, and 30 times higher than Estonia.
Today, the gap has narrowed to the point that Taiwan’s minimum wage is only 1.2 to 1.5 times higher than the other countries.
Slovakia (since 1991) and Czech Republic (since 1993) have seen their minimum wages grow seven to eight times higher. Estonia has seen its minimum wage grow to be 38 times higher than it was in 1991. Hungary’s has grown 41 times higher since 1989, and Latvia’s has grown 51 times higher since 1992.
Once again, Taiwan’s minimum wage is just 2.6 times higher than it was in 1989.
When we compare the initial group of countries together, it becomes clear: While Taiwan’s minimum wage was the highest among all these countries 30 years ago, it has stagnated to the gap between the top and the bottom half of the group.
In the chart below, you can see that since 2004, Taiwan has fallen into the white space in between these two groups of countries. Meanwhile, countries in the lower-minimum wage group are also catching up with Taiwan and closing the gap.
If Taiwan’s minimum wage had grown in tandem with the minimum wages of the other countries and remained one of the highest in this group, Taiwan’s minimum wage today would be in the range of between NT$36,500 and NT$48,000, about where Spain and South Korea are today, respectively.
Instead, about 40% of Taiwanese today still earn less than NT$35,000 and the average regular wage is still only NT$41,865.
In other words, Taiwan’s workers today are severely underpaid.
When we compare the GDP per capita of the countries in the top half (in the chart below), you can also see that while South Korea’s GDP per capita has grown the fastest among these group, the growth of Taiwan’s GDP per capita has been relatively flat.
In fact, when you compare Taiwan with not just South Korea, but other countries which started off with lower GDPs per capita than Taiwan—Slovenia and Malta (with the exception of Portugal, which was badly affected by the 2008 financial crisis)—you can see that while they started off with lower GDPs per capita, they have all surpassed Taiwan today.
Even Spain, which was also greatly affected by the 2008 financial crisis, has seen its GDP per capita remain at a higher level than that of Taiwan.
When we compare Taiwan with countries in the bottom half of the group, you can see that in 1995, their GDPs per capita were less than half than that of Taiwan. Today, they have caught up to have GDPs per capita around 70% to 90% of Taiwan’s.
Here’s another look at how Taiwan’s GDP per capita performed against these six countries in 1995, and again in 2019:
Again, when we compare all the countries together, you can see that while most of them have seen their GDP per capita grow faster than Taiwan, Taiwan’s GDP per capita growth has been relatively flatter.
Another way to look at the changes in minimum wage and GDP per capita between Taiwan and these countries is by comparing them using the chart below. In 1993, you can see that Taiwan has the highest minimum wage and one of the highest GDP per capita among these countries (second highest, in fact, after Spain). The Southern European countries of Spain (for minimum wage), Greece and Portugal were behind Taiwan. South Korea was somewhere in the middle. The Central and Eastern European countries of Hungary, Slovakia, Estonia and Latvia were far behind.
In 2000, Taiwan took the lead with the highest minimum wage and GDP per capita, but the Southern European countries were catching up, with South Korea and Slovenia not far behind. The Central and Eastern European countries were still far behind, but the gap was narrowing.
Today, however, Taiwan has lost the lead. Instead, South Korea has flown past all these countries and now boasts the highest minimum wage and the second highest GDP per capita. Not only has Taiwan stagnated; the Central and Eastern European countries have also caught up with Taiwan.
If this trend continues, all these countries will continue to grow and leave Taiwan behind in the dust.
Also, should this continue, the tier of emerging countries after this comparison group, like the other lower-income Eastern European (Poland, Croatia and Romania) and the Latin American and Caribbean countries, along with countries like Malaysia, might also catch up with Taiwan.
The problem is with the low-cost strategy that Taiwan is adopting, which has prevented Taiwan’s minimum wage, and wages in general, from growing. When wages remain depressed, domestic private consumption cannot grow quickly—and, as part of the GDP calculation comprises of consumption expenditure, this would explain why Taiwan’s economic growth has stagnated.
But that’s not the only problem.
Taiwan Heads Upstream, Not Downstream
Taiwan’s adoption of the low-cost model has also inhibited its ability to improve the ability of businesses to amass capital for investment for innovation, and has therefore resulted in not just economic stagnation but innovation stagnation.
This 2017 study by Isabella Cingolani, Pietro Panzarasa and Lucia Tajoli categorizes countries in terms of their importance in terms of upstream and downstream production. Countries ranked higher in upstreamness are defined as countries which tend to “preferentially export intermediate goods to other countries that, in turn, have a tendency to preferentially export finished products and import intermediate inputs.” Countries ranked higher in downstreamness are countries which “preferentially import final products from countries that, in turn, tend to preferentially export finished products and import intermediate inputs.” Countries ranked higher in upstreamness tend to engage more in contract manufacturing and earn lower profits, while countries ranked higher in downstreamness tend to have more lead firms which earn higher profits.
When comparing Taiwan’s electronics industries to those of other notable countries, Taiwan ranks first in upstreamness. The chart below correlates the minimum wages of countries with their ranking in upstreamness. This comparison does not show a clear pattern as to whether countries with lower or higher labor costs (or minimum wages) do better in terms of upstreamness.
But the pattern becomes clearer when comparing the countries in terms of downstreamness: Countries which pay higher minimum wages actually rank higher in terms of downstreamness, while countries which pay lower wages generally rank lower. South Korea and the United States have somehow been able to position themselves in a sweet spot, doing well in terms of both upstreamness and downstreamness.
Taiwan, meanwhile, ranks at the bottom of this 20-country comparison.
One more thing to add: There have been concerns that increasing wages, and thus costs, would lead to lower exports. But when comparing Taiwan with South Korea, this claim is not borne out in the statistics. While Taiwan’s exports today are less than two-thirds that of South Korea, their exports were actually on par with one another from the mid-1970s to mid-1990s.
However, since 1994, while South Korea’s exports have spiraled upwards, Taiwan’s exports have comparatively stagnated.
One reason for this is because South Korea was able to open up its economy via free trade agreements after the 1997 financial crisis, South Korea decided to abandon a low-cost model and to restructure its economy. A 2012 article by CommonWealth Magazine sums it up by saying “South Korean companies decided to invest heavily in technology and R&D and in building global brands,” while Taiwanese businesses decided to continue to pursue “cheap labor” instead of upgrade their industries. The reality is that because South Korea was able to successfully restructure and transform to become a higher-value economy, its exports therefore increased with it. There is no reason why Taiwan could not, since both countries had followed a similar economic development model. However, Taiwan’s pursuit of low wages and low costs have resulted in it losing its advantages to its neighbor.
In truth, it is not that Taiwan has a small market. Since the middle of last century, South Korea has had a larger population than Taiwan, but up until the mid-2000s, Taiwan was still able to have a larger economy than South Korea. Taiwan has the scale if it does things right.
It is clear, however, that Taiwan’s unhealthy overreliance on the low-cost model has instead resulted in it being unable to hold on to the lead, causing Taiwanese to buy into the idea that they do not have the market size to compete.
This is simply not true.
Taiwan has the market if it wants it. As it is, its citizens are not endowed with the financial capability to help the country compete.
In other words, Taiwanese businesses shot themselves in the foot, and they have no one to blame but themselves.
The case can therefore be made that because South Korea and other more advanced countries stopped pursuing a low-cost model and moved toward a higher value-add model, they were able to restructure and move up the value chain to more value-added production. Because Taiwan has continued to maintain a low-cost model and low wages, it has not been able to break free from its overdependence on low costs, and businesses have therefore not been compelled to restructure, thereby preventing Taiwan’s economy from restructuring and moving up the value chain to earn higher profits and grow its GDP per capita.
Taiwan’s economic stagnation therefore also results from its unwillingness to abandon its low-cost model while putting businesses on a drip of low wages. In fact, Taiwan’s wage share as a percentage of GDP has declined to become one of the lowest among developed economies—which also means an increasing profit share for businesses.
This is yet another reason why Taiwan remains stuck in a loop of economic stagnation.
Taiwan’s businesses complain about the lack of growth in domestic private consumption, but the irony is that if they do not want to increase wages while keeping profits to themselves, then Taiwan’s domestic private consumption will not be able to grow. This also leads one to wonder whether Taiwan’s low-cost model has resulted in Taiwan’s businesses being lulled into the complacency of feeling that there is no need to restructure or innovate, since they can still rely on this low-cost and low-wage model to earn increasingly higher profits.
But Taiwan’s businesses cannot have their cake and eat it, too. Taiwan’s economy is not going to restructure from such an overreliance on low-cost production. In the long term, Taiwan’s businesses are only hurting themselves, while other countries grow and restructure into higher value-add production—and leave Taiwan behind in the dust.
Low Wages, High Cost of Living
Finally, even when comparing Taiwan’s cost of living with that of other countries, there is also a clear case to be made that Taiwan’s wages have been undervalued.
When we compare Taiwan with countries in the top half of the earlier group (those with higher GDPs per capita than Taiwan), Taiwan’s cost of living is actually higher than the rest (except for Malta and South Korea), according to the Numbeo database.
Taiwan’s cost of living is higher than Spain, Slovenia, Greece and Portugal. When comparing for consumer prices, and when including rent, it is still higher than all four countries.
Despite this, Taiwan’s minimum wage is lower than that of all four countries: Portugal by 6%, Greece (14.83%), Slovenia (34.26%) and Spain (58.99%).
Seeing that Taiwan’s cost of living is a shade above that of Spain and Slovenia, Taiwan’s minimum wage should be at least the same or higher than those of Spain and Slovenia. Today, Spain’s minimum wage is NT$36,727 while Slovenia’s minimum wage is NT$31,013. A good benchmark may be somewhere in between Spain and South Korea, as Taiwan’s cost of living is in between those two countries, which puts us around NT$40,000. As it is, however, 50% of Taiwan’s workers currently earn less than NT$40,000. Taking Spain’s minimum wage as a benchmark, Taiwan’s minimum wage workers are therefore only earning half of what they should be earning if their wages are to be commensurate to Taiwan’s cost of living.
As such, it is clear that Taiwan’s workers are severely underpaid. And this low-cost model that Taiwan relies upon is not doing anyone any favors.
There have been irrational fears spoken by business owners about how higher wages will lead to higher prices. But of course higher wages will lead to higher prices—this is simple economics, and the businesses surely know it.
But when you look at the historical trend, while Taiwan’s minimum wage and inflation has on average been increasing, Taiwan’s inflation has still not grown as fast as the minimum wage growth.
In fact, in the years in the early to mid-1990s when Taiwan saw its highest increases in minimum wage, inflation also increased at a faster pace—but the increase was still lower than increases to the minimum wage.
In fact, there were long periods during which previous Taiwanese governments refused to increase the minimum wage at all, under former Presidents Chen Shui-bian (from 2000 to 2006) and Ma Ying-jeou (from 2008 to 2010, and in 2016). In these years where Taiwan did not increase the minimum wage, there was still inflation and prices continued to rise.
The trick, therefore, is not to not increase minimum wage to prevent price increases. The fact of the matter is that prices will increase even if wages are held stagnant. In fact, when businesses use the argument that wages should not be increased because this will increase prices, what they are really saying is that high minimum wage increases would not allow them to increase prices fast enough to earn the high profits they want.
It is time we stop being taken advantage of by these businesses, who are not only trying to profit from Taiwan’s low-cost environment, but also harming Taiwan by preventing it from developing the ability to restructure.
The idea is to ensure that minimum wage growth can be increased at a rate faster than inflation, so that purchasing power can increase and private consumption along with it, thereby helping to increase earnings and profits while higher wages spur businesses into restructuring. When the two work hand in hand, this will increase capital for innovation and allow Taiwan to move up the value chain to compete with other higher-income countries. This is a no-brainer, just by looking at the data alone. But as it is, Taiwan’s wages have suffered severe stagnation under the policies of previous administrations, and there is an urgent need to restore Taiwan’s minimum wage to NT$30,000 at the very least.
Fortunately, President Tsai Ing-wen (蔡英文) has been the first president in the last 20 years to take economic restructuring seriously. As mentioned in my previous article for The News Lens, Tsai has required businesses returning from China to Taiwan to invest in higher-value production while also paying minimum monthly salaries of NT$30,000 if these businesses were to require government assistance. Tsai has also embarked on bold digital transformation initiatives to use new technologies such as artificial intelligence and the Internet of Things to try to spur innovation, which has resulted in the world’s largest tech firms, such as Google, Microsoft and Amazon, increasing their investments in Taiwan over the last few years.
Under Tsai, Taiwan has also seen three years of the fastest average consecutive minimum wage growth in the last 20 years. Last year, Taiwan was also able to achieve its lowest unemployment rate in the last 18 years, which suggests that there is spare capacity in Taiwan’s economy to increase Taiwan’s wages for higher-value production while also increasing employment opportunities. In the last quarter, Taiwan has also seen faster economic growth than the other three Asian Tigers.
If anything, a higher minimum wage in Taiwan is long overdue, and the wage stagnation has prevented Taiwan from being able to restructure while also pulling down Taiwan’s economic growth. Tsai is the only president who has taken this issue seriously enough in the last two decades to do something about it, and she should be given the mandate to pursue further policies of restructuring and wage growth.
But to break Taiwan’s from the cycle of stagnation might require even higher minimum wage increases. I believe that, for a start, Tsai would need to make an election promise to increase the minimum wage to NT$30,000 within the next three years, which would not even require average increases of more than 10% every year.
If anything, a minimum wage of NT$30,000 would uplift the livelihoods of the 31% of Taiwanese who are earning less than that amount today. This would also alleviate the anxieties and fears of an electorate who have therefore been tending towards populist politicians such as Kaohsiung Mayor Han Kuo-yu (韓國瑜) and independent Taipei Mayor Ko Wen-je (柯文哲). Improving their economic conditions would help allay the fears over their economy while increasing support for the current ruling party and for Tsai’s plans to restructure Taiwan’s economy.
Finally, I understand that there might be an impending recession at a global level and this might not a good time to spike up minimum wages, but while we are considerate toward businesses in such times, we would need to show the same courage to be considerate to workers when the time comes. Unfortunately, I do not know if such courage will be forthcoming.
In any case, when the economy picks up, I believe Tsai should take the bold step of pushing for higher minimum wages so as to push Taiwanese businesses to restructure, like the South Korean government did after the 1997 economic crisis, so that Taiwan’s economic potential can be restarted and the county can make up for lost time.
