Taiwan’s Missing Economic Growth: Pitfalls of Profit-Driven Growth

Taiwan will be reviewing its minimum wage in the third quarter of this year, but business groups are once again claiming that minimum wage should not be raised because it will hurt businesses.

This article looks at the data to explain why raising wages will not hurt businesses, but can instead strengthen them.

From the mid-1990s to late-2010s, Taiwan suppressed its minimum wage growth, with the aim of driving export growth. This led to Taiwan’s manufacturing profits becoming one of the highest in the world, on a per manufacturing worker basis (left chart below), while Taiwan’s minimum wage became one of the lowest among the advanced countries today (center chart). (Manufacturing profits in this article are used as a proxy to measure export growth.) Due to minimum wage stagnating, domestic non-manufacturing profits per capita relying on domestic consumption also started stagnating (right chart).

Data source: Minimum wage (Taiwan, other countries (1, 2)), profits (Taiwan, other countries), population figures for per capita calculation (Taiwan (1, 2), other countries), employment in manufacturing sector for per manufacturing worker calculation (Taiwan (1, 2), other countries)

Comparing monthly manufacturing profits per manufacturing worker with monthly minimum wage, Taiwan’s manufacturing profits to minimum wage ratio has thus grown to being one of the highest among the advanced countries. But Taiwan’s domestic monthly non-manufacturing profits per capita relative to monthly minimum wage are also high, signifying that while non-manufacturing profits stagnated, they are still very high. Taiwan’s manufacturing profits relative to non-manufacturing profits have also grown to being one of the highest among the advanced countries—signifying that manufacturing profits are excessively high. These vast differences indicate that Taiwan’s growth is highly imbalanced.

Indeed, in the charts below, when we compare with a snapshot of countries, Taiwan’s monthly manufacturing profits per manufacturing worker is about three times higher than monthly minimum wage (red line in left chart). But in Slovenia, Japan and France, manufacturing profits are lower than minimum wage.

This means that Taiwan’s manufacturing profits are too high, and it no longer makes sense for Taiwan’s government to keep suppressing wages for them.

Between these countries, they have similar levels of monthly non-manufacturing profits per capita, but Taiwan’s monthly minimum wage (red line in left chart) and average wage (blue line) is only slightly higher than its non-manufacturing profits, while wages are much higher in Slovenia, Japan and France. In Japan, businesses have also been lowering their profits in response to the country’s wage stagnation.

In other words, even domestically, Taiwan’s profits are too high relative to wages, which means that Taiwan’s consumer prices are also too high relative to wages. There is thus little logic for business groups to claim their raising minimum wage would hurt businesses. Taiwan’s businesses are earning lavishly.

Moreover, note that other countries have been able to achieve similar profits levels as Taiwan, even with higher wages. Slovenia and Japan have similar price levels as Taiwan, and are able to pay wages 30% to 70% higher than Taiwan—among other advanced countries, they have allowed wages to grow faster, while letting profits grow more slowly, so that economic growth is more balanced. This enables purchasing powers to continue to rise, while businesses benefit in tandem.

But it wasn’t always like this. Up until the mid-1990s, Taiwan’s wages were growing in tandem with profits and the economy—Taiwan’s growth used to be balanced (left chart below). But after Taiwan started suppressing wage growth, this led to Taiwan’s growths decoupling and becoming unbalanced, with manufacturing profits growing faster, while average wage stagnated.

In the early-1990s, Taiwan’s monthly minimum wage growth was the fastest in the last four decades—it was growing by an average of NT$1,033 a year from 1991 to 1995. This led to Taiwan’s monthly average wage also growing the fastest, by an average of NT$2,208 a year. It was only until 2017 when Tsai Ing-wen became president, that Taiwan’s minimum wage started growing as fast as it did in the early-1990s, by an average of NT$913 a year. However, because businesses have become too used to paying low wages, they are still growing average wage slowly, and average wage growth has still not caught up (growing at an average of only NT$1,309 a year).

(As such, to be clear, the Democratic Progressive Party (DPP) government has raised minimum wages as fast as in the early-1990s, and with other advanced countries, but the issue is that businesses want to retain their excessively high profits and are unwilling to grow wages faster. Also, because Taiwan’s wages have been stagnant for so long before DPP became government, it requires even stronger wage increases for Taiwan to recover and catch up.)

As I have written, the minimum wage functions as a multiplier effect to grow the economy and other economic indicators—higher minimum wage growth leads to higher domestic consumption and consumer demand, and thus higher consumer prices and profits, and then economic growth. From 1991 to 1995, we can calculate the multiplier effect of minimum wage growth by averaging the growth of the average wage in these years, then divide it by the average growth of the minimum wage. In other words, when we divide NT$2,208 by NT$1,033, we obtain the multiplier effect of 2.14—for every NT$1,000 growth in minimum wage, average wage grows by NT$2,140. The multiplier effect on total monthly wages per capita (compensation of employees) and monthly household consumption expenditure per capita is about 1, and about 0.6 for non-manufacturing profits. Similar to average wage, the multiplier effect on GDP per capita is about 2 times.

Among most other mature advanced countries, they have similar ratios. Monthly average wage and monthly GDP per capita is generally twice as high as monthly minimum wage, total monthly wages per capita and monthly household consumption expenditure per capita is about the same level as monthly minimum wage, and monthly non-manufacturing profits per capita is about 30% to 60% that of minimum wage. In other words, domestic profits grow in tandem with minimum wage growth.

Data source: Average wage (Taiwan, other countries (1, 2)), total wages (Taiwan, other countries), household consumption expenditure (Taiwan, other countries), GDP (Taiwan, other countries)

After Taiwan’s minimum wage was suppressed from the mid-1990s, its multiplier effect on the economy became more erratic—the minimum wage stopped growing for a decade and was not growing fast enough to push up economic growth, leading to the economy growing more slowly.

From 2000 to 2025, Taiwan’s minimum wage was growing one of the slowest among the advanced countries. Among other advanced countries, their minimum wages were growing faster. Spain and Estonia have similar GDP per capita as Taiwan, and their monthly minimum wage was growing by an average of NT$1,000 a year. South Korea used to be poorer than Taiwan before the mid-2000s, but it grew its minimum wage by an average of NT$1,500 a year, to overtake Taiwan. New Zealand used to be at a similar economic level as Taiwan in the early-1990s, and as it grew its minimum wage by an average of NT$2,000 a year, its economy has now caught up with France.

Note: Data is calculated until 2025 or the latest year available.

If Taiwan’s minimum wage had not stagnated, its economy would have grown much faster as well. Using the multiplier effect calculated above, if Taiwan’s monthly minimum wage had grown by NT$1,000, NT$1,500 or NT$2,000 a year, its minimum wage could have grown to be about NT$45,000, NT$60,000 and NT$75,000 a month respectively (instead of only NT$28,590 today), while its average wage would have grown to about NT$100,000, NT$130,000 or NT$165,000 a month (instead of about NT$60,000 today). Non-manufacturing profits could be 2 to 2.5 times higher, driven by higher wages and consumption; and Taiwan’s GDP per capita could grow by about 1.3 to 1.6 times faster, or to about US$45,000 (to be on par with New Zealand and France) or US$56,000 (to be on par with Canada, Finland, Belgium, Sweden and Austria). If Taiwan had grown its minimum wage as fast as other advanced countries, instead of being ranked 37^th in terms of GDP per capita, Taiwan could rank around 25^th or 15^th richest in the world today. In terms of total GDP, Taiwan’s GDP could have grown to be as large as the Netherlands and Türkiye, to become among the 20 largest economies in the world.

As a comparison, if Taiwan’s monthly minimum wage had grown by NT$1,000 a year and the minimum wage’s multiplier effect was as strong as in the early 1990s, Taiwan’s minimum and average wages would have grown as fast as South Korea and Spain, instead of being at only 60% of their levels.

Taiwan’s GDP per capita would have continued being higher than South Korea as it was before the mid-2000s, and would never have fallen behind South Korea.

If Taiwan’s monthly minimum wage had grown by NT$1,500 a year, it would have caught up with New Zealand—an economy which had a similar GDP per capita as Taiwan in the early-1990s.

If Taiwan’s monthly minimum wage had grown by NT$2,000 a year, its wages, profits and GDP per capita would be at the level of Australia and the Netherlands today, to be among the top 10 richest countries in the world.

In particular, take a look at the non-manufacturing profits of Australia and the Netherlands—even though their wages are one of the highest in the world, their domestic profits are also high. Unlike what business groups in Taiwan make themselves believe, higher wages do not hurt businesses. Instead, higher wages lead to higher domestic consumption and demand, which allows businesses to charge higher consumer prices, and in turn drive up profits and the overall economy.

If we compare with Singapore and Ireland, which in the 1980s and 1990s had wages/GDP per capita closer to Taiwan’s, they have become one of the richest countries in the world (among the top 5). If Taiwan’s monthly minimum wage had grown by NT$2,000 a year and based on the multiplier effect from 1991 to 1995, Taiwan’s wages, profits and GDP per capita would have grown to being on par with them as well.

Of note, take a look at Ireland—when it stopped growing its minimum wage from the mid-2000s to mid-2010s, this led to its average wage stagnating and its profits and economy growing more slowly—which highlights the pitfalls of slower wage growth. You can also observe a similar pattern among the other countries above.

Data source for Singapore: Average wage (1, 2), total wages and GDP. Note: Ireland’s GDP data is based on its modified GNI data which excludes profits derived from profit shifting from overseas.

If Taiwan had not suppressed minimum wage growth, its wages, profits and GDP per capita would have been much higher than it is today. In other words, Taiwan’s monthly minimum wage could have been up to NT$45,000 higher today, its monthly average wage could have been up to NT$100,000 higher today. Businesses could be earning as much as NT$25,000 more a month on average (or NT$300,000 more a year) and Taiwan’s GDP per capita could be higher by up to NT$56,000 a month—all these are the missing growths that Taiwan could have achieved if wages were not suppressed.

It’s less feasible to calculate the multiplier effect of minimum wage growth on manufacturing profits, as manufacturing profits are also dependent on external demand and prices. However, comparing with other countries, countries with higher minimum wages also have higher manufacturing profits—higher wages lead to workers being more engaged and innovative at work, and thus results in businesses producing higher-value products which they can charge higher prices for, and thereby earn higher profits (as is the case among Western European countries).

On the other hand, Taiwan’s current profits are derived from suppressing wages while its manufacturing value has not grown as fast as the other mature advanced countries—Taiwan’s technological complexity (which measures the innovativeness and diversity of manufacturing products) is lower than most other advanced countries, while the diversity of its manufacturing production has also declined, but increased in South Korea.

Taiwan’s manufacturing businesses are thus able to earn high profits less so because their production have become of higher-value, but because wages are suppressed to let them do so. But as we have seen, this leads to domestic businesses earning lesser profits, while Taiwan’s economy grows slower and falls behind other countries.

Suppressing Taiwan’s wages lead to manufacturing profits rising faster, which leads to gross domestic savings rising faster as well (left chart below). Taiwan’s gross domestic savings and gross domestic investment used to be growing in tandem with one another up until 2000, but as manufacturing companies earned more profits, they instead channeled more of their earnings into savings instead of investing them (right chart). The growing savings also lead to other negative impacts on Taiwan’s economy and society, as the excessive savings contribute to housing prices growing excessively, while Taiwan’s workers earning low wages increasingly cannot afford housing.

Given this background, from a macroeconomic perspective, raising minimum wage therefore does not hurt businesses. In fact, it helps businesses earn higher profits and enables the economy to grow faster—as the examples of other advanced countries show.

Since 2019, to catch up with the cost of living, other advanced countries have been growing their monthly minimum wages faster by an average of NT$1,500 (like South Korea), NT$2,500 (Spain and Poland) or NT$3,000 a year (Lithuania and New Zealand).

Note: Data is calculated until 2025 or the latest year available.

If Taiwan’s minimum wage were to grow similarly from 2026 onwards, Taiwan’s minimum wage could grow to between NT$44,000 and NT$59,000 by 2035, its average wage could grow to between NT$95,000 and NT$127,000, its domestic non-manufacturing profits could grow to be 60% to two times higher, and its GDP per capita could grow to be 30% to two-thirds higher than it is today.

In other words, Taiwan’s wages and profits could catch up to the level of Australia today, and its GDP per capita could rise to be about US$45,000 to US$55,000, to be at the level of France, Australia or Germany today.

Business groups threaten that raising wages will hurt businesses, but this is not what the data says. Instead, raising the minimum wage has a clear multiplier effect, and enables the economy to expand on all fronts. Higher wages lead to higher consumption, consumer demand and thus higher consumer prices and profits. Higher wages lead to higher work engagement and innovation, and higher-value products and profits.

Basically, suppressing wages only led to businesses earning more profits and keeping them as savings, and channeling them into unproductive investments like housing. But the key beneficiaries are mainly manufacturing businesses which earn extravagant profits, while domestic businesses are cannibalized because wages are too low to enable them to grow faster and earn higher profits. Such parasitic behavior prevents Taiwan’s domestic economy from growing faster and catching up with other advanced countries. Meanwhile, the low wages and high housing prices cause resentment that fuel political instability. The government has tried to coax businesses to share profits with workers but this is unrealistic—Taiwan’s profits relative to wages are already one of the highest in the world, precisely because wages are so low, and businesses don’t have to or want to share profits with workers. These problems need to be addressed by restoring balance into Taiwan’s economy—by ensuring that minimum wage grows faster, and the minimum wage’s multiplier effect can function healthily to expand Taiwan’s economy. Only legal mechanisms like a higher minimum wage will compel profits—especially in the manufacturing export sector—to be shared, so that higher wages can enable profits in other sectors to grow faster, and rebalance the economy.

Countries with higher wages also experience increasing quality of life, as workers have higher purchasing powers and have better well-being, and higher GDP means there is more tax revenue that can be used to spend on social services and infrastructure. The suppression of wages in Taiwan therefore prevents Taiwan’s society from progressing, while social services face bankruptcy, and infrastructure and the environment deteriorate.

The suppression of Taiwan’s wages means that businesses are stuck using the low costs as their business model, and makes them resistant to change, but this is unhealthy for Taiwan’s economy, as it prevents Taiwan’s economy from transforming faster to a higher-value model which can charge higher prices. For domestic businesses, the low wages prevent them from having higher consumption and consumer demand, and to charge higher consumer prices, which drags down Taiwan’s economy.

Taiwan’s businesses may not adopt a macroeconomic outlook because they are not the country’s long-term strategic planners. As such, Taiwan’s government needs to look at the data to develop a new economic vision for Taiwan, based on using raising wages faster to grow the economy faster, while also enabling businesses to earn higher profits.

Due to Taiwan’s wage suppression, Taiwan has lost economic growth, and growing wages faster can enable Taiwan to recover its lost growth faster.

(Featured photo by Jimmy Liao on Pexels)