In South Korea and high-income economies in Eastern Europe (which are less wealthy than say, the Netherlands), the minimum wage has been growing rapidly because of its inadequacy to cover the cost of living. Meanwhile, consumer prices tend to grow faster than producer prices.
In the wealthiest countries, the minimum wage has been adequate for the cost of living. Wages across the board have been rising less quickly, and consumer prices tend to grow less slowly and more closely with producer prices.
Taiwan, like South Korea, falls into the category of advanced countries with a relatively low GDP per capita. When these other countries are rapidly increasing the minimum wage, Taiwan’s minimum wage is stagnating. What’s worse, consumer prices are growing much faster than producer prices in spite of the slow wage growth. Below, we’ll look at the path Taiwan has taken by analyzing consumer and producer prices.
Faster growth in purchasing powers and profit margins in advanced countries with a relatively low GDP
Economists often assess purchasing power by measuring the gap between the growth rates in consumer prices and the minimum wage. In 1980, Taiwan had one of the lowest GDP per capita among today’s advanced countries, but the minimum wage was growing much faster than consumer prices (at least up until the 1997 economic crisis), leading to a sharp rise in purchasing power.
The wider the gap between the growth rates of consumer and producer prices, the greater the profit margin tends to be. During the 1980s, Taiwan was an advanced country with a relatively low GDP per capita. But while its profit margin had been growing more rapidly than that of most other countries, its GDP per capita has remained stagnant.
Prior to the 1997 economic crisis, the rapid increase in Taiwan’s profit is largely attributed to its high minimum wage growth, which increased consumer demand and household consumption expenditure, and in turn boosted profits.
But things took a different turn when wages began to be suppressed following the crisis.
From 1988 to 1997, Taiwan (red line) and South Korea were among the least wealthy countries with the least adequate wages. Their minimum wages, which affects purchasing power, was increasing the fastest to catch up with the cost of living.
The rapid growth in purchasing power also led to an expansion of consumer demand and household consumption. Businesses in Taiwan and South Korea saw their profit margins growing rapidly.
Wages (and purchasing power) and profit margins in the Nordic and Benelux countries didn’t grow as rapidly as those in Taiwan. But note that due to a higher GDP per capita, these countries tend to have higher absolute profits.
Prior to the 1997 economic crisis, Taiwan was on track to become like other advanced economies, increasing purchasing power by growing the minimum wage.
But Taiwan froze the minimum wage for about a decade, slowing down the growth of its purchasing power (growing the least over the last decade among the set of countries in the chart below). The phenomenon explains why younger Taiwanese who start work at the turn of this century feel poorer than older Taiwanese, and feel they are not benefiting from economic growth.
While most advanced countries have developed the economy by growing wages, Taiwan has suppressed wages and its economy has stagnated.
But despite wages stagnating, Taiwan’s profit margins grew modestly, even faster than many other countries. This is because producer prices had been declining for a while after 1997.
Taiwan’s profit margin has been increasing dramatically again since the early 2010s when producer prices started declining globally. In fact, they have grown the fastest among advanced countries.
Meanwhile, Taiwan’s wages and purchasing power have been growing comparatively slowly despite rapid growth in profit margins.
With profit margins growing so rapidly, it might not be surprising that since 1997, Taiwan’s profit share as a percentage of GDP has been growing one of the fastest among advanced countries.
Based on data from 2011, advanced countries with higher profit margins tend to have higher profit shares. Taiwan has both one of the highest profit margins and profit shares, but what does this mean for consumers in the country?
Let’s introduce a factor that measures how fast profit margins are growing as compared to purchasing powers (or the profit margin growth-to-purchasing power growth ratio). The chart below shows that Taiwan’s ratio has often been the highest since 1997, with profit margin growing much faster than purchasing power.
Meanwhile, in South Korea and Eastern European countries, the ratio has often been declining. Their purchasing power tends to be growing much more rapidly than profit margin — which is still growing fast, just not faster than purchasing power.
Taiwan has long maintained a high ratio, which means either that its wages (and purchasing power) are growing too slowly, or that its consumer prices (and profit margins) are growing too quickly. To know which one it is, we look further below.
Based on data from 1997, countries with a lower profit margin growth-to-purchasing power growth ratio tend to have lower GDP per capita.
This holds true in 2011:
In both charts above, Taiwan stands out as an anomaly. But did high profit margin translate into economic growth?
It doesn’t seem to be the case. The chart below shows that countries with a lower ratio — meaning their purchasing power is growing faster than profit margin — tend to experience higher GDP growths. The top priority for these countries is a higher purchasing power (which could be achieved by lifting the minimum wage) for their citizens to catch up with the cost of living.
Again, Taiwan turns out to be an outlier (red dot).
In the previous article, I explained that Taiwan’s economy didn’t recover from the 1997 Asian financial crisis and hasn’t been growing as other advanced countries at a similar stage of economic development Following the crisis, the government wasn’t active in raising the minimum wage, which could have been about NT$50,000 per month if grown at pre-1997 levels (It’d be just NT$26,400 in 2023).
Taiwan’s low profit margin growth-to-purchasing power growth ratio is a result of slow growth in the minimum wage and purchasing power. In reality, The current position on the chart reflects both weak profit and wage growth.
A fast growth in consumer prices (and profit margins) couldn’t explain Taiwan’s high ratio. Profit margins for businesses are limited if purchasing power, which expands consumer demand, doesn’t increase fast enough. Only a small percentage of consumers could afford the more expensive products that would bring businesses higher profits.
In other words, Taiwan’s high profit margin and profit share are illusory. The growth in profits is a contribution of a small group of consumers, and profits take up a larger proportion of the GDP because the GDP is low.
Using the profit margin growth-to-purchasing power growth ratio as a benchmark and charting it against GDP growth, we can see where Taiwan should be on the chart based on its current level of economic development and how lopsided the economy has become.
Based on data since 1997, countries increasing the minimum wage at a higher rate tend to have higher consumer demand and household consumption expenditures, and thereby profits and GDP growths. Taiwan, growing the minimum wage at the lowest rate,, saw the slowest growth in household consumption expenditure, profits, and economic growth.
Taiwan’s low-cost approach has resulted in a sluggish economy. If wages increased faster, businesses would earn more profits than they could today.
The following two charts explain how inadequate Taiwan’s minimum wage is:
Countries tend to increase the minimum wage more rapidly so that wages catch up with the cost of living as soon as possible. Once they do so, purchasing power increases accordingly.
In the chart below, Taiwan again stands out as an anomaly. Purchasing power barely grew as the minimum wage remained one of the lowest and most inadequate among advanced countries.
In the chart below, Taiwan falls far away from the trendline again. Given the low minimum wage, Taiwan’s profit margin growth-to-purchasing power growth ratio should be much lower. This indicates that the minimum wage is increasing too slowly.
While some policymakers believe the opposite, Taiwan’s high profit share indicates that the economy is growing too slowly. The overrepresentation of profits in the GDP signals that the economy isn’t expanding fast enough.
Taiwan’s wages are too low to support higher consumer demand, and the growing consumer prices also further constrains consumer spending, leading to the economy being stuck in a vicious cycle, where its wages, profits and the economy have all stagnated together.
Taiwan’s saving grace right now is that higher exports are helping to boost GDP figures, but this is unsustainable. As long as the vicious cycle isn't broken, the economy will continue to be stagnant.
As it is, Taiwan’s businesses are taking an increasingly larger slice from a small economic pie. But the government should have plans to expand the economy as a whole, which enables both workers and businesses to benefit together from a bigger economic pie.
Taiwan needs to follow in the example of other emerging economies like South Korea by pursuing a model of increasing wages more rapidly in order to push up consumer demand and household consumption expenditure to a more optimal level, and thereby enable profits and economy to reach their highest potential.
In the next part of this article, we’ll compare Taiwan with other emerging economies with similar growths in profit margins to demonstrate how far its minimum wage and purchasing power could potentially have achieved.
READ NEXT: Taiwan’s Economic Slowdown (Part 1): Taiwan’s Wages Are Growing Too Slowly to Allow Profits Grow
TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)
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