This year, the most important task facing President Tsai Ing-wen’s (蔡英文) administration is to comprehensively tackle the problem of low salaries — in particular among younger people.
The government has said that it aspires to achieve a minimum monthly salary of NT$30,000.
The Tsai administration could incentivize businesses to raise salaries by introducing pay structures that benefit the younger generation. This could be achieved through subsidies, or, when companies tender for government projects, by adjusting the scoring system to factor in the amount they pay their employees.
Although calling for government incentives appears to be a relatively clear-cut solution, such measures might confuse cause and effect, or even achieve the opposite effect as a result of overreaching in an attempt to come up with a clever solution. Here are the reasons:
From a macro-economic perspective, using subsidies and other administrative incentives to drive up salaries will cause two things to happen.
First, it will push up wage costs for businesses and lead to rising prices, which will drag down consumption and export growth. This will result in decreased demand for labor — the employment rate will fall — and slow GDP growth.
Second, as prices increase, a fixed nominal money supply means that the real money supply will decrease, interest rates will rise, investment will dry up and the employment rate as well as GDP will fall.
This will mean that workers’ real salaries do not improve and we will be back where we started — or perhaps in an even worse position. If the government were then to cancel its administrative measures, the problem of low salaries would become even more acute.
Following the above scenario, one can see that it is imperative that the government do all it can to create an optimal environment for investment by putting measures in place that encourage large sums of idle capital — dumb money or a bad position — to be channeled into investment within the real economy to stimulate economic growth.
That way, the government would be able to keep the employment rate and salary increases on the right track.
At present, commentators, high-level government officials and even politicians are loudly calling for more inflation as a way to shore up wages and economic growth, which is akin to using inflation to shore up the economy.
However, such arguments are misleading and their proponents are unintentionally misinforming the public.
In 2009, oil and electricity prices soared, heaping further pressure on Taiwan’s economy, which was already teetering on the brink of recession. This example should serve as a warning to those who advocate higher inflation.
Salary levels are determined by labor supply and labor demand. However, salary levels are the effect and not the cause of these two factors. Furthermore, in each industry — and even at individual companies — the cause and effect relationship will be slightly different; it is therefore difficult for a government to handles these through administrative measures.
Although the labor market is regulated through law and thus does not function like a genuine free market, it is still capable of performing the basic market function of determining salaries, as is true in the rest of the world.
Although the economy is displaying signs of recovery, the unemployment rate remains high, which shows that the country has not yet reached a state of full employment. The oversupply of labor is why salaries continue to remain stagnant.
Since 2000, for 17 years, wages in the real economy have been in decline. This has created the abnormal situation where everyone has to work harder and harder just to make ends meet.
According to government data, last year, a total of 8.985 million Taiwanese were in employment; an increase of 79,000 or 0.89 percent on the 2016 figure. This demonstrates that job creation as a result of the present economic recovery is fairly limited.
Further, last year, 395,000 Taiwanese earned a monthly salary of less than NT$20,000, while 2.656 million Taiwanese earned less than NT$30,000 per month. Added together, these two groups make up 33.96 percent of Taiwan’s overall workforce. Although the figure has been reduced by 219,000, there is still a long way to go before the poverty problem is solved.
The number of Taiwanese earning more than NT$30,000 per month has risen by 298,000, an increase of 3.4 percent. When taken together with the 6.7 percent reduction in sub-NT$30,000 salaries, one can see clear signs of progress.
The government has not yet properly explained the basis behind its aspiration to achieve a minimum monthly salary of NT$30,000.
The latest government data show that last year, nominal GDP per capita was NT$739,000, while wage compensation — the share of labor compensation in GDP — was 43.8 percent. Dividing the product of these by 12 months gives us NT$26,974.
In the late 1980s and first half of the 1990s, wage compensation was 50 percent of GDP, which last year would have been NT$30,792 per month per capita. That amount would probably be acceptable for low-income earners.
The only shortcoming here is that the minimum cost of living differs between the special municipalities, cities and counties, so it would not be appropriate to apply the same low salary standard to low-income families across Taiwan.
The main reasons for Taiwan’s low wages are as follows:
First, corporate structure. There are 1,410,000 small and medium-sized enterprises, which make up 97.2 percent of all businesses, while 41,000 big businesses make up the remaining 2.8 percent. The former employ 8,811,000 people, or 78.2 percent, while the latter employ 2,456,000 people, or 21.8 percent.
Small and medium-sized businesses are mainly operated to provide a living, and this is particularly true for small businesses. The monthly wages they offer are necessarily lower and their employees make up the working poor.
Big businesses — especially big corporations — enjoy tax exemptions and preferential water and electricity fees, and the cost of pollution is not fully reflected in their cost of business. They make big profits and their employees get a bigger share of the profits, making up the medium to high-income earners and even the wealthy.
While wage compensation as a part of GDP has dropped from 50 percent in the first half of the 1990s to 43.8 percent in 2016, the operating surplus, or return on capital, has increased from 29 percent to 35 percent during the same period, further widening the wealth gap.
Second, labor factors. The technical knowledge among employees resulting from their education and experience varies greatly with the result that wages have become polarized.
Those with lower technical skills make up the majority of employees and so their salaries are low. Those with more advanced degrees often go abroad to further their education, while it is becoming increasingly common to see students from less advanced schools in simpler jobs or even working in non-standard forms of employment.
Third, business model. Taiwan’s economy is export-driven, but most of the big exporters are low-profit assembly or original equipment manufacturing companies. The annual turnover of these companies is normally quite large, but the low profits mean that employees get a smaller share. In other words, there are also low-income earners at large businesses.
These companies do not invest sufficiently in innovation and branding, and they lack key technologies, which means that they lack the capability to manufacture key components. As a result, the export content of each exported unit is quite high and there is little opportunity for product differentiation, which means that there is little difference between them and competitors in other countries.
Because they lack a competitive advantage, their prices are determined by external factors, as the importer can determine the price. Exporting materials and components is sensitive to exogenous factors, as the lack of a competitive advantage means that overseas suppliers can set prices.
The result is that the terms of trade deteriorate and real national income — or economic well-being — dissipates together with the enormous annual value of foreign trade, making it difficult to raise monthly wages.
In summary, if the government wants to avoid achieving the opposite result and creating chaos in the market, it should not raise wages through administrative means, such as subsidies or adjusting the scoring system in government tenders.
To solve the low-wage problem, the government should look at the current situation, trace its causes and come up with effective countermeasures.
Chang Wen-po is a retired department director at the Economic Development Council and a former professor at National Taiwan University.
Translated by Edward Jones and Perry Svensson
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