When Seoul Forum for International Affairs director Jung Ku-hyun recently visited Taiwan, he had one big question: Why is the average starting salary of South Korean university graduates 2.6 times higher than that of Taiwanese graduates? We spent more than an hour together discussing the main causes of this strange situation.
Two decades ago, the average starting salary for South Korean university graduates was roughly the same as that of their Taiwanese counterparts.
Now, however, South Korea’s average starting salary is much higher than Taiwan’s because wage growth in South Korea has kept up with economic growth, while salaries in Taiwan have remained pretty much what they were two decades ago.
During these two decades, South Korea’s price indices have grown more quickly than in Taiwan, and as a result, the real purchasing power in South Korea is not as high as Taiwan’s.
For example, if one looks at last year, US$100 in Taiwan could buy as much as US$136 in South Korea. If pay in Taiwan was only 30 percent lower than in South Korea, there would be almost no difference in terms of real purchasing power between the two countries.
However, one can conclude from this that the difference in purchasing power is not sufficient to explain the huge gap between Taiwanese and South Korean graduate starting salaries.
We also excluded two other possible reasons for the wage gap during our conversation. First, the difference in pay between the two countries is not the result of South Korean university students being better than Taiwanese ones, as Taiwan does not lag behind South Korea in terms of international measures for quality.
Second, the difference is also not a result of imbalances in the job market for university graduates. South Korea has one of the world’s highest university attendance rates and its graduates face just as much pressure as Taiwanese graduates do when it comes to securing employment.
One popular explanation is that there are differences in South Korea’s and Taiwan’s international competitiveness: The problem with low salaries in Taiwan is linked to the competitiveness of its businesses in the global supply chain.
Taiwanese exporters have chosen to adopt original equipment manufacturing to fight for minuscule profits. This means that they must constantly chase increases in output efficiency and try to cut costs.
This is different from the strategies of South Korean companies, which emphasize research and development, brand building, increasing differentiation and improving the technology in their products. This is also why South Korean companies are capable of absorbing increases in the cost of labor, and is, without a doubt, a key factor.
However, both Jung and I believe that we have to take the factor of bargaining between employees and employers into consideration to explain the huge differences in pay between the two countries. The reasons for this are as follows:
First, in South Korea, only a minority of conglomerates enjoy the market advantages caused by differentiation, while there are also many companies that are not very competitive in international markets, especially in the service sector. These companies make up the biggest part of the labor market, but they also have to pay their employees more than double Taiwanese salaries.
On the other hand, Taiwan also has many small and medium-sized enterprises that possess skills that are important globally and that allow them to occupy key positions in the global supply chain.
This has made them so-called “hidden champions.” However, these hidden champions do not need to pay their employees the same as South Korean workers.
Second, if big South Korean conglomerates such as Hyundai Motor Co, Samsung and POSCO had the chance to continue to decrease pay like Taiwan’s hidden champions, they would also freeze salaries, allow the price of their company’s shares to increase, increase stockholder dividends and give out higher bonuses to their managerial staff.
The key point is that these South Korean conglomerates do not have this option.
On the other hand, Taiwanese capitalists always win out against their employees: First, they generally do not have to face strong labor unions since the unions that did possess strong collective bargaining power collapsed following the privatization of Taiwan’s state-owned enterprises.
Second, Taiwanese capitalists generally have the option of moving their operations to China, which allows them to use cheap Chinese labor as leverage to force local workers into accepting pay freezes. It also helps them put pressure on the government not to increase the basic wage.
A comparison between South Korea and Taiwan shows that well-known South Korean conglomerates such as Hyundai Motor, Samsung and POSCO do not have the option of moving large parts of their operations to China, but South Korea’s labor unions can rely on strikes and collective bargaining mechanisms to force these conglomerates into increasing pay with earnings.
Such pay increases cause other large businesses and governmental departments to follow in their footsteps. This then spreads to other parts of the economy, which has had the effect of spurring continual growth in South Korean pay levels.
In the end, Jung and I came to the conclusion that since there is not much the Taiwanese government can do to close the salary gap, it will be difficult to stem the trend of highly-skilled workers leaving Taiwan.
Second, the average future Taiwanese wage level will be decided by the pace of wage increases in China’s coastal regions — Taiwanese workers will have to wait until salary levels in China’s more developed parts catch up to Taiwan’s salary levels before they will be given an opportunity to push for salary increases.
Before this happens, the fruits of Taiwan’s economic growth will be split between business leaders and their stockholders, senior management and landowners.
After hearing me explain that Taiwan’s corporate income tax rate is only 17 percent and that the real tax rate is less than 12 percent, that business leaders do not have to pay capital gains tax when the value of their shares go up, that rich people with lots of real estate only have to pay a symbolic land value increment tax and that government revenue here mainly comes from individual income tax paid by income earners, Jung could not help but exclaim: “Taiwan really is a capitalist’s paradise!”
Chu Yun-han is a professor of political science at National Taiwan University.
Translated by Drew Cameron