Taiwan’s minimum wage increased in 2022 by its greatest amount in 15 years. Meanwhile, the unemployment rate has also dropped to the lowest it’s been in over two decades.
This may come as a disappointment to the business groups that fearmonger that increasing the minimum wage will lead to rising unemployment. This has not happened. (I don’t expect these groups to announce that they were mistaken any time soon.)
I’d like to go a step further. Not only do minimum wage increases not put people out of work, such increases may in fact lead to better employment rates.
Let’s look at the data in Taiwan.
In January 2022, Taiwan’s unemployment rate declined to 3.61%, the lowest monthly unemployment rate since January 2001.
What is even more impressive is that the decline in unemployment rate came right after the Covid-19 pandemic outbreak Taiwan saw in the spring and summer of 2021. After the outbreak was effectively controlled, the unemployment rate declined very rapidly, from 4.80% in June last year to 3.61% in January this year, as we see in the chart below.
The unemployment rate declined back to the levels just before the pandemic, and then went even lower. In April 2021, before the outbreak occurred, Taiwan’s unemployment rate was 3.64%. After the outbreak was controlled, the unemployment rate returned to the same level by December, and then declined further to 3.61% in January 2022.
In addition, in October last year, it was announced that the minimum wage would increase to NT$25,250 this year, but instead of unemployment rising, the unemployment rate has instead continued to decline.
Under President Tsai Ing-wen, Taiwan’s minimum wage has increased at a faster rate in her six years in office than it had under her two predecessors during their eight years in power. President Tsai has increased the minimum wage by 26.20% thus far, as compared to only 9.09% under President Chen Shui-bian and 15.79% under President Ma Ying-jeou.
The chart below shows more clearly how Taiwan’s minimum wage has grown at a faster rate under Tsai. The minimum wage increase has been steeper under Tsai (green line) than under Chen (orange line) and Ma (blue line).
A small number of business groups fearmonger that increasing the minimum wage will lead to higher unemployment. But Taiwan’s unemployment rate has mostly remained at an even lower level throughout her presidency (represented in the green line in the chart below) than in the terms of her predecessors, despite the greater increases in the minimum wage in Tsai’s term in office.
The charts below make this point easier to understand. When comparing in terms of six-year moving averages, we see that from the mid-1990s to the late-2000s, when the minimum wage increase started to slow down and even stopped increasing (green line), unemployment (purple line) started to increase as well (unemployment rate is charted on an inverted axis to illustrate the inverse relationship). It is only in the last few years, when the minimum wage increases became higher, that the unemployment rate began to decline again.
Evidently, increasing the minimum wage does not lead to higher unemployment.
The rising minimum wage and declining unemployment rate also have positive effects on economic growth.
In the chart below, we see that the years in which the unemployment rate was highest coincide with years which saw the slowest economic growth. (GDP growth is charted on an inverted axis to illustrate the inverse relationship).
In other words, the economy tends to grow faster in years when unemployment declines, and slower when unemployment increases.
So when a small number of business groups fearmonger that increasing the minimum wage will lead to higher unemployment, it’s important to remember that this is not borne out by the historical record.
The data in Taiwan shows that increasing the minimum wage has coincided with reductions in unemployment, and economic growth is also higher in years with lower unemployment.
Increasing the minimum wage is clearly correlated with benefits to the economy, such as reductions in unemployment and higher economic growth.
But how does this work? Let’s explore further.
In the chart below, we see that in the years when the minimum wage is increased by a higher rate, this usually correlates with higher consumer confidence. In years when the minimum wage increases were lower, a decline in consumer confidence tends to follow.
In turn, when there is higher consumer confidence, consumers are also likely to spend more, and private consumption expenditure also tends to be higher. We see a close relationship between the change in consumer confidence and the change in private consumption in the chart below.
Higher private consumption expenditure also means higher economic growth. We see below that there is a close relationship between the change in private consumption and economic growth.
Higher private consumption also means higher profits (operating surpluses) for businesses. In the chart below, we see how closely the change in private consumption and the change in profits follow one another. Slower growth in private consumption expenditure in recent years has likely led to the slower growth in profits.
In the two charts above, we see a marked slowdown in the growth in private consumption expenditure in Taiwan in the last few decades, corresponding with slower economic and profit growth.
When comparing private consumption with minimum wage, we get a better understanding as to why this happens. Below, we see that the slower growth in private consumption has followed the slowdown in the growth in minimum wage. This is especially apparent from the mid-1980s to mid-2000s, when minimum wage growth slowed until it stopped growing, with private consumption following just behind.
In the last few years, with minimum wage being increased at relatively higher rates again, private consumption expenditure has stabilized and the growth slowdown seems to have been arrested (except for a dip in 2020 due to Covid-19).
If the aim of businesses is to increase domestic consumption in order to increase their profits, there is a very strong case for them to support higher minimum wage increases.
Increasing the minimum wage is a smart business decision. As higher wages spur more people to get back into the labor force, workers become more confident about their ability to spend, and in turn spend more to help the economy grow, which helps businesses earn higher profits.
With increased consumption, businesses are able to increase production which in turn increases employment, driving economic growth and boosting profits as well.
Indeed, we see in the chart below a close relationship between consumer confidence and unemployment. When consumer confidence increases, unemployment declines as well (the unemployment rate is charted on an inverted axis to illustrate the inverse relationship).
Increasing the minimum wage serves two functions in relation to unemployment, as the higher wages increase the willingness of workers to reenter the workforce thereby reducing unemployment, and their higher spending power also results in higher consumption and production, which helps generate jobs for more workers.
How can this economic virtuous circle be explained?
Based on analysis conducted by the European Central Bank, increasing labor income pushes up household incomes which in turn promotes private consumption expenditure. Importantly, increasing the minimum wage boosts the incomes of lower-income households, and as their incomes grow, they become more confident about their spending ability, which thereby drives consumption and consumer spending.
The median and average wages in Taiwan tracks closely with that of minimum wage growth. This means that higher minimum wage increases enable wages to rise across the board.
Taiwan’s businesses have long complained about how the government needs to do more to increase domestic private consumption, but it is clear from the illustrations in this article that if businesses do not support wage increases, there is very little else the government can do to help boost consumption. When businesses hold down wage growth, they impede the consumption ability of consumers and hinder the growth of their own businesses.
The charts above tell a compelling story: if an economy has income growth, private consumption will closely follow, leading to the economy growing and higher profits.
So beyond fairness and justice for workers, it makes sense for Taiwan’s businesses to support wage increases. It’s just a question now of whether they will be farsighted enough to see this common benefit of wage increases. It’s up to us to make sure that they do.
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TNL Editor: Nicholas Haggerty (@thenewslensintl)
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