What’s Holding Down Salaries in Taiwan?

The slow rate of economic growth is considered to be the major factor causing the stagnation in compensation levels.

Why does nearly everyone in Taiwan feel they are working hard but still receiving a meager pay packet?

“The biggest problem is the low rate of growth,” says Peng Su-ling, director of the Center for Economic Forecasting at the Chung-hua Institution for Economic Research (CIER). Other factors include the impact of global competition, the proximity of the enormous China market, and a union movement that is weak even by regional standards.

Economic growth has been lackluster in recent years compared with Taiwan’s rip-roaring economic glory days several decades ago that propelled it into the ranks of Asia’s Four Tigers. Four decades ago, Taiwan was a world leader in the manufacture of a whole range of products, from umbrellas and furniture to the downstream assembly of personal computers. But after other countries played catch-up, now only Taiwan’s upstream electronics companies constitute a sector that is competitive internationally (although some individual Taiwanese companies in other areas are outstanding world players).

As a result, GDP growth stood at just 1.5% in 2016 before international demand for Apple products containing local components pushed it up to an estimated 2.86% last year. The Directorate General of Budget, Accounting and Statistics (DGBAS) is forecasting 2.42% for 2018.

Several interviewees blame the slow growth and consequent low salaries on Taiwanese companies’ being too reliant on the original equipment manufacturing (OEM) and original design manufacturing (ODM) economic models that involve accepting orders from branded Western and Japanese companies, performing upstream manufacturing, and then outsourcing downstream assembly to other countries. The result is low profit margins and a cost-cutting mindset in employers, who are reluctant to invest in human capital through salary increases, says May Wei, leader of the Talent and Rewards, Taiwan department with Willis Towers Watson, a global advisory firm.

Most economists agree that Taiwan has not adequately responded to this global competition by upgrading its industries or creating other means of value-adding such as branding that could lead to higher professional salaries. “Simply speaking, we have no new industries,” says Chiou Jiunn-rong, Deputy Minister of the government’s National Development Council (NDC).

Another complication, notes Chao Wen-heng, associate research fellow with the Taiwan Institute of Economic Research (TIER), is evidence that salary growth in Taiwan over the past 15 years has been decoupled from workers’ productivity. Theoretically, he notes, if employees are more productive and contribute more to a company’s gross profits per hour of work, then their salaries should increase as a result.

Before 2001, that was true of Taiwan. From 1991 to 2001, gross profits generated per hour of work expanded 66% and salaries on average rose 56%. But afterwards, while productivity using this measure grew 69% overall from 2001 to 2016,  salaries on average grew a mere 16%, indicating that profits have increasingly tended to stay in the hands of company owners rather than be shared with workers.

For example, Chao notes, service industries on average grew 33% from 2001 to 2015 in terms of gross profits generated per hour, but salaries in this sector rose only 11% (even decreasing by around 4.1% once inflation was factored in). As over half of Taiwan’s workforce is in the service sector, the overall calculation of average salaries is pushed downwards. Meanwhile, manufacturing productivity grew 128% but salaries increased by only 22%, or roughly 5.1% after adjustment for inflation.

Professionals working in Taiwan’s internationally competitive electronics components manufacturing industry are the most productive in Taiwan, Chao’s study finds. This industry, which employs over half a million people, accounting for around 22% of all manufacturing employment, saw gross profits generated per hour leap 359% from 2001 to 2015, accompanied by a mere 50% increase in pay. Although 50% salary growth may seem quite high for Taiwan, when the sector’s enormous profits are considered, these professionals proportionally are compensated even less than service workers for the value they add to their companies.

As salaries in the electronic components sector are significantly higher than in other industries, employers may think they are justified in not awarding substantial pay raises to these professionals, Chao notes. Thus the over-concentration of profits in a few industries has an impact in suppressing overall salary levels. Chao calls for more balanced economic development as the solution.

The role of SMEs

Another factor is that Taiwan’s economy is dominated by the more than 1.4 million small-and-medium-sized enterprises, which account for over 97% of all companies in Taiwan. In notes provided to Taiwan Business TOPICS, the NDC cites the high correlation in Taiwan between company size and salary. Its studies find that in 2015, the median monthly salary of a listed company was NT$51,000, while for non-listed companies, which tend to be smaller, the figure was NT$33,000. The median monthly salary was less than NT$30,000 for companies with fewer than 10 employees, and over NT$40,000 for those with more than 100 workers.

Smaller companies in Taiwan tend to be family-run, often led by autocratic aging founders who prefer to appoint family members to succeed them – another reason why companies tend to be unwilling to invest in training future executives who are not relatives. “Their management is very local, more like a one-man show,” notes Cindy Chen, the regional head for Taiwan and South Korea for global recruitment company Adecco.

Several interviewees also noted that as global competition makes Taiwanese companies more insecure about their future, they tend to pay a higher proportion of compensation in the form of bonuses compared with counterparts in other countries. Bonuses may vary in size depending on how good the year has been. “Taiwan has the highest variable pay proportion across APEC markets,” says Grace Kuo, Taiwan Data Services Leader with Willis Towers Watson. “For example, variable pay is 10-15% of salaries in Singapore, but in Taiwan it can be 20-25% or even more.” She adds that variable pay as a percentage of salary increases as executives climb up the corporate ladder.

While Taiwanese baseline salaries can appear low, once bonuses and other compensation are factored in, it is clear that Taiwanese companies are often prepared to pay competitive wages for critical talent, Kuo says. TIER’s Chao notes that insecurity about the future also tends to cause Taiwanese companies to increase their retained earnings, rather than distribute profits to employees or shareholders.

The Taiwan media often claims that university graduates get paid a notoriously low monthly starting salary of “NT$22K,” and helping young people find better jobs with higher salaries is a stated priority of President Tsai Ing-wen’s administration. But Kuo says her company’s surveys reveal that new university graduates receive salaries of US$1,200 (almost NT$35,000) on average.

Entry level pay for Taiwanese graduates is higher than in China, she notes. It’s also competitive regionally. “The more serious problem happens at the executive level,” Kuo adds. Taiwanese executive compensation is not competitive with neighboring countries, she says. Even when bonuses are factored in, both mid-level and high-level executive remuneration is generally higher in China.

A study from Willis Towers Watson tracking over 500 companies in the Taiwanese market found average salary increases to be in the 3-4% range over the past 15 years, whereas in 1996 the figure was as high as 8%. In China last year, salaries correspondingly increased by a rate of 7%.

Low wages in Taiwan used to be blamed on the hollowing out of the manufacturing sector as companies rushed to set up shop in China where labor costs were much cheaper. Now, even though pay scales in China are often higher than in Taiwan, especially in coastal China, the mainland is still attracting investment due to the favorable business opportunities.

Decisions to invest in China are often made for reasons unrelated to salaries; for example, car companies focus on the masses of potential customers and logistics companies wish to set up shop near manufacturing operations. In addition, ambitious professionals are attracted to work in China not just by high pay, but also by the career opportunities offered. Adecco’s Chen notes that if a sales executive manages 15-20 people in Taiwan, it is considered to be large-scope, whereas in China professionals in their early thirties could be managing 1,000 or 2,000 people.

By 2015, as a result, an estimated 720,000 of Taiwan’s roughly 10 million-strong workforce was working overseas, most of them in China. Peng notes that these Taiwanese expatriates are mostly middle and upper class, and their absence in Taiwan affects consumption and related businesses. One of the negative side-effects of globalization is that while many white-collar professionals can follow influxes of capital into labor-intensive markets and move offshore, blue-collar labor cannot relocate so easily, exacerbating the wage stagnation.

William Farrell, Greater China Director for executive search firm Boyden, suggests that China’s increasing internationalization may be a factor in keeping down salaries for Taiwanese executives, since they are no longer so sought-after to work in the Chinese market. He notes that 10-15 years ago foreign multinationals used to cultivate their Taiwanese talent in areas such as ICT and finance with an eye to transfering them to China. “That is the exception now, not the rule,” Farrell says, as China now has considerably more talent of its own and is also more adept at recruiting foreign professionals.

Taiwan’s economic marginalization in the region is also leading to declining levels of investment, which means shrinking job opportunities. Last year, total investment stood at around 20.9% of GDP, compared to around 30% before 2007, Chiou says.

Adecco’s Chen notes that with fewer international companies investing in Taiwan, English-language abilities among young graduates are “worse than 10 or 15 years ago.” As a result of the declining English capability, she says, Taiwanese often lose out on job opportunities overseas (especially in software and other technology-related areas), and are forced to take on more routine and less creative work at home.

Several interviewees noted that Taiwan’s university system is turning out graduates who are too homogeneous and academic, making employers reluctant to award them high compensation when they lack needed technical skills. Technical institutes and junior colleges that once made a distinct contribution to Taiwan’s economic development by teaching practical industry-related subjects were allowed to upgrade to the status of a university a few decades ago, becoming more academic in orientation and less in touch with industry.

There are now 126 universities in Taiwan, and the number of their graduates and post-graduates seeking employment each year is almost double the level of 20 years ago, according to the NDC. Still, employers frequently complain that they can’t find the right person to fill a vacancy, while job-seekers complain they are not being offered enough after all their hard study. Kuo of Willis Towers Watson says that in recent years companies increasingly have been looking for highly specialized talent, such as support staff for artificial intelligence labs, but Taiwan’s educational system is not meeting the demand for these kinds of skills.

NDC’s Chiou reports that the Ministry of Education is seeking to encourage some public universities to return to their original status as vocational colleges. But private institutions have strongly resisted this course of action, fearing they will lose competitiveness.

Chiou adds that it should ultimately be up to employers to provide employees with needed training, and the government should not have to take on the burden. Cost-conscious Taiwanese companies tend to be unwilling to spend that money.

New business models

Meanwhile, new disruptive business models and automation are also pushing salaries downwards, particularly in the service sector, where low-skilled, low-paying jobs are becoming more and more prevalent. Giving Uber as an example, TIER’s Chao says the internet-based ride-sharing company employs large numbers of low-paid workers but its profits are derived from the innovation of the business model itself; while labor is needed, it makes little contribution to the value creation and is easily replaceable. The situation is similar with convenience stores, he says (although they are not new disruptors, having had  a long presence in Taiwan).

Employers increasingly regard the hiring of full-time employees as too expensive and prefer to hire part-timers and temps, who now represent 7.11% of the workforce, according to the NDC. While workers consider that their salaries have remained flat, employers view labor costs as rising because of legally required non-salary remuneration including labor insurance, pensions, and contributions to health insurance. Major reforms, such as the New Labor Pension System introduced in 2005, have increased costs. In 2016 these costs made up 14% of all compensation, up 1.6 percentage point from 2001, the NDC says.

Some economists argue that the presence of migrant labor is also pressing down salaries for blue collar workers. Chao notes in an article that in 2001 the number of foreign workers in Taiwan stood at 304,000, but this figure doubled to 625,000 in 2016. The NDC says foreign workers comprise 8.4% of the labor market.

According to the NDC’s Chiou, there has been discussion within government – so far without a clear conclusion – about introducing restrictions on foreign labor, as Singapore did in 2009. While some officials contend that this step would be helpful in pushing up blue collar salaries, others argue that it could impede national development. If wages are pushed high enough, says Chiou, Taiwanese workers, including the better educated, may be willing to take on repetitive jobs. He points to the example of bus drivers, who earn NT$60,000 to NT$70,000 per month although they work long shifts.

Unions in Taiwan tend to be rather weak, in part because of the presence of so many SMEs, leaving workers with little bargaining power when negotiating for a greater share of company profits. The NDC puts Taiwan’s union membership rate at 7.3% of employees, lower than Singapore’s 19.7%, Japan’s 17.3%, and Korea’s 10.2%. Taiwan’s unionization rate has decreased from 14.6% in 2010 due to the increased numbers of temps and part timers.

In response to Taiwan’s salary stagnation, says Chiou, the government is implementing both “push” and “pull” policies. One “push” policy has been raising the minimum wage, which has been hiked twice since President Tsai took office – from an original NT$20,008 monthly to NT$22,000, rising 10% overall. The minimum hourly pay has been raised  three times from NT$129 to NT$140, rising 16.67%.

The NDC says that over 1.66 million workers will benefit from the latest increase in the monthly minimum wage and a further 390,000-plus will benefit from the increase in the hourly minimum, stimulating consumer spending. Chiou says the Council’s studies have found that around 30% of companies are responding to the minimum wage increase by considering or implementing pay raises.

Further periodic adjustments in the minimum wage are expected. Vice Premier Shih Jun-ji was quoted by the official Central News Agency as stating that the minimum wage may rise to NT$30,000 per month in four to six years, with increases of 6% annually, provided there is continuous economic growth.

But TIER’s Chao says the raises so far have been too small to have much impact, while CIER’s Peng expresses concern that too high a minimum level could increase unemployment or cause employers to cut back working hours in the face of higher personnel costs. Peng notes that such measures need to be accompanied by strong economic growth.

At this point, it is too early to say if the 3% pay raise for civil servants, teachers and military personnel approved by the legislature early this year will have an impact on private-sector salary levels, Chiou says.

Another approach being mulled by both officials and economists is rewarding businesses that raise salaries with tax incentives, as Japan has been doing. It recently slashed the corporate tax rate from 30% to 20%, Reuters reported, but only for companies that raise wages aggressively and boost domestic capital spending.

Meanwhile the government’s “pull” policy is to seek ways to increase investment, in part by reducing land shortages and ensuring a stable water and power supply. It also wants to help develop new and innovative value-added industries that create higher-paying jobs, such as those earmarked for promotion in the “5+2” program, including biotech, the Internet of Things, and green energy.

Kuo and Wei of Willis Towers Watson say the government is moving in the right direction, but add that the process could be accelerated. At the same time, the increasing unavailability of certain talent domestically may spur Taiwanese multinational companies to recruit more talent from abroad, says Boyden’s Farrell. He notes that some Taiwanese international players, such as local chemical manufacturers, are no longer limiting their talent searches to Taiwan.