Pay Raises rooted in Economic Fundamentals, not Populist Rhetoric
United Daily News editorial (Taipei, Taiwan, ROC)
May 15, 2014
Summary: The film "The American President" included some wonderful dialogue. At
one point, the main character says that politicians usually do not solve
problems. They merely provoke anxiety. Then they blame their opponents
or some third party for that anxiety. The allegation that "Labour did
not receive pay raises because capitalists pocketed all the profits"
recalls a a line in the film. After politicians have provoked anxiety,
capitalists may well leave. Will the Technology Development Program be
distorted? Politicians will shirk responsible for the consequences. If
Taiwan politicians and policy makers only wish to incite populist
sentiment, do not be surprised if low-pay and low-growth on Taiwan
Full Text Below:
Everyone is now concerned about low wages. Some companies have responded to the government's call to raise wages. This inspires optimism. But some radicals have blamed employers, saying that the long term failure to raise wages was the result of "bosses unwilling to share profits with employees." They even demanded that the law be amended to force companies to either raise wages or pay more taxes. Their alternative is to use the Technology Development Program (TDP) as the basis for wage raises. Their views simplistically reduce pay raises to bosses and employees fighting over who will receive the largest slice of the pie. They totally ignore international labor competition. Raising wages is essential. But too much populist rhetoric will do more harm than good.
Let us begin by calling a spade a spade. Let us first understand what the term "salary" means. In a free economy, salaries are determined by the labor market by labor supply and labor demand. Over the past ten years, Taiwan has experienced a low birth rate. There has been no significant increase in the labor supply. Much low-wage work is being performed by low wage foreign labor. As a result, wages have failed to rise. This is due to a lack of demand for specialized, skilled labor.
But why is labor demand by Taiwan manufacturers inadequate? In the final analysis, it has to do with the global competitiveness of Taiwan companies. Not every Taiwan company is as globally competitive as TSMC, MediaTek, Largan, or Giant. These companies have a strong demand for labor, in research, business, accounting, and production. Salaries for workers in these companies will surely increase. But suppose a company fails to innovate and its products lack distinction? Suppose that in a competitive global environment, the local labor force lacks distinction, and can easily be replaced by others? Salaries will decline due to international competition. They may even approach the levels in low-wage economies such as Vietnam, Malaysia, and the Chinese mainland.
The current salary freeze on Taiwan is the result of a long term lack of innovative industries with distinctive products. This has led to a reduced demand for their labor. In other words, most companies that lack distinctive products now face global and transnational labor competition. Salaries on Taiwan have not risen in 15 years. That has everyone worried. But we must understand that it was the result of the functioning of a market economy. Stubbornly blaming entrepreneurs or engaging in populist demagoguery will not help.
Basically globalization has created an external logic that countries must follow. For example, capitalists can set up factories around the world. They can outsource services. This external logic makes it difficult for domestic labor to make demands of capitalists. Governments the world over offer favorable conditions to capitalists to persuade them to set up factories. This external logic forces governments to lower taxes in order to keep them from leaving. In short, the external logic is too powerful and tends to override the internal logic in any given country.
If a populist political climate forces business owners to raise wages, what will the result be? Will domestic populist pressures reverse the consequences of inadequate innovation and International competitiveness? Unfortunately they will not. Under populist pressures, business owners may be able to tolerate a slight raise. But capitalists will never allow such domestic determinants to become the norm. The most important force for businesses is the profit motive. Forcing entrepreneurs to pay dividends and taxes means forcing them to pay 20 to 30 cents on every dollar earned. If governments force capitalists to pay too much in taxes, they will leave. So why wouldn't they leave if governments force them to give employees too large pay raises?
Globalization means that the entire world has become one vast market. The external logic of globalization means that market forces are ubiquitous. In other words, "The world is flat." The most important revelation about market forces, is that lone individuals or small countries cannot defy market forces. The best way tiny entities can cope is to go with the flow. We must go with the flow of market forces. We must adopt countermeasures when the time is right. In particular we create opportunities for innovation and upgrading.
The film "The American President" included some wonderful dialogue. At one point, the main character says that politicians usually do not solve problems. They merely provoke anxiety. Then they blame their opponents or some third party for that anxiety. The allegation that "Labour did not receive pay raises because capitalists pocketed all the profits" recalls a a line in the film. After politicians have provoked anxiety, capitalists may well leave. Will the Technology Development Program be distorted? Politicians will shirk responsible for the consequences. If Taiwan politicians and policy makers only wish to incite populist sentiment, do not be surprised if low-pay and low-growth on Taiwan persist.
2014.05.15 02:04 am