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Turkey: The effects of the minimum wage increase on the economy

The minimum wage in Turkey for 2021 is 2825.90 TRY. The net minimum wage for workers that married and have unemployed spouses is determined as …

Turkey: The effects of the minimum wage increase on the economy
29.12.2020
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The minimum wage in Turkey for 2021 is 2825.90 TRY. The net minimum wage for workers that married and have unemployed spouses is determined as TRY 2,879.57. 2.919,81 TRY for woerkes that married, have unemployed spouse and one child; 2.960.06 TRY for workers that married, have unemployed spouse and with two children; 3.013.72 TRY for workers that married, have unemployed spouse and with three children. The minimum wage increase was realized by 22%.

 

The inflation rate reached 14% year-on-year in November, while TRY depreciated 20% against the USD since the beginning of the year.

 

The effects of the minimum wage increase on the economy should be evaluated from many angles. According to the official inflation rate (assuming that the end of 2020 inflation will approach 15%), it is seen that a 7% welfare share is added to the inflation. So, there is a real income increase of roughly 7%. However, when evaluated for the labor force with minimum wage or the working segment with income close to the minimum wage, the inflation effect felt when we weigh 21% food inflation or expenditure items such as electricity and natural gas price increases, causing the real income increase effect to not be felt as on paper. This reduces the ability of households to cope with the economic difficulties caused by the coronavirus.

 

The effects of the minimum wage on inflation and employment are another aspect of the business. The minimum increase in production affects the economy through both the demand and cost channels. The demand effect of the minimum wage increase in the short term will create a higher breakeven point in consumer prices and we will see price increases accordingly. In particular, the inflationary effect on the basic consumption side may increase. Another effect is the price increase effect that may occur on goods and services produced due to increased labor costs. The net minimum wage, which is 2825.90 TRY, is applied as 3577.50 TRY gross and the state supports 75 TRY minimum wage. Moreover, since the minimum wage increase will be a benchmark for other wages as it is the reference wage increase, and the wages below 2825 TRY will automatically rise above this level, the cost increase does not occur only on the minimum wage employee. Increasing labor costs of businesses are reflected in the price of goods and services sold. Under these circumstances, the minimum wage increase will not create an effect that helps the Central Bank in combating inflation.

 

Its effect on employment also results in a decrease in employment rate and an increase in informal employment. Employers can reduce blue-collar personnel to keep employee costs stable. Since dismissal is prohibited during this period, this would be done in the form of “unpaid leave”. In this practice, the unemployment rate is not affected, but there is a decrease in the employment rate and participation rate. That is, even if there is not a situation reflected in the official unemployment rate due to “TURKSTAT’s definition of unemployed”, an increasing unemployment effect will be seen in real life. Informal employment also increases in small and local businesses.

 

We see that it is not just about increasing the minimum wage. The important thing is to increase the purchasing power of money. It is to increase the number of goods and services that can be requested with a minimum wage. Today, when comparing the minimum wage with developed countries, we compare the same quantity and quality of goods and services that can be purchased with a minimum wage. Or we compare how many minimum wages it costs to own a car or own a house. In summary, the way to improve the economic conditions of individuals is not to increase the minimum wage.

Kaynak Tera Yatırım
Hibya Haber Ajansı

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