Who is right about Turkey’s minimum wage?

The Justice and Development Party (AKP) government has set Turkey’s monthly minimum wage at 1,603 liras for 2018, an increase of about 14 percent but almost flat in dollar terms at $382 per month.

The announcement comes at a time when the Turkish economy is already struggling and elections are on the horizon. The yearly hike does exceed the country’s inflation rate of 13 percent but still does not mean the working population is any better off. 

Had it not been for President Recep Tayyip Erdoğan’s comments harshly criticizing Turkey’s minimum wage earners for being “ungrateful”, the numbers would probably not have attracted much attention. Following up the president’s comments with an almost mocking attitude, Deputy Prime Minister Hakan Çavuşoğlu said a person earning the minimum wage could now buy a brand new 1400cc car if he were to put aside 42 months of his salary. That figure stood at 90 months when the AKP came to power in 2002, he added.  

Let us now have a closer look at the evolution of the minimum wage in Turkey over the course of the AKP government and compare it with developments in inflation, the realities of the country and in the global context.

A healthy comparison would of course start with comparing the accumulated minimum wage increases over the years with the accumulated inflation number for the same period. Thus, taking 2003 as the base, which is the year that followed AKP’s election, we should compare earnings with a selection of inflation indices. These should include, of course, headline consumer price inflation (CPI), food inflation, with a weight in the overall CPI index of between 21 percent and 29 percent over the past 14 years, rent inflation, which accounts for 15-17 percent of CPI, then clothing (8 percent), education (2.7 percent), health (2.6 percent) and transportation (16 percent).   

The results are stunning, proving clearly that the AKP government has indeed prioritized Turkey’s minimum wage earners over the whole course of its 15-year reign. More specifically, the minimum wage increased in tandem with headline inflation during 2003-2012 and then accelerated rapidly thereafter, especially during 2015-2017.

These two distinct periods match the two eras of AKP’s economic management style – namely prioritizing lower inflation during 2002-2012 and higher growth in 2012-2017, at the cost of higher inflation.

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Figure 1: Turkey’s Net Minimum Wage vs Inflation (Source: TURKSTAT)

Let’s speak a little more in terms of figures.

Taking 2003 as the base year, between 2003 and 2018 the index of Turkey’s net minimum wage rose to 709 from 100. That compares very favourably with the index of headline CPI inflation of 357, food price inflation of 411, rent inflation of 472, health cost inflation of 278, transportation price inflation of 349, education price inflation of 352 and clothing price inflation of 242.

In U.S. dollar terms, the net minimum wage of $150 back in 2003 increased to $405 up to the point where the U.S. Federal Reserve announced its plans to reverse monetary policy. When the lira began depreciating after 2013, a period in which inflation remained stubbornly high, Turkey’s minimum wage eased back to around $380, still relatively robust due to two large adjustments in 2015 and 2017.

The results, as shown in from Figure 1 above, prove that the government did what it could to support Turkey’s lower income groups. Such a policy stance has served it in two ways -- it helped stimulate economic growth, so long as interest rates remained comparatively low and, perhaps more importantly, it kept the AKP voter base intact during a stormy period in domestic politics.    

But, of course this is not the whole story.

The Confederation of Turkey’s Trade Unions (TURK-IS) is the publisher of hunger and poverty thresholds for Turkey, a reliable indicator for economists to follow. Its “limit of hunger” calculation, defined as “monthly food expenditure of a family of four required to ensure healthy, balanced and sufficient nutrition” has increased to 1,608 liras as of December 2017. Considering that the minimum wage is now 1,603 liras for 2018, the insufficiency of the payment speaks for itself.

According to TURK-IS’s data on the “limit of poverty”, which includes compulsory expenditure including clothing, rent, electricity, water and heating in addition to food costs; total costs of 5,238 liras compare very unfavorably for a family where even both parents are earning the minimum wage. 

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Figure 2: Turkey’s Net Minimum Wage vs Hunger and Poverty Limits (Source: Turk-Is)

A comparative analysis is thus required to decide whether minimum wage earners in Turkey are as ungrateful as Erdoğan claims.

An OECD paper on “minimum wages after the crisis” helps us reach a conclusion. As can be seen from the graph below, among 34 countries analysed in terms of after-tax value of hourly minimum wages., in U.S. dollars, Turkey ranks 27th. Australia and Luxembourg lead with wages of over $9 per hour, while Latvia and Mexico rank bottom with wages of under $2 per hour.

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Minimum wages have been employed widely in OECD countries since 1990, and are employed commonly across the globe. In countries such as Turkey, where workers have weak bargaining power given the demise of union power over the past couple of decades, minimum wages, alongside working-hours regulations and related provisions, are vital to protect earnings. As stated in many OECD, ILO and World Bank reports, minimum wage schemes are employed to promote inclusive growth, a hotly debated topic since the 2008 global financial meltdown.

Yet, analysis is still difficult as many governments including Turkey offer other financial support schemes to top up income for the low paid.

Another macroeconomic indicator -- the GINI coefficient -- calculates wealth distribution and inequality. The coefficient ranges from 0 to 1, with 0 representing perfect equality and 1 representing perfect inequality. A GINI coefficient of around 0.40 is by no means impressive; ratings are mainly observed in Nordic countries at around 0.22-0.25.  

Turkey’s GINI coefficient was 0.43 back in 2006 and is now 0.41, meaning that despite strong economic growth both before and after the global crisis, the AKP government has achieved very little in terms of correcting high income inequality between the richest and the poorest sections of society.

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Source: CIA World Factbook

Figures for the absolute minimum wage and Turkey’s comparative minimum wage, combined with the GINI coefficient, show that the AKP has achieved the minimum to support such wage earners over the past 14 years.

Turkey remains weak on a comparative basis when one compares net minimum wage levels with other nations in the G-20 and OECD. When looking at the limited improvement in the GINI coefficient over the past years, it appears that wealth accumulated since the 2008 financial crisis in particular was not shared among the poor to any significant extent.

So, one could conclude that there is indeed some justification for minimum wage earners to feel “ungrateful”, as the president has put it.