Effects of minimum wage increase

So 2016 will start with a wage shock since the jump in minimum wage will also drive up wages close to minimum wage through market mechanisms. As might be expected, the business community, small and medium-sized companies in particular, are more than worried.

Employers have tried to get some subsidies from the national budget, aiming to compensate for at least part of the extra labor cost they will face. However, the assistance demanded by them is not guaranteed at all. The most recent and most powerful official statement on this issue belongs to the president of the republic. Addressing employers, he declared that they “would earn a little less and that’s all.” The problem is that we have no idea about the quantitative effects of a sizable wage shock on the Turkish economy since there was no research conducted on the issue, at least not to my knowledge. In a way, the AKP government is not prepared for a wage shock. It is of course possible to predict the nature and direction of the first wave of effects, as I tried to do two weeks ago in my column “On minimum wage” (Nov. 13). The economic management of the nation should also have made quantitative estimations in order to design some counter measures to compensate for adverse side effects before deciding to take such a critical step. Unfortunately, nothing was published, and the most recent Medium-term Economic Program totally ignores the effects of the imminent wage shock.

The first step is to estimate the average wage increase. Then, considering how much of the national income is made up of salary payments, we may try to compute the various effects of the increase on the main economic indicators. Of course proper work on the subject requires comprehensive wage data as well as economic research on the interferences between wage changes and macroeconomic variables such as consumption and inflation, etc. Comprehensive data are lacking, unfortunately, but given the climate of ignorance, I still had the audacity to make some rough estimations on the expected average wage increase and on gross domestic product (GDP), essentially to satisfy my personal curiosity.

By how much will the average wage rise when the minimum wage increases? We need to look at wage distribution first to answer this question. The micro data from the Households Labor Surveys of 2013 gives approximately the following distribution: One-quarter of wage earners are at or close to minimum wage level. Informal wage earners receiving below minimum wage constitute approximately 10 percent of salaried workers, while those earning more than twice the minimum almost 30 percent. I assumed that wages close to minimum wage would increase on average by 15 percent and those below minimum wage by 25 percent. I also assumed that a knock-on effect would not occur at higher wage levels. According to these assumptions I estimate the average wage increase to be roughly 10 percent.

As for the share of wages in GDP, the Turkish Statistics Institute (TurkStat) has not published this data since 2006. This year, salaries constitute 26 percent of national income, while wage earners constitute 58 percent of total employment. In 2014 the share of wage earners was 66 percent. Given the increase of real wages higher than real GDP, I estimate the current share of wages to be close 40 percent. So, the share of wage payments might be estimated at approximately 4 percent of nominal GDP for 2015.

This is quite a sizable shock, but not so alarming. This income increase will push up private consumption by 2 percent and GDP by 1.5 percent, roughly. Nevertheless, it is worth noting that this positive effect does not take into account the adverse supply-side effects originating from wage increases detached from labor productivity. This fact will certainly shake a number of small and medium-sized companies with mediocre productivity levels. Other adverse effects could also be on the agenda, for example, the high inflation of today will be pushed up further by higher labor costs as well by increasing exchange rates since current account deficits will be widened. To what extent? Sadly, I am unable to make a reliable quantitative estimation on this issue for the moment.

SOURCE: TODAY’S ZAMAN

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