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On minimum wage.

ySTANBUL (CyHAN)- The hottest debate in the Turkish economy currently is about the large increase in the minimum wage promised by the Justice and Development Party (AKP) in the last electoral campaign.

The AKP government is getting ready to increase the minimum wage by 30 percent in January. This rather unexpected promise was made under pressure in response to the opposition parties who had promised even more before the June 7 election. When the AKP lost that election, it decided to reintroduce the promise and among other policy changes -- in particular calling off the settlement process with the Kurdish movement -- it was obliged to make extensive economic promises, a sizable increase of the minimum wage being the most important one.

The net minimum wage is actually TL 1,000 ($350) but its cost to firms is close to TL 1,700 ($600) since income tax as well as all social premiums are paid by the employer. Let us note the relevant wage is the net one because of this particular setting. According to the president of the ystanbul Chamber of Commerce (yTO), this huge increase in the minimum wage will cost firms TL 16 billion ($5.6 billion or approximately 1 percent of the gross domestic product [GDP]). Now, the extra labor cost will be much higher. Indeed, since a large part of wages are concentrated just over the minimum wage, market mechanisms will push these wages up. So, within months average wages will unavoidably increase, around 20 percent probably, provoking a real wage shock in the economy.

It is well known that hundreds of thousands of small and medium-sized enterprises (SMEs) have mediocre productivity levels and most of them are having difficulties remaining afloat. The consequences of a sudden and high wage shock at a firm-wide level are straightforward: a number of them will fold up or try to partly absorb the shock by increasing informal employment, as evidenced by a number of studies on minimum wage effects in developing countries. In Turkey, one fifth of wage earners are not registered with the Social Security Institution (SGK) and the underreporting of wages for formal employees is also quite widespread. Or, as pointed out to Reuters by ystanbul Association of Exporters President Hikmet Tanryverdi, many export companies will leave Turkey and set up their production centers in neighboring countries like Romania, Bulgaria and Egypt where labor costs are much lower.

Employers who offered no objections to this minimum wage increase during the electoral campaign, probably because of the possible furious reaction by the president, are now complaining openly. They argue that to avoid catastrophic consequences the state should intervene by taking on the financial burden of the increase, or at least the extra tax and premiums. Until recently some AKP economic ministers like Finance Minister Mehmet E[currency]imE-ek have insisted the costs of the minimum wage increase are the problem of the private sector, all the more since employers did not object to this pledge made by opposition parties in the successive electoral campaigns. This interpretation is of course completely unfair and might be considered rather as a reproach to the silence of business community. However, the real worry of Ali Babacan and E[currency]imE-ek about public subsidies obviously concerns the fiscal discipline that they defended inch-by-inch all the time.

Here the AKP government faces a dilemma for sure. Not providing subsidies to private firms, particularly those having low labor productivity, will certainly cause big supply side problems regarding economic growth. On the other hand, if sizable financial support is given, the budget deficit will significantly increase. This might be a real headache, all the more since other economic promises will already dig into the budget deficit, whose small size constitutes a unique anchor for the economy. The latest statement on this dilemma came from Economy Minister Nihat Zeybekci, who declared that the Treasury may compensate part of the cost in question. Before I end, it is worth adding that the wage shock will also have other adverse side effects. A boom will occur in domestic demand that will enlarge the existing high current account deficit (CAD) close to 6 percent of the GDP while the rise of production costs will push up inflation, which has already evolved as high as 8 percent. Joy may prevail among low-wage workers but this happiness may be a short lasting one.

SEYFETTyN GE[pounds sterling]RSEL (Cihan/Today's Zaman) CyHAN

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Publication:Cihan News Agency (CNA)
Date:Nov 14, 2015
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