In Turkey it is not just the minimum wage that matters

The Minimum Wage Determination Commission has been working to determine the minimum wage effective in 2022. The current gross and net minimum wages for those over sixteen are 3,577.5 and 2825.9 liras, respectively. [The net amount mounted $383 in January 2021 and is $218 in December 2021 due to the depreciation of the Turkish lira.]

These values ​​have been valid as of the beginning of 2021. The level at which the minimum wage will be set is crucial. In this case, the first question is: How much did the price of the basket of goods consumed by a minimum wage worker hike in one year?

What could the new minimum wage be?

Let us assume that this price increase is close to 30 percent. In 2021, GDP is expected to rise by around 11 percent. Since GDP is the sum of all our incomes, let us think that this increase will be reflected in the minimum wage as a share of welfare. Consequently, the net minimum wage should be at least 4000 liras.

As a share of welfare, I considered that the last year’s growth rate would be reflected precisely to the minimum wage. However, this has not been the case for the past few years. The share that wage earners get from GDP (not only minimum wage earners) has gradually decreased compared to the share capital gets from GDP. Figure 1 shows the wage earners’ income ratio to the last year’s total GDP by quarter. The highest share is in the last quarter of 2016: 32%. In the third quarter of the current year (latest data available), this share dropped to 28%. There is a reduction of four points.

Of course, this is a very rough calculation. For example, it is based on the last year’s minimum wage, and it might be lower than “the level it should have been.” Figure 1 implies that there is no “maybe”; it shows that the share of the wage earners in GDP decreased in that period as well. Another reason why it is a rough calculation is that labor unions have “poverty line” calculations, and this simple calculation does not take that into account either. In addition, this is not my area of ​​expertise, so this is a “rough” calculation.

Purchasing power

There is another issue that is as vital as the minimum wage level. How will the purchasing power of the minimum wage change during the year? When inflation is high, the purchasing power of the wage set at the start of the year unfortunately gradually erodes over the months.

Figure 2 shows the course of the net minimum wage adjusted for inflation (real wage) for January 2020 – November 2021. Months take place on the horizontal axis, and I took the real net minimum wage of January 2018 as 100. Therefore, the vertical axis shows the monthly real minimum wage values ​​for 2020 and 2021 when the real minimum wage for January 2018 is 100. Let me show a few noteworthy points.

Meltdown in purchasing power during the year

First, the purchasing power of the minimum wage declines significantly during the year. For example, the purchasing power in November 2021 is 15.1% lower than the value at the beginning of the year. Moreover, this calculation takes consumer inflation into account. However, the minimum wage worker does not use some goods in the consumer goods basket. For instance, the minimum wage earner neither buys a new car nor spends money at hotels. If I used food inflation instead of consumer inflation, the erosion would be more pronounced.

Second, towards the year-ends of 2020 and 2021, the real minimum wage fell below its value at the beginning of 2018 (below 100). In other words, almost the last third of the year, they spent below the purchasing power of the beginning of 2018.

Third, the real minimum wage of November 2021 reduced to its value in November a year ago, and it will very likely worsen below the purchasing power at the end of last year in December.

Fighting inflation is important

The conclusion is clear: Fighting inflation is essential. No matter which economic model is being applied, “price stability” should not be underestimated. Otherwise, even if you set a high minimum wage for the new year, you will see that wage fall to the purchasing power of the previous year after a few months. Furthermore, the purchasing power of that year was probably lower than the previous year.