Timing problem with Turkey’s minimum wage hike

Turkey recently raised the minimum wage by 30 percent to 1,300 Turkish Liras ($430) for over 5 million workers. This move is very good for a country where the hunger threshold for a four-member family is 1,450 liras ($480) and the poverty threshold is 3,966 liras ($1,313). I strongly support it. What’s more, Turkey’s recent growth has mainly been based on consumption. So, to put is simply, wage hikes will allow people to spend more.

However, there is a problem of timing with the minimum wage hike. Today’s increase has the potential to damage existing problems in the job market tomorrow, worsening companies’ competitiveness at a time when Turkey has been struggling to escape the middle-income trap and harming the attraction of the country for foreign companies looking to investment. 

Let’s do some math about the expected extra costs for employers of the minimum wage hike. The government has announced that it will cover 40 percent of the cost of the hike - but only for 2016. This would amount to assistance of around 9.7 billion liras ($3.2 billion) of the projected cost of 24 billion liras for employers. The raise is expected to most hit small and medium-sized enterprises (SMEs), which make up around 95 percent of all enterprises in Turkey. The total annual revenue of SMEs, which account for around 78 percent of the country’s total employment, is estimated to be around 40 billion liras, which is not even double the expected burden from the minimum wage hike.

Even before the New Year, when the minimum wage hike became effective, some SMEs reportedly started firing people rather than face the additional burden. The comments by a senior manager of a factory based in a small province in northwestern Turkey to a TV channel this week were quite striking: “We moved our facility to this province a couple of years ago because its workforce is cheaper than the workforce in Istanbul. But with the minimum wage rise, employment conditions here have become much less favorable for many facilities. For example, one factory fired 300 people before the New Year, slashing around half of its workforce. This move is huge, as alone it will affect more than 1,000 people with their families.” 

Turkey’s job market already has a serious unregistered employment problem. Many analyses have recently warned of a further potential rise in unregistered employment and official unemployment with the latest minimum wage hike. According to official figures, one in three employees work currently work unregistered in Turkey, with women in the worst conditions - although there has been a relative improvement over the past decade. In addition, many workers are registered in the social security system with lower wages than they are actually paid, as companies attempt to slash their employee costs. 

Before the latest minimum wage hike, controls should have been increased to detect whether companies are employing unregistered people. The required changes should also have been made to flexible employment conditions and Turkey’s controversial subcontracting system, which tops the agenda due to unhealthy working conditions and serious work accidents. 

Increasing the minimum wage also has the potential to negatively affect companies’ competitiveness in Turkey, which was once popular as a production field for many global companies but has begun to lose its position to Eastern Europe and small Asian countries. The World Economic Forum’s latest Global Competitiveness Report saw Turkey fall in the rankings from 45th to 51st, mainly “driven by a general decline in almost all factors driving competitiveness.” The 30 percent rise in the minimum wage will further lower Turkish companies’ competitiveness - especially in labor-intensive sectors such as textiles and automotive manufacturing, as well as service sectors such as retail - because it will increase worker costs. A recent study revealed that companies are planning a hike of 12 percent on average in their employees’ wages to adapt to the minimum wage hike. 

In this environment, Turkey will become a less popular destination for foreign direct investment, as foreign firms’ competitiveness will specifically be negatively affected against local players, which know the dynamics of the local job market better. 

Besides, as high-ranking economy officials have already suggested, the most challenging economic area for Turkey in 2016 will be the rising inflation rate. One of the worst scenarios of the minimum wage hike could see an increase in goods and services prices and taxes. 

So the minimum wage hike is good for most of society, but some preparatory steps should have been taken to improve the job market and companies’ competitiveness beforehand, in order to help Turkey escape the middle income trap. This challenge is of great importance for Turkish companies, which are trying to compete simultaneously with more developed added-value producers and developing producers that can offer cheap labor.