Turkey: A sharp increase in the minimum wage

The net minimum wage in Turkey in 2022 is 4,250 TRY (275 USD). The minimum wage is increased by 50%. While the minimum wage, which was 2,826 TRY in 2021, was equivalent to 380 USD at the beginning of the year, it decreased to 186 USD in foreign currency due to the ongoing depreciation of the lira towards the end of the year.

Inflation rate reached 21.3% year-on-year in November, while TRY has lost 51% value against USD since the beginning of the year. From basic needs; The increase in food prices was 27.1% year on year as of November. Especially after the rapid depreciation of the lira against the dollar this year, high price increases have been triggered in many product groups, a phenomenon that causes the purchasing power of the lower-middle income segment to erode by more than half and increases the cost of living for individuals.

The effects of the minimum wage increase on the economy should be evaluated from many perspectives. According to the official inflation rate, it is seen that a nearly 25-30% welfare share is added to the inflation. However, when evaluated for the minimum wage or those working with an income close to the minimum wage, the 27% food inflation or the inflation effect felt when the expenditure items such as electricity and natural gas hikes are weighted cause the real income increase effect to not be felt like on paper.

The effects of the minimum wage on inflation constitute the other dimension of the business. Minimum output growth affects the economy through both the demand and cost channels. The demand effect of the minimum wage increase in the short term will create a higher breakeven point in consumer prices and we may see price increases accordingly. Particularly, the inflationary effect on the basic consumption side may increase. Another effect is the price increase that may occur on the goods and services produced due to increased labor costs. Since the net minimum wage of 4250 TRY will be a precedent for other wages due to the reference wage increase, and wages below 4250 TRY will automatically rise above this level, the cost increase will not occur only on minimum wage personnel. Increasing labor costs of businesses are reflected in the price of goods and services sold as an increase.