Jobs Seen at Risk as Erdogan Legacy Morphs to Middle-Income Trap

  • Election setback forced AK Party U-turn over raising salaries
  • Services industry, biggest creator of new jobs, hit hardest

Turkey’s decision to raise the minimum wage risks becoming a hollow victory for millions of workers, as more businesses warn of hiring freezes and layoffs to keep their labor bills down.

“My overall costs rose by a fifth because of the wage increase,” Caner Aktas, owner of a travel agency in the center of the capital Ankara, said of the boost to the lowest legal salary by a third to 1,300 liras ($446). “We were planning to add to our headcount, which is now 40. We’ll have to postpone.”

The central bank says service companies like Aktas’s, which created more than three million new jobs since 2010, will probably suffer the most from a change that is likely to increase unemployment and boost the underground economy. Turkey’s jobless rate hit 10.8 percent in December, behind only Spain, Italy and Saudi Arabia in the G20 Group of Nations.

It was a scenario foreseen by the ruling AK Party when it criticized opposition pledges to raise salaries ahead of the general election last June. In a speech warning of potential damage to exporters, Prime Minister Ahmet Davutoglu said the “optimum point for the minimum wage can be found by employers and laborers together, while the government stands as witness.”

‘Populist Decision’

But after losing its majority in parliament for the first time in over a decade, the party bowed to pressure before a repeat poll five months later, and the government has now saddled the economy with “an extremely populist decision,” according to Atilla Yesilada, an Istanbul-based economist at GlobalSource Partners.

“If you increase the minimum wage by 30 percent all of a sudden, either people will be out of a job or your exporters won’t be able to do business,” Yesilada said by phone. “Social peace is indeed important, and the government should do its best to improve income inequality. But doing this by placing the entire burden on businesses is a silly decision.”

Different Economy

The hand-wringing illustrates how much Turkey’s economy has changed during 13 years of AK Party rule. Growth has averaged 2.6 percent a year since the 2009 recession, compared with 6 percent over the six years before, the most successful period of economic management under then-Prime Minister Recep Tayyip Erdogan, who moved to the presidency in 2014. With gross domestic product stuck around $10,000 per capita since 2008, Turkey’s quest to escape the so-called middle-income trap now depends on increasing the economy’s productivity. Raising salaries without adding more value to Turkish goods doesn’t serve that purpose, Yesilada said.

When Erdogan decided in 2004 to raise the minimum wage by 40 percent to more than 300 liras, he met little opposition. Turkey’s jobless rate rose by 0.3 percentage point to 10.8 percent at the end of that year, according to World Bank data.

That probably won’t be the case following the latest increase, the biggest since 2004, according to the central bank. Turkey’s economy is expected to expand 3.1 percent this year, and forcing companies to absorb higher salaries makes little sense without a commensurate increase in productivity, it said in a report in January.

Company Costs

Labor bills make up almost a third of costs for companies in the manufacturing industry. The latest increase in salaries means that the country isn’t a haven of cheap and skilled labor anymore, according to Levent Koc, a managing partner at Istanbul-based consultancy firm StratejiCo.

"The overall costs of a company will increase by up to 6 percent as a result of the new minimum wage level, a critical margin for most employers,” Koc said in an e-mailed note.

Not everyone is critical, least of all Turkey’s lowest-paid workers. They now receive salaries that are almost on a par with the U.S. when adjusted for purchasing power parity, according to the Turkish employers’ union TISK, which opposed the increase.

Labor minister Suleyman Soylu defended the move in January on the basis that the workers’ higher living standards would outweigh the costs to employers.

Deputy Prime Minister Mehmet Simsek said the measure would help the economy expand 4.5 percent this year, from an estimated 4 percent in 2015.

‘In The Red’

Before general elections in June, Simsek said the main opposition party CHP’s leader, Kemal Kilicdaroglu, did not “understand the economy” after pledging to raise the minimum wage by 50 percent. Turkey could face a “crisis” if it were to implement the opposition’s “populist” plans, he said then in an interview with Haberturk television.

“I think the net impact on the economy will be modestly positive due to higher private consumption, though admittedly it is likely to boost unemployment,” Maya Senussi, a senior economist at Roubini Global Economics LLC in London, said by e-mail. Unemployment may increase between 0.5 percent to 0.8 percent, she said.

The government has also tried to offset the impact on Turkish companies, offering tax cuts worth about a fifth of the additional labor cost. For Aktas the travel agent, that’s not enough for his hiring plans to remain viable.

“Salaries make up 70 percent of all my costs,” he said. “The government incentives don’t really help. We’re currently in the red.”

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