We know very well that high inflation is one of the most important factors that distort income distribution and lead to welfare losses, especially for wage earners. In the past two years, we have seen this once again in spades. While nominal wage increases have been strong at times, real losses have been more pronounced. It can be said that wage increases are based on inflation differentials and additions, and that there is no real loss. We believe that this is not a very correct view.
Even if wage increases seem to meet and partially exceed inflation at first, the rapid introduction of price increases based on wage increases can cause a real decline in the minimum wage within 1-2 months, leading to real losses for months. Moreover, if we take into account that the minimum wage is mostly based on basic food and necessities, we can see that the average annual increase in categories such as housing, transportation and nutrition is much higher than the headline figure. For example, according to the latest data, price increases in sectors such as rent, transportation, unprocessed food, restaurants and hotels are above 90%. Considering that headline inflation is 62%, the real loss reflecting the welfare of minimum wage earners is much higher.
Minimum wage should protect from poverty
Another dimension of the issue is that the rate of increase in the minimum wage is not reflected at the same rate in wage increases at higher levels and average wages converge towards the minimum wage. In this context, the losses of middle income groups are much higher. When we consider year-end inflation, we exclude the effects of the high inflation experienced throughout the year. In this context, taking into account average inflation, not year-end inflation, or even the deflator including all goods and services as expected inflation can partially compensate for the losses. According to the November results of the hunger and poverty line survey published by Türk-İş, the hunger limit for a family of four was TRY 14,025, while the poverty line, which includes basic household expenditures including food, was TRY 45,686. According to the CBRT’s calculations, food inflation will be 31% and headline inflation will be 36% in the next year. When we increase the current hunger and poverty line figures with these estimates, the hunger line will rise above TRY 18,000 and the poverty line above TRY 60,000. It would not be wrong to point out that the risks in this forecast are on the upside. According to the definition of the International Labor Organization, the minimum wage is expected to protect workers from poverty and income inequality. In this context, the need for a significant increase in the minimum wage is evident.
Competitiveness also important for employees
So far, we have looked at the minimum wage in the context of employees. As we have tried to share in detail in many of our articles in recent weeks, the high inflation we have experienced has resulted in losses in the competitiveness of many companies in both the manufacturing industry and the services sector. Especially in exports, this loss occurred because our competitors entered the market with lower prices, making it difficult for us to compete with the effects of exchange rates, wages and high inflation. A possible high rate of increase may have consequences such as increasing the loss of competitiveness on the one hand and threatening the decline in inflation by reflecting these increases on prices on the other. In this context, a significant way out seems to be for the public sector to step in more and bear part of this cost in order to minimize such negative impacts on both employees and employers, which could ultimately harm the stability of the national economy.
Public support needed
Raising tax brackets and providing direct public support to the minimum wage, albeit temporarily, which the business community has voiced on different occasions, may provide a solution. Of course, such a public support initiative is expected to increase the budget deficit and public debt. However, in order to keep this at a minimum level, it is possible to make serious savings in public expenditures. We are in a period of tight monetary policy in the fight against inflation. We expect tight fiscal policy to complement monetary policy. However, the tendency for both policies to be tight simultaneously and strongly may lead to challenging macro balances. Tight monetary policy and relatively flexible fiscal policy can go hand in hand. In this process, fiscal policy that shows some flexibility on the revenue side can contribute positively to growth, the health of the real and financial sectors and income distribution. I am not saying that budget deficits are good and that we have the luxury of unlimited deficits. With the current data, Turkey’s public debt and budget deficit ratios are at levels suitable for some flexibility for a while. Support from the budget to macro stability, income distribution, minimum wage, education, the unemployed, high value-added sectors and exports can be provided mainly through public savings, not through taxes. The resources to be provided by taxes and the permanent improvement in budget balances can be achieved by combating informality and spreading tax revenues to the grassroots. Ensuring that wage earners get their due and that many of our sectors gain competitiveness are too valuable to be compared with short-term budgetary concerns.