Wage rigidity in the Turkish labor market

Rigidities like firing costs, taxes on employment and minimum wage levels are one of the most controversial issues in labor economics. Theory and a number of pieces of empirical research assert that the more a labor market is rigid and employment is constrained because of high labor costs, then the more likely it is to have a higher level of unemployment since companies will try to fire some workers and will miss some investment opportunities as they will be unprofitable. However, the rigidity issue is not just a simple matter. It implies a critical dimension regarding workers' rights. For this reason, workers' unions defend that “labor market rigidities” is a concept developed particularly by a neo-liberal ideology aiming to lower labor costs for higher profits. This is why it is quite difficult for democratic governments to implement labor market reforms.

This is also the case for Turkey. Personally I think the Turkish labor market is rather rigid if we consider its formal segment. Indeed, those Turkish companies that fully abide by the existing labor laws -- their workers are not only registered with the Social Security Institution (SGK) but at the same time their wages are fully declared -- pay one the highest severance wages in the world (a month's salary for every year of work). The minimum wage, which rose rapidly in real terms during the first years of Justice and Development Party (AK Party) rule after 2002, is also relatively high in the majority of regions, as I will try to prove in this article. The major consequence of rigidities in the Turkish labor market is the existence of a large informal segment. One out of five wage earners is not registered at all with the SGK. So for these workers, there is no need to give any severance pay and no need to give any justification when they are fired. Statistics (household surveys) show that these informal workers are paid less than the minimum wage on average. The laws of the jungle prevail in this fully informal segment. However, it also exists in the semi-informal segment where workers are registered with the SGK but their wages are not fully declared or they are fired before completing a year's work and rehired in order to avoid high severance payments. It is absolutely astonishing to learn that only one out of 10 wage earners can effectively profit from their right to severance pay. Obviously, a number of companies, particularly small and medium sized ones, are quite successful in finding ways to avoid labor market rigidities. A comprehensive and radical severance pay reform prepared by the Ministry of Labor and Social Security last year was unfortunately removed from the government's agenda at the last minute by the prime minister because of threats of a general strike made by workers' unions. The rigidity emanating from a relatively high minimum wage is also important in Turkey. This rigidity is commonly measured by the ratio of minimum wage to the median wage. The closer the minimum wage is to the median wage, the more rigid the labor market is considered to be compared to others where the ratio is lower. The ratio for Turkey was computed by the Organization for Economic Cooperation and Development (OECD) in 2011 as 0.71 and it was the highest among all OECD countries. The Bahçeşehir University Center for Economic and Social Research (BETAM) on July 23 published its research titled “Wage rigidity in the formal and the informal labor market” in which it computes a slightly different version of this measure in order to make possible a comparison across 26 regions. The ratio of the minimum wage to the median income of formal wage earners working in the private sector was 0.8 at the country level in 2011. What is particularly striking in BETAM's research is not the high value of this ratio but the huge differences among the ratios particular to each region. Indeed, while the ratio is 0.63 and 0.71 for İstanbul and Ankara, respectively, it is more than 0.9 in half of the regions and even reaches 0.98 in Malatya. This high disparity of the wage rigidity indicator across the country proves that “one size does not fill all.” On the one hand, while it is not easy for companies to find workers at the minimum wage level, where it stands relatively low compared to the costs of living, in places like İstanbul and Ankara, in many other regions those willing to be hired at the minimum wage are so numerous that the median wage is almost equal to the minimum wage. The standard remedy to this situation is well known: Differentiate the minimum wage across the regions. But the AK Party government refused to even consider this remedy since it is politically a hot potato.