Policies such as this higher minimum wage policy are also part of the larger motivation in the Turkish government’s recent decision to focus on real economic activity, supporting investment, production and employment, and preferring that to the recessionary contractionary policies recently employed by the major world economies. (Getty Images Photo)

Minimum wages and unemployment nexus?

Minimum wage debates have even turned into a rather ideological debate all over the world

Türkiye has just announced the highest minimum wage floor in the history of the modern Turkish republic, both in Turkish lira and dollar terms. This new adjustment and the new minimum wage deserve attention as it directly affects millions of workers – around 7 million employees – in the country. But, indirectly, it affects almost everyone over the potential inflationary effects, possible hikes in various fees, retirement benefits and wages.

With that said, I recall an earlier comment from a businessperson – who is a friend of mine – saying: “Minimum wages don’t work. They lead to unemployment. Companies cannot pay this.” Was he right? Would a higher minimum wage really lead to unemployment? Should the market just decide what wages and payments should be?

Minimum wage debates have even turned into a rather ideological debate all over the world. For instance, the two modern dominant neoclassical criticisms of higher minimum wages are that they cause a rise in prices and increase unemployment. A rather interventionist focus, on the other hand, would be on the basic standards of living and equal payments.

These types of wage adjustments are surely needed in order to avoid declining purchasing power, economic contraction, resulting in potential negative impacts on labor markets and employment. Nevertheless, does a higher minimum wage floor really increase unemployment or lead to higher prices and inflation? Or would it rather increase employment via rising purchasing power and the renascent demand?

Labor market dynamics

Relatively theoretical or ad hoc supply and demand analysis do show potential negative impacts of higher minimum wages. The argument is that higher costs of production may force companies (that are not able to increase their prices instantly) to lay off some of their workforces and thus increase unemployment. Although challenged by a recent line of the empirical literature, it is still widely advocated by contemporary neoclassical school academia and conservative politicians.

Understandably, exorbitant minimum wages could potentially increase the tendency toward an informal or underground economy. While higher minimum wages help increase devotion to the company and tenure, they could also increase the tendency to employ immigrants and refugees, and hence increase unemployment rates, including in Türkiye. So, steep minimum wages could hence potentially strain companies, and lead to decreased employment.

However, there is also a vast literature of empirical studies showing the opposite. As in the popular examples of prominent economists such as Piero Sraffa, Robert Reich, David Card and Alan Krueger, a long literature provides empirical data from the United States and many other European economies showing no negative impacts from higher minimum wages toward employment.

There is, therefore, at least no consensus over the adverse impacts of higher minimum wages on employment. In particular, after the 1990s, new empirical evidence has predominantly shifted views toward no negative impacts on employment. This opposing view has even been expanding throughout academia.

An argument is that due to their flexible or monopsonistic nature, labor markets are rather complex. Furthermore, a reasonable minimum wage could even increase employment. For example, higher minimum wages could also decrease training costs by decreasing turnover rates.

That said, low-skilled workers, in particular, are still at the core of this debate. The negative impacts consensus is also rather over rising unemployment amongst the low-skilled workers. Most of the empirical findings on rising unemployment are also related to these low-skilled workers or the tradable sectors. These workers, however, could indeed be supported by supplementary programs such as a family support system or conventional unemployment reliefs.

Moreover, other social impacts of lower minimum wages including the psychological, health-related and consumer behaviors, as well as the general public impacts on families should also be considered. Too low wages would amplify income-wealth inequalities. Let’s not forget that too many employees are still paid close to the minimum wage today, while profits are soaring.

Inflationary effect

A higher minimum wage could lead to cost-push inflation, though, just as in an energy shock. At least in the short run, wage increases are likely to increase the costs of production. Yet, regulatory measures could be used to limit even this type of price increase. Meanwhile, in Türkiye, the TEM (Turkish Economy Model) is actually already supporting businesses and mitigating these types of inflationary effects.

Demand-pull inflation, on the other hand, may also be true, but still not that common in newly rising economies such as Türkiye. The argument behind this demand-pull focus is that increasing purchasing power (following rising wages and salaries) and higher demand is another factor that could lead to higher prices. However, demand-pull inflation is particularly common in advanced economies.

In developing or newly rising economies such as Türkiye, it is rather more difficult to assume (for instance that) all the income increases would lead to an instant demand explosion. Bequests or intergenerational transfer motives should also be taken into account. Moreover, this idea or argument is again too theoretical and relevant to more developed economies. And usually not an empirical fact, especially amongst emerging or newly rising economies.

Finding the right amount of rise

In an inflationary cycle that weakens purchasing power, it makes the most sense to increase minimum wages and rise up purchasing power. After all, workers under a fixed-income scheme do not have any other tools to adjust to rising prices. Therefore, a wage increase is the only option to restore purchasing power and level up the standards of living or improve the general living conditions.

Policymakers should probably focus more on finding the right amount of minimum wage that keeps workers out of poverty but still keeps employers on their feet. This is probably more critical than whether to increase the minimum wage or not. And of course, a balance between too high and too low minimum wage is required. The benefits of a higher minimum wage floor to society should be larger than the accruing costs.

Therefore, while conjunctural inflationary disruptions are being replaced with these minimum wage adjustments, the new wage adjustments should not lead to new disruptions and distress themselves. Hence, companies and employees should both be considered, and their resilience and financial circumstances should all be well considered.

Does a higher minimum wage really work?

Higher minimum wages help mitigate rising income and wealth inequalities, and in the meantime, could also raise dedication or feelings of devotion in the workplace. They may also help increase tenure and help with concentration and increased productivity in the company, as well as job satisfaction.

Moreover, this public support and higher minimum wages are also in line with the TEM that focuses on more investment, production, employment and exports, as well as a lower current account deficit. Thanks to the TEM, the total employment figure is nowadays up to 31.6 million people, the highest in modern Turkish history. And the unemployment rate is down to 10%. Of course, this is despite the recently rising labor force participation rate of 52%.

Thus, policies such as this higher minimum wage policy are also part of the larger motivation in the Turkish government’s recent decision to focus on real economic activity, supporting investment, production and employment, and preferring that to the recessionary contractionary policies recently employed by the major world economies. Rising purchasing power and increasing demand could also potentially lead to higher production and employment.

In an ideal world and a fair business environment, the minimum wage would and could be abolished. The market would set a proper wage that balances the needs of employees and the budget of employers. However, that ideal world is too far away from reality. In today’s standards, no business would be willing to pay an extra penny, unless (for instance, in the Turkish case) they earn in dollars and pay in Turkish lira.

In Türkiye, for instance, around 38% of employees are still paid close to the minimum wage. Even in profits-booming 2022, over 7 million workers are paid just almost the minimum legal wage. On the other hand, firm sales, profits, and hence the resulting stock prices, are surging nowadays. Higher minimum wages are still needed, for many reasons, at least for the time being.

[Daily Sabah, January 6 2023]

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