Why is the minimum wage hike so important for Turkey?

One of Turkey’s most  cherished pre-Christmas rituals, that of determining the annual minimum wage hike, has started with the first meeting of the joint commission, where the biggest labor union is boycotting the whole event. Even pro-AKP labor federations like Hak-İş are reluctant to participate, because there is no way their members will be satisfied with numbers bandied around like 25% or 30%. To remind our readers, even with a 30% hike to minimum wage, it will be less than the official poverty line. Why is this issue such a hot potato in Turkey, in the following essay, we try to explain.

The negotiation over the national minimum wage (Asgari Ücret) in Turkey is not merely a social policy discussion but a primary macroeconomic event that fundamentally shapes inflation expectations, costs, and aggregate demand. The outcome of these discussions holds disproportionate weight compared to similar negotiations in most developed economies, transforming the minimum wage from a labor market floor into a major inflationary anchor.

1. The Disproportionate Reach of the Minimum Wage

The core reason for the profound inflationary impact lies in the sheer number of workers affected. Unlike OECD peers where the minimum wage often impacts less than 15% of the workforce, Turkey faces a much wider scope:

• High Coverage: Current estimates suggest that 35% to 40% of Turkey’s registered workforce is paid at or very close to the minimum wage level.

• Widespread Spillover: Due to this high coverage, the minimum wage acts as a benchmark for almost all wage segments. A hike creates a strong spillover effect, pressuring employers to raise salaries across the entire income distribution to maintain internal equity, thus expanding the cost shock to over 50% of the labor force.

2. The Dominance of Cost-Push and Demand-Pull Channels

A significant minimum wage increase, such as a hypothetical 30% hike announced for January 2026, impacts inflation through two powerful channels:

• Cost-Push Inflation: This is the direct mechanism. Companies, particularly in labor-intensive and non-tradable sectors like retail, food service, and accommodation, immediately face higher operating costs. Given limited competition from imports in these services and the high inflation environment, firms are readily able to pass these costs onto consumers. A 30% rise translates directly into increased input costs for businesses, feeding quickly into the Consumer Price Index (CPI).

• Demand-Pull Inflation: The large number of recipients means the hike injects substantial purchasing power directly into the economy, significantly boosting aggregate demand. If the economy, already facing capacity constraints, receives this boost, the increased demand puts further upward pressure on prices, adding to the cost-push effect.

3. Fueling the Wage-Price Spiral

The critical structural issue is the established bi-directional causality between wages and prices, which minimum wage hikes consistently reinforce.

• Inflation Drives Wages: In Turkey, minimum wage setting is reactive; it aims to compensate workers for past inflation, often exceeding official targets to restore lost purchasing power.

• Wages Drive Future Inflation: This inflation-driven hike (e.g., a 25% adjustment to offset expected 2025 inflation) then becomes a cost base for 2026, solidifying and amplifying future price increases. This creates a self-fulfilling wage-price spiral, making the disinflation process significantly more challenging, as modeled by the Central Bank of the Republic of Turkey (CBRT).

4. Policy Challenges and Expectations

For policymakers focused on disinflation, the minimum wage is the single greatest test. A high hike (e.g., a 35% increase if policymakers aim for a real income boost, acknowledging the poverty line) directly contradicts the tight monetary policy stance by adding fuel to both demand and cost pressures.

Econometric studies suggest that the pass-through effect in Turkey is substantial: a large minimum wage adjustment can contribute several percentage points to the annual CPI, making it exceedingly difficult for the CBRT to achieve its inflation targets solely through interest rate adjustments.

In conclusion, the minimum wage negotiation is paramount for inflation because it determines the trajectory of costs for nearly half the workforce, acts as a primary source of demand stimulation, and crucially feeds the endemic wage-price spiral, making it the most watched and most contentious variable in Turkey’s macroeconomic forecast.

Turkish press sources, Atilla Yesilada, Gemini