Former academician and investment banking researcher Prof Cevdet Akcay is the most outspoken member of Central Bank’s (CBRT) Monetary Policy Committee. He has created controversies in the past when he commented that CBRT is spending a lot of its precious time cleaning up the mess inherited from the previous governor, Mr Sahap Kavcioglu, currently the chairman of BRSA, Turkey’s banking watchdog.
Akcay landed in another major controversy on Thursday, during the Q&A session of the last Inflation Report when he commented: “Regarding the minimum wage adjustment for 2025, Deputy Governor Cevdet Akcay commented that the pass-through of the minimum wage increase is lower when economic activity is relatively weak, while the current environment is likely to allow wage setting based on inflation expectations”. Actually, his comments were more blunt, taking a position that wages and salaries should be indexed to official inflation projections, according to Turkish press accounts.
Setting annual minimum wage and pension hikes according to CBRT inflation targets compared to the current practice of compensating recipients for past inflation is the source of a major debate among Turkish economists. A majority assert that wage and pension hikes based on forward inflation will result in worsening of the income distribution, adding that wages and pension hikes are not necessarily inflationary. A minority claims backward indexation is a major cause of inflation stickiness. This group argues that compensating recipients for past inflation creates a vicious cycle of wages chasing inflation, leading to an inflationary spiral.
With 40% of the Turkish workforce estimated to receive compensation around the minimum wage, and Turkey being largely a labor-intensive economy, it doesn’t make much sense to argue that backward-indexation won’t cause inflation stickiness. The majority of economists arguing against this observation seem to confuse the state’s duty of providing its citizens with sufficient income to meet basic needs with adjusting the minimum wage. Poor families ought to receive welfare payments to meet their needs, but it is not optimal policy to fight poverty by legislating higher wages, which erodes competitiveness and has a visible impact on the hiring of undocumented workers.
Nevertheless, Prof Akcay’s comments created a maelstrom in social media, with harsh criticism leveled at him and CBRT. His remarks were probably not intended to take part in the controversy but to politely warn the Erdogan administration to go easy on the 2025 wage and pension round. The bargaining on the adjustments to the statutory minimum wage, pensions and civil service salaries will begin in December. While there is an official bargaining process between private sector, the state and labor unions, at the end Erdogan makes the decision. He is keeping his cards very close to his chest. Turkish media blurts out new gossip on the size of hikes every day, with estimates ranging from 25% to 40%.
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