The impact of workdays lost to strikes on wage growth in Turkey
© The Author(s) 2018
Received: 9 December 2017
Accepted: 5 May 2018
Published: 7 June 2018
This paper empirically examines how wage growth in Turkey has been influenced by workdays lost to strikes, by inflation and by real GDP through the vector autoregression model for the annual period 1963–2015. According to empirical results, wage growth is largely affected by workdays lost to strikes and inflation. This analysis is tested by considering workdays lost to industrial action in order to understand the main dynamics behind wage growth, because this is a significant factor in the elimination of macroeconomic imbalances in the Turkish economy. As a conclusion, the mathematical base social contract, new wage-setting, and inflation policies are recommended to reduce macroeconomic problems in Turkey.
The main questions in this paper are based on workdays lost to strikes, and on inflation and real GDP to understand their impact on wage growth, because this is one of the most important and direct influences on countries’ economic policies. For instance, wage growth dynamically affects exchange rates, inflation and in particular a country’s competitiveness in international trade. To understand the wage dynamics in Turkey, workdays lost to strikes must be taken into account because this gives trade unions the power to stand against low wage growth policy and to push for higher wage growth on the wage-bargaining table. In other words, the more workdays lost to strikes, the more government and industries incline to bow to the demands of trade unions. The first question is how workdays lost to strikes have impacted on wage growth in Turkey. The second question is how to develop new policies for preventing high wage growth that is not compensated by productivity growth. In essence, if the problem is solved, this can help reduce inflation and bring stability to the macroeconomic picture. The formula called the mathematical base social contract, a new wage-setting and inflation-controlling policy, can serve as the institutional solution for answering these questions.1
The main motivation of this research is to prove how industrial actions can have a devastating influence on macroeconomic factors by implementing an empirical analysis. Although it is widely accepted that industrial actions are the principal reason behind high wage growth, there are only a few empirical studies on this, and there has not been an outstanding empirical work that took Turkey into account. There are several reasons why this has not been researched sufficiently. The first is about the transparency of statistics on industrial actions. The data of workdays lost to strikes are difficult to collect or access on a daily or monthly basis because wage bargaining usually happens once or twice a year, either with government or the employers’ associations. Thus, collecting annual data to create a satisfactory model with enough time spans takes time. Second, the institutionalization of trade unions has remained behind economic development. For instance, in Turkey, although mechanization or industrial development began in the early 1950s, trade unions were only legalized in the early 1960s. In other words, after the technological change in the economy, Turkish peasants moved to industrial cities and became workers, something that had happened in the developed countries long before. After this economic phenomenon, trade unions were legalized by the government and could organize larger members. The difficulties pointed out above also made it hard to compare Turkey with a number of developing countries in terms of industrial actions because most countries have not made available enough data to facilitate a comparative analysis, or have lagged behind in the development process.2 However, Turkey provides the chance to conduct such an analysis since it has regularly shared data on industrial actions since the early 1960s. The country has consistently released detailed statistics about industrial actions, enabling a time-series analysis. In consequence, it is possible to discuss the wage policy of the country in this research. Hence, this study aims to contribute to the economic literature for understanding the power of trade unions and its influence on wage growth, and to serve as a resource for the creation of new empirical analyses for other countries.
There is no direct research that can be used to estimate the effect of workdays lost to strikes on wage growth, but there is some indirect research. Card and Olson (1995) tried to show a systematic relation between the determinants of strike success and the determinants of the wage gain for successful strikes in the USA. This work indicates that successful strikes mostly created significant wage gains and failed strikes always resulted in no change in wages.3 Irfan (1982) explained changes in industrial employment, unionization and real wages for Pakistan. He estimated that the real wages of industrial workers were influenced by unionization, manufacturing output growth and minimum wage legislation. For the Turkish economy, Yüksel (1999) described the political, social and economical results of strikes. His work points out that manufacturing industries are where workers are most willing to organize strikes. Alesina and Giavazzi (2006) discussed how the lobbying power of trade unions on governments directly influences economic policy in many European countries, and how this lobbying factor blocks reforms which might otherwise create a system called flexicurity, which provides flexible and secure conditions for the workers. In some previous research, Turkey was analyzed in terms of its integration into the EMU and its relationship with China (Ünal 2016a, b, 2017).4 These papers demonstrated that the most important cause of low competitiveness in Turkey was its very high wage growth, which was not compensated by productivity growth. Therefore, in this paper, it is important to highlight what factors caused high wage growth by calculating productivity growth rates via input–output tables, and connecting the assumptions to the empirical analysis. This paper provides a concrete analysis of the role trade unions’ power plays, and how conflict in wage negotiations can be eliminated via the mathematical base social contract, new wage-setting and inflation policy.
In Sect. 2, the methodology of the research and connection between wage growth, inflation and exchange rates are discussed in order to explain the importance of wage growth. For this, input–output analysis is used to estimate productivity growth and unit labor cost (ULC), and their impact on inflation and purchasing power parity (PPP). In Sect. 3, trade unions and wage–labor relations are discussed from a historical perspective. In Sect. 4, the dynamic effects of workdays lost to strikes, inflation and real GDP on wage growth are examined by forecast error variance decomposition and impulse response function in the framework VAR model (Sims 1980). In Sect. 5, results are discussed and institutional changes are recommended.
2 Methodology and connection between wage growth, inflation and exchange rates
ULC growth rates, PPP and nominal exchange rate (annual, unit: %)
Source: The change rate in the lira against the US dollar was derived from the Central Bank of the Republic of Turkey. For additional information, see Fig. 1
Change rate in the lira against the dollar
Change rate in PPP against the United States
ULC growth in non-tradable goods
ULC growth in export goods
As shown in Fig. 1 and Table 1, wage growth, inflation and exchange rates show correlated movement over time. Wage growth generally remained greater than inflation over the periods under consideration. The mean wage growth was 39.4% and that of inflation was 38.5%. This means that the wage growth was basically considered in bargaining to be set greater than inflation. Moreover, decreasing wage growth also shows parallel movement with inflation and slowing depreciations in the lira. This fundamentally indicates that wage policy is an effective tool which must be taken into account as a dynamic factor behind inflation and exchange rates. In addition, the most significant information on the table is where wage growth remained above productivity growth, which shows that the economy is driven by the high cost of production and wage growth, which are not flexible. The mean productivity growth of export goods was approximately 3.7% and that of the productivity growth of non-tradable goods was approximately 2.8%. In particular, in a free market, whereas the reversion of the productivity growth of export goods to its mean happens consistently, the same reversion movement is not indicated in wage growth. This shows that wage growth is not dependent on natural market conditions, but is artificially set by policy makers. In other words, wage growth is not flexible and does not fluctuate according to economic conditions.
3 Trade unions and wage–labor relations in Turkey
Trade unions were institutionalized in the early 1960s in Turkey. For the first time, workers had the right to negotiate collective agreements with the government and employers’ associations, to utilize the collective bargaining process and to engage in industrial strikes organized by their trade unions. This right has its roots in the pre-1960s, when labor power was not unionized and the Turkish economy was largely based on agricultural growth. Agricultural workers were the engine of production. At that time, without unionization and industrial development, a large agricultural sector did not organize effective actions to increase their wages. However, industrialization attracted workers from rural areas to factories and created a working class, distinctive from farm workers. Moreover, it became easier to organize workers who were intensively populated in cities. Thus, the institutionalization of workers became an important factor in the creation of decent working conditions in the production process. Implementing import substitution industrialization during the 1960s under planned economic policies developed the rights of workers. In this period, Turkey followed protectionist policies, but the militancy of communism in the unions and ideological strikes distorted economic and political life. As protectionism came to dominate the economy, it became essential to develop domestic industries. Workers were not only key to the production process but were also an important part of domestic consumption. Hence, it was a strategic condition for the government that workers be considered a factor in consumption growth, and this became the most significant reason behind welfare policies. To widen the wealth of workers, trade unions gained the legal status to organize industrial actions. In addition, to develop the domestic market and national industries, the government legislated to regulate industrial production to encourage for domestic demand. The increasing power of workers began to influence wage growth, inflation and the value of the lira. The trade unions effectively organized industrial actions by harnessing communist populism in the 1960s and 1970s.
In the 1980s, Turkey abandoned domestic consumption growth and transformed its economy to promote export growth. The military coup in the early 1980s halted industrial actions and banned trade unions for around 3 years. Nevertheless, the democratic parties eventually re-emerged and achieved government, and then, the trade unions were liberated. Hence, industrial actions significantly increased over the next few years and workdays lost to strikes peaked. During this period, Turkey tried to implement deregulation policies, which had been slowed down for political reasons, due to social upheavals.7 Furthermore, Turkey experienced record levels of inflation and depreciations in the exchange rate (see Fig. 1). In the 1990s, trade unions were accused by the government of being the cause of Turkey’s main economic problems. Over the years, society was gradually disrupted by continual industrial actions. The government lost its ability to function as an effective tool for institutional changes. Against all unfavorable policies, the most important thing that the government could do was to establish the Privatization Board of Turkey. This gave the government a chance to reduce the influence of trade unions in the economy, which helped in the privatization of industries so that the link between trade unions and industries could be diminished. Nevertheless, this did not prevent Turkey experiencing the worst economic crisis in its history. After the economic crisis in 2000–2001, Turkey implemented a number of institutional changes in wage–labor relations and the exchange rate system. The changes were supported by deregulation policies. Privatization transactions increased significantly, and foreign direct investment (FDI) inflows intensified in the chemical and chemical products, electric and optical equipment, machinery, and transport equipment industries in the 2000s.8 Although inflation targeting was implemented, it was never able to achieve a satisfactory level of inflation. The outstanding performance of the Turkish economy slowed down in the 2010s, as in previous periods. Turkey experienced a dramatic depreciation in its exchange rate. Between 2010 and 2016, depreciation in the exchange rate was on average 10.3%. Inflation and interest rates remained high. In 2016, inflation was 7.7% and the interest rate was 14.6%.9 Although deregulation policies weakened labor power and reduced industrial actions in the country, the unions have still maintained their power to increase wages. Nevertheless, high inflation remains a problem in the economy, and the lira still has been experiencing ongoing depreciations.
4 Influence of workdays lost to strikes on wage growth
In Turkey, there are several factors that influence wage growth, which are being discussed for wage bargaining among the trade unions, employers’ associations and the government. The first thing trade unions always demand from the government and the employers’ associations is a wage increase above the inflation rate. Thus, wage increases and the inflation rate have been moving in parallel. The most developed countries changed their policies in the 1980s, to increase wage growth in accordance with productivity growth rates.10 In practice, the developed countries basically aimed to consider wage increases in terms of GDP growth in order to eliminate inflation, and to follow an intensive export growth policy.11 In contrast to the developed countries, Turkey is still implementing the same wage policy based on the inflation rate. However, the power of trade unions cannot be ignored, as it continues to influence wage policy. In particular, workdays lost to strikes is considered to be the most important factor in this paper, because the main aims of industries are to keep producing. In a dispute about wage increases, the first thing that is decided by trade unions is to organize strikes, and this causes workdays to be lost and entails costs for the employers. Hence, three factors that are assumed to influence wage growth are detailed in this paper. These are workdays lost to strikes, inflation and real GDP. The annual data of workdays lost to strikes until the year 1963, when the trade unions became institutionalized, were collected, and their connection to inflation and real GDP and to wage growth was estimated by empirical analysis.
4.1 Data collection
High wage rate growth has been the basic cause of high inflation rate and unstable exchange rates. Therefore, to find the influences of industrial actions, inflation and real GDP growth on wage growth, the data for workdays lost to strikes and for other two variables were collected annually between 1963 and 2015.12 Inflation has been a main factor in creating wage growth. This means that when a country experiences low productivity growth in non-tradable goods and high wage growth, trade unions can demand greater wage growth in a year as a compensation for inflation. However, this can also serve to increase inflation because the productivity growth of non-tradable goods does not increase at the same pace. This problem is caused by industrial actions dictated by the power of trade unions. Real GDP could have been taken as general wage-setting factor, but this policy was not explicitly considered in Turkey.
At the end of the 1970s, as industrial actions increased, inflation stood at 45.3% in 1978, 58.7% in 1979 and a record level of 110.2% in 1980. After the military coup in 1980, the inflation rate decreased significantly, to 30.8% in 1982. Nevertheless, after the re-establishment of democracy, inflation gradually increased and again hit high levels. When workdays lost to strikes increased again at the end of the 1980s, inflation hit approximately 73.7% in 1988. Until the mid-1990s, inflation was consistently over 60%. And in 1994, the inflation rate peaked at 106.2%. Following this peak, inflation gradually started decreasing. Nevertheless, compared with most of the developed countries, inflation has remained very high in Turkey in the 2000s and 2010s. In addition, inflation has remained above productivity growth rates and far above its level in the early 1960s.
During the 1970s, the key component of the growth was non-tradable goods (see Fig. 1). The productivity growth of non-tradable goods was higher than that of export goods. However, during the 1980s, Turkey shifted to export growth policies. Thus, export growth became the most important component of economic growth.
In this paper, the first factor included for analysis is “workdays lost to strikes” in Turkey. The second factor determining wage increases is inflation; in other words, CPI, because trade unions characteristically take inflation into account when pushing for higher wages, in order to maintain or improve the living standards of their workers. In this way, trade unions strive to protect or enhance the purchasing power of workers. This is used to legitimize a wage increase above the inflation rate. The final factor is the real GDP growth of the country. It is assumed in this paper that high real GDP growth gives trade unions the opportunity to demand much higher wage increases. All data are described in logarithmic form. As the workdays lost to strikes were zero in 1981, 1982, and 1983 after the military coup, to get the logarithmic form of the variable, + 1 was included for each year. The variables are described as follows:
wdls: workdays lost to strikes
cpi: consumer price index (1990 = 100)
gdp: gross domestic product (real, LCU)
wi: wage index (1990 = 100).
4.2 Unit root test
Results of ADF unit root test
Source: Data were derived from Ministry of Labor and Social Security, ÇSGB. In Turkish, Grev ve Lokavt uygulamaları, see the link (http://www.csgb.gov.tr/csgbPortal/csgb.portal?page=grevlokavt) accessed on January 20, 2016
In the first difference of the variables, wdls and gdp became stationary, and in the second difference of the variables, cpi and wi became stationary. The results in Table 2 indicate that all variables are not stationary at the same differences. In other words, integrated orders are one for wdls and gdp, whereas they are two for cpi and wi. Therefore, in the vector autoregression (VAR) model, while for wdls and gdp logarithmic level is used, for cpi and wi logarithmic first difference is used. Thus, the variables that are in the VAR model are not stationary, but their integrated orders are equal to one.
4.3 Forecast error variance decomposition
According to the assumptions in this paper, wage growth is instantaneously influenced by workdays lost to strikes. Furthermore, such industrial action also plays a significant role in inflation, as it widens the gap between wage growth and the productivity growth of non-tradable goods. That results in high inflation. From this perspective, it is assumed in this paper that real GDP is instantaneously influenced by those of the other two factors. Hence, Cholesky ordering is wdls, cpi, gdp, wi, respectively, for the VAR model.
Results of forecast error variance decomposition for wage index
In consequence, workdays lost to strikes and inflation, which are the most important factor in the wage-bargaining process, play positive roles in wage increases. Thus, these variables are important causes behind wage growth in Turkey.
4.4 Impulse response functions
In Fig. 6, the response of wage growth to workdays lost to strikes runs to around 3.5 years. This shows that the workdays lost to strikes have a significant positive impact on wage growth. For the following years, the impact of workdays lost to strikes on wage growth remains positive but is not statistically significant. In addition, as seen in the figure, the response of wage growth to inflation usually has 4.5 years time span and thereafter becomes statistically insignificant. GDP’s effect on wage growth is inconsiderable, but the response of wage growth to wage growth becomes statistically significant, though its significance gradually decreases in the following years. The reason why the wage index plays a significant role is hidden behind expectations of wage increases. As the workers obtain wage growth in a year, they are likely to expect increases significantly greater than, or at least on a par with, the previous year. Therefore, high wage growth creates strong anticipation even if productivity growth rates remain lower, or even if there is an economic crisis. In this section, it can be seen that industrial actions and inflation were the most important causes of wage growth.
5 Discussion of political implications
The VAR analysis shows that main configurations for wage growth are industrial action resulting in workdays lost to strikes and inflation, both of which influence the wage-bargaining process in Turkey. The pressure of workers’ demands on wage growth causes high inflation and unit labor cost growth and thus an unstable economy in Turkey. To eliminate these problems, new institutional changes must be taken into account based on productivity growth, since wage growth must be compensated for according to descriptive output in the economy. In the wage-bargaining process, inflation has been taken as the main figure for wage growth, and wage growth must at least be above the inflation rate to legitimize real wage growth. However, in a given year, a possible low productivity growth of non-tradable goods means much more increase in wages in the incoming year because low productivity growth can cause higher inflation. This situation then becomes a spiral and causes much higher inflation, following much higher wage growth in the economy. In addition, wage growth that is greater than the productivity growth of export goods is the main reason for possible depreciation in the exchange rate (see Sect. 2). Thus, there must be a new and revolutionary mechanism to bring an optimum increase in wage growth that could decrease high inflation, lower unit labor cost growth and create stability in the exchange rate system.
It is controversial to estimate the productivity growth of export goods in the economy. However, two methods can be used for that purpose. The first is by using the mathematical methods described in Sect. 2, where it is clearly shown how price increases can be connected with productivity growth rates. With available input–output tables, it is possible to calculate the productivity growth of export goods. The second method of estimation is the reversion to the mean. These two methods can help policy makers to decrease unit labor cost growth and inflation in the economy.
5.1 Mathematical base social contract
Wage growth that moves in parallel with the productivity growth of export goods is the desired principle level for compatible international trade and a stable exchange rate. One of the problems discussed above is wage growth in excess of the productivity growth of export goods. Industrial actions that caused workdays lost demonstrate the political power of trade unions in the Turkish economy, and this situation causes excessive high wage growth compared with productivity growth. Put another way, wage growth has not been compensated for or justified by productivity growth. This problem emerged because of two other problems. First, governments did not implement enough deregulation policies, which could have decreased wage growth and eliminated inflation, due to political costs in elections. Second, the trade unions tried to maintain their position in the Turkish economy and acted against neoliberal policies. Deregulation policies remained limited, and economic policies were easily manipulated without considering market conditions in the economy. On that point, it is important to create a balance between the trade unions and the government that directly influences wage growth. To do that, the new mechanism should not cause disparity between any of the actors’ interests, but must create a social contract and create a balance between the separate interests of the trade unions, employers’ associations and the government. As it stands, the trade unions try to increase wage growth as much as they can, and the employers’ associations struggle to keep wage growth as low as they can, while the government can use wage growth to attract voters in elections. Hence, a policy called the mathematical base social contract needs to be implemented. This contract can determine the optimum interests of the actors in wage-setting policy.
5.2 Reversion to its mean as a new wage-setting policy
How to calculate effectively the productivity growth of export goods to set wage growth nationally in each year gives rise to some questions. In a country not experiencing technological change, productivity growth will be more static until reaching the technological frontier. Thus, reversion to its mean as a new wage policy is favorable. The future prediction of the productivity growth of export goods is relatively difficult. As seen in the stock market, the change of any variables inclines toward its mean after straying above or below the mean in the long run in a free market economy. Figure 1 shows the productivity growth of export goods and its mean by considering its historical fluctuation between 1973 and 2011. The historical mean of the productivity growth of export goods is 3.7%, calculated by taking into account approximately 38 years of the Turkish economy. Moreover, until the economy reaches the technological frontier, the configuration of the productivity growth of export goods is unlikely to show any great long-term shift from its mean. In Fig. 1, although the productivity growth of export goods strayed away from its historical average, in the long run, it moved closer to it and continued fluctuating around its mean. Therefore, it is desirable to consider the historical mean value of productivity growth of export goods for wage growth and estimate the flexibility of wage growth, where the two essentials should at least come to balance in the long run to reduce macroeconomic instability. To do this, wage growth, remaining above the mean, must increase at the same pace as the productivity growth of export goods and reach its mean. Nevertheless, wage growth in the Turkish economy does not show a reversion to its mean and does not move around the mean. That shows that wage growth is not flexible and is generally influenced by economic policies in the country, running counter to the productivity growth of export goods, which has not been easy to control by government interventions or industrial actions. This new wage policy is important and must be considered by the trade unions, employers’ associations and the government.
5.3 New inflation policy
By considering the individual interest of the three actors, the greatest possible wage growth comes where constant export prices for international balance, low inflation, and a more stable exchange rate system can be created. This mechanism can be created by the mathematical base social contract between the three actors. The rules of the mathematical base social contract are as follows: first, the contract should be at an optimum level that reduces the individual interests of the government, trade unions and employers’ associations; second, it should serve to minimize the inflation rate by narrowing the gap between wage growth and the productivity growth of non-tradable goods. However, in the Turkish economy, wage growth is determined by the inflation rate, making it impossible to reduce macroeconomic imbalances. Thus, the inflation policy of the country must be changed. In other words, wage growth should not be determined by the inflation rate but the productivity growth of export goods. In this way, Turkey could create a more stable economy.15
In this paper, high wage growth in the Turkish economy has been analyzed by considering workdays lost to strikes, inflation and real GDP growth. To determine the real dynamics behind wage growth, the VAR analysis was implemented by deriving data from variables between 1963 and 2015. According to the results of the VAR analysis, wage growth was determined largely by workdays lost to strikes and inflation, but real GDP remained an insignificant component. In consequence, workdays lost to strikes and inflation were seen to be the key factors in wage growth. As the analysis shows, industrial actions have been influential in Turkey, usually entailing wage demands in excess of the inflation rate.
In order to reduce macroeconomic imbalances in the economy, Turkey needs to change its current institutional forms. First, Turkey must implement the mathematical base social contract. According to this type of contract, in order to reduce the individual interests of trade unions, employers’ associations and the government, wage growth must be indexed to the productivity growth of export goods. Second, Turkey needs to implement a new wage-setting policy, taking into consideration the reversion of the mean of the productivity growth of export goods. That means that wage policy in the country must be more flexible and be determined according to economic conditions. As the productivity growth of export goods cannot be set by a control, but rather by market conditions, wage growth must be implemented by considering the reversion of the productivity growth of export goods to its mean. Finally, a new inflation policy must be implemented for the sake of wage-bargaining policy. In other words, instead of considering the inflation rate for wage bargaining, the productivity growth of export goods must be taken into account. Hence, Turkey will be able to reduce inflation and unit labor cost growth and experience more favorable macroeconomic factors.
By collecting data between 1963 and 2015, we can run an econometric analysis for Turkey. This research is an example for prospective future research that might consider industrial actions.
For instance, most of the developing countries or former communist countries did not release enough data for the conducting of a comparative analysis.
This empirical analysis covers the years between 1881 and 1886.
Ünal (2016b) compared the Turkish economy with the Chinese economy. According to this research, Turkey should link its wage growth to the productivity growth of non-tradable goods.
Country B represents a perfect economy, where productivity growth of export goods and non-tradable goods, and proportional wage growth are equal to each other (ŵ = q̂ n = q̂ e ).
Social upheavals refer to industrial action when trade unions intensified their actions against deregulation policies (see Fig. 2).
Source: For exchange rate, data were derived from the Federal Reserve Bank of St. Petersburg. Louis (national currency to the US dollar exchange rate), the inflation rate was derived from the World Bank (inflation, consumer price) and deposit interest rate was derived from the IMF.
There are some cases in European Union countries that aim to consider wage growth according to European Central Bank’s inflation targeting close to 2%.
Ministry of Labor and Social Security. Grev ve Lokavt uygulamaları, in Turkish, (http://www.csgb.gov.tr/home/contents/istatistikler/grevlokavtuygulamalari/) accessed on February 14, 2017.
This policy will provide more sustainability for the exchange rate system. However, linking wage growth to the productivity growth of export goods can be less advantageous against export-led growth countries, since these countries do not try to create a balance between the actors of wage policy, but instead seek to eliminate trade unions influence and decrease wage growth relative to the productivity growth of non-tradable goods as much as they can.
Creating this new inflation policy can also help inflation targeting policy and decrease the gap between wage growth and the productivity growth of non-tradable goods.
The UN database “national accounts estimates of main aggregates” and “GDP by type of expenditure” categories were used to calculate deflators. ve deflator is exports (US dollars, current prices) divided by exports (US dollars, constant prices). v n deflator is domestic demand (US dollars, current prices) divided by domestic demand (US dollars, constant prices). Domestic demand = GDP − export + import.
Thanks go out to Robert Charles Perry for his input and efforts on this paper.
The authors declare that they do not have competing interests.
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