Turkey's plan to increase the minimum wage by more than a quarter next year is expected to add 1.5-2 percentage points to inflation, three sources said, adding the final impact would depend on growth figures. President Tayyip Erdogan's government, which is facing local elections in March, is mulling a set of measures to offset unemployment that is seen rising in the first half of 2019 as the economy has slowed.
Turkey announced on Tuesday a 26 percent increase to the minimum wage, bringing it to 2,020 lira ($381) a month. "The minimum wage was hiked by a high margin due to high inflation. It is seen adding 1.5 - 2 points to 2019 inflation but this impact could change in line with growth," one of the sources said.
A December central bank survey showed that the end-2018 CPI was seen at 21.28 percent. Turkish economic growth dwindled to 1.6 percent year-on-year in the third quarter, falling short of forecasts as a currency crisis and soaring inflation led to the worst economic performance in two years.
"Inflation is trending at a higher than expected level, creating issues for the economy. Measures may need to be taken to avoid further issues caused by this rise," the source said. The government plans to offer a tax cut of 101 to 150 Turkish lira ($19.05 - $28.31) monthly for employers who have workers on minimum wage, President Tayyip Erdogan said on Tuesday.
That cut will be funded through its unemployment fund, which is worth a little over 125 billion liras, sources sources said. There are around 7 million workers on minimum wage in the country. "A simple calculation of such a monthly incentive for 7 million labourers will be 10 billion liras for the whole year. The proceeds from the unemployment fund will be used to fight unemployment," a second source said.
The unemployment fund pays a temporary salary to those who have recently become unemployed. It has paid 27.7 billion lira to 6.68 million Turks so far, and it will also be used to create part-time jobs for the public, especially on social work, sources said.