ISTANBUL EMPLOYERS' MUTED REACTION TO TURKEY'S

UNCLAS SECTION 01 OF 02 ISTANBUL 000190

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TREASURY FOR OASIA - MILLS AND LEICHTER
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USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO


E.O. 12958: N/A
TAGS: ECON EINV EFIN PGOV TU
SUBJECT: ISTANBUL EMPLOYERS' MUTED REACTION TO TURKEY'S
MINIMUM WAGE JUMP


1. Sensitive but Unclassified. Not for internet
distribution.



2. (SBU) Summary: The recent decision of the Turkish
government to increase Turkey's minimum wage by 38 percent,
while also raising pensions by 21 percent, has sparked strong
criticism in financial circles, but only a muted reaction
from organizations representing the "real" economy.
Istanbul-based employers' associations note that the raise
was imposed over their objections by government and labor
representatives in the tripartite commission that is
responsible for addressing the issue. They stress, however,
that the primary impact will be felt in the Anatolian
heartland, rather than Istanbul, given that most workers here
already earn far above the minimum wage. Leading brokerages
are less sanguine, worrying about the potential impact on
Turkey's budget and about the potential for more "populist"
measures in the run-up to March's local elections. End
Summary.



3. (SBU) The decision by the Turkish government to raise the
country's minimum wage by 38 percent at the beginning of the
year (representing a net 34 percent increase to recipients),
together with its subsequent decision to raise pensions by 21
percent, has brought only a muted reaction from Istanbul
business circles. Meetings with a range of employers'
associations, including those in the glass and food
industries, showed little concern about the issue. Food
Employers' association head Nazim Duzenli noted that
employers had refused to sign on to the increase in the
tripartite commission that addresses the issue, leaving it to
be adopted over their objections by labor and government
officials. He predicted little immediate impact on his
members, however, given that his association has no employers
with workers who earn the minimum wage. That is true, he
suggested, of most businesses in Istanbul and the Marmara
region. The measure's impact, he predicted, would be greater
in Turkey's Anatolian heartland, among small to medium-sized
employers (KOBIs) who do tend to have workers at minimum-wage
levels. Teoman Yenigun, head of the glass employers'
association, concurred with this argument, adding, however,
that over time there would be a trickle-down effect on larger
Istanbul-based businesses, in that many of their domestic
inputs are sourced from KOBIs. That impact will not be felt
for some time, Yeoman predicted. Yeoman's concerns with the
measure focused more on its implications for public finances
and for the encouragement it may give to Turkey's large
"shadow economy" than for his industry's situation.



4. (SBU) Other major employers have been similarly sanguine.
Sabanci Holding's head of finance, Faruk Bilen, told us
recently that he saw no impact on the holding from the
decision, in that it too employs no minimum wage labor. From
a moral standpoint, he suggested that it is difficult to
question the step, in that low-wage workers have borne the
largest burden since the 2001 crisis, and the increase only
allows them to partially recoup their losses. At a time when
the government spends nearly 70 quadrillion lira a year on
interest payments, he suggested, a meager 2.6 quadrillion for
increased wages at the lower end of the scale is hard to
challenge.



5. (SBU) Largely glossed over by employers now, but an
unwritten subtext to their lack of militancy over the issue,
is the fact that the actual increase came in much closer to
their recommendations than to that desired by workers or even
initially by the Prime Minister. The 38 percent increase
represents a rise from 226 million TL to 303 million TL.
While clearly out of line with inflation targets, a point
Istanbul brokerages have emphasized, it falls far short of
the 100 percent increase (to 454 million TL) originally
proposed by workers, or the 340 million TL (or 55 percent
increase) advocated by the Prime Minister. In fact, news
reports during the commission's deliberations noted that the
level proposed by employers was 300 million TL, virtually
identical to the final figure. Even TUSIAD Chairman Tuncay
Ozilhan had publicly indicated that a rise of 20 percent
would track with Turkey's 2004 inflation target, when coupled
with an expected 7-8 percent increase in worker productivity.
Employers had also desired a 25 percent discount in social
security premiums on the increase, and in fact achieved a
government agreement to assume part of the burden of the
increased social security taxes that would result, so that
the actual increase to employers is 20 percent, precisely in
line with Ozilhan's comments. In fact, it is the fiscal
impact of the government's agreement to assume part of the
social security tax burden, rather than the minimum wage
increase per se, that causes financial analysts here to worry.



6. (U) If large employers have opted to avoid publicly
criticizing the increase, Istanbul financial analysts have
been less recalcitrant. Leading brokerages such as
HCIstanbul and Bender have criticized the increase's
"populist" nature, and warned particularly about its
implications for inflation, the shadow economy, and the
government's budget. While State Minister Babacan has been
quick to stress that the Prime Minister identified
compensating spending cuts to absorb the cost of the minimum
wage and pension increases, most analysts were not impressed,
with HCIstanbul, for instance, arguing that it will be
"practically impossible" to find savings measures to balance
the cost, which it estimated at 4.1 quadrillion (2.9 billion
USD or 1 percent of GNP). Hence its report on the issue
concluded that the government would be forced to resort to
tax measures or price hikes in the public sector, both of
which would further encourage inflation.
SMITH