Is there a virtuous cycle between wages and productivity? Turkish experience after the transition to democracy

Date

2024-03-01

Author

Taymaz, Erol
Voyvoda, Ebru
Yilmaz, Kamil

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We analyze the behavior of plant-level real wages and productivity in Turkish manufacturing after the transition to democracy in 1987 and test for the direction of the causality between these two variables. The Turkish experience is almost an experimental case because successive governments after 1987 let real wages increase rapidly under the pressure of intensifying political competition. Real wages in state-owned enterprises increased by nearly 200% from 1988 to 1993, followed by a 130% increase in real wages in private manufacturing. Our analysis shows that labor and total factor productivity increased at an unprecedented rate during the same period in response to the exogenous wage hikes. Econometric estimates provide strong empirical evidence supporting the hypothesis that there is a bi-directional relationship between wages and productivity, and wage increases do not reduce surplus because the increase in productivity (value added per worker) compensates for increasing wages.

Subject Keywords

Democratic transition, Labor productivity, Long-run growth, Real wages, Total factor productivity, Labor unions

URI

https://www.scopus.com/inward/record.uri?partnerID=HzOxMe3b&scp=85183671266&origin=inward
https://hdl.handle.net/11511/108655

Collections

Department of Economics, Article