US embassy cable - 04ISTANBUL190

UNCLAS SECTION 01 OF 02 ISTANBUL 000190 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, PGOV, TU, Istanbul 
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