Determining the relationship between unemployment and minimum wage in Turkey

The minimum wage, which has increased more than tenfold in Turkey since 2014, has been a controversial topic for Turkish economic policy in the last few years. This controversy is due to a variety of factors including the high rate of minimum wage-bound workers and the minimum wage dropping below the hunger and poverty limits because of inflation despite rapid increase in the nominal minimum wage. The literature on the Turkish labor market, as well as the broader empirical and theoretical literature in economics, is divided about the employment effect of minimum wage. We hypothesized that the minimum wage has a positive and a Granger causal relationship with unemployment because the high rate of minimum wage bound workers suggests a minimum wage increase might introduce a lot of rigidity in the labor market. To test this hypothesis, we conducted Ordinary Least Squares (OLS) regression and Granger causality tests using unemployment, minimum wage, gross domestic product (GDP), and producer price index (PPI) data from 2014 to 2022. We concluded that there is a positive correlation between minimum wage and unemployment and that the minimum wage has a Granger causal link to unemployment. Although further research is required to establish a definite causal link, the findings in this paper establish a positive relationship and strengthen the case that a higher minimum wage has a causal link to a higher level of unemployment. These results imply that greater consideration of the of minimum wage on unemployment is needed in minimum wage setting.