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

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  • Taymaz, Erol
  • Voyvoda, Ebru
  • Yilmaz, Kamil

Abstract

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.

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  • Taymaz, Erol & Voyvoda, Ebru & Yilmaz, Kamil, 2024. "Is there a virtuous cycle between wages and productivity? Turkish experience after the transition to democracy," World Development, Elsevier, vol. 175(C).
    • Handle: RePEc:eee:wdevel:v:175:y:2024:i:c:s0305750x23002929
    DOI: 10.1016/j.worlddev.2023.106474
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    More about this item

    Keywords

    Democratic transition; Real wages; Labor productivity; Total factor productivity; Labor unions; Long-run growth;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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