Are Real Wages and Competitiveness Compatible in the Turkish Manufacturing Industry

In developed countries there generally exists a positive correlation between real wages and labor productivity. However, data from the Turkish manufacturing industry indicates the absence of such a correlation in the Turkish economy. The implication is that nominal wages are being used as an instrument for populist policies in Turkey, leading to a trade-off between real wages and competitiveness, as found in the analysis of Dornbusch and Edwards (1993). During populist periods, real wages increase at a higher rate than labor productivity. It follows that the resulting loss of competitiveness leads to a deterioration of the balance of payments and therefore contributes to economic crises in Turkey. In our study we empirically estimate labor productivity elasticities of real wages for both the public and private sectors of the Turkish manufacturing industry, using various cointegration techniques. Our econometric model is a modified version of Collins and Park (1989) that specifies the relationship between real wages, labor productivity, and competitiveness. We generate estimations using quarterly data, ranging on a ten-year period: 1988Q11998Q2. Our empirical findings strongly indicate that: (1) in the private sector, labor productivity elasticity of real wages is very low so that there is an obvious trade-off between competitiveness and real wages determination, (2) in the public sector, real wages are inelastic to labor productivity so that competitiveness and real wages are perfectly incompatible.