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Orhan Torul

Associate Professor of Economics at Boğaziçi University

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Surprising Trends Amid Turbulent Times

Turkey’s economy has been on a rollercoaster ride in recent years, facing challenges like currency crises, high inflation, and unorthodox policy responses. But how have these dramatic events affected economic inequality in the country? In a recent paper, my co-authors and I address this question and offer novel insights.

We study the period between 2002 and 2022 and document several unexpected trends in wage, income, and consumption inequality in Turkey. Here is a brief breakdown of our findings:

1. Wage Inequality Is Actually Decreasing

Contrary to what many might expect, wage inequality in Turkey has been on a consistent downward trend, even during recent economic turmoil. This means that the gap between high and low earners in terms of wages has been shrinking.

What’s driving this trend? Several factors are at play:

  • Substantial increases in the minimum wage: This has boosted earnings at the lower end of the income scale, which directly impacts a notable fraction (at least two fifths) of the Turkish workforce. Recent aggressive minimum wage hikes, possibly a byproduct of Turkey’s unorthodox economic policies, have directly targeted lower-income workers, contributing significantly to the reduction in wage inequality.

  • A rapidly growing proportion of university graduates in the workforce: This has increased competition for higher-paying jobs, potentially putting downward pressure on wages at the upper end.

  • Declining “college premium”: One of the most stark findings is that the wage advantage university graduates typically enjoy over those with only a high school education has been narrowing, especially in recent years.

We suggest two possible determinants for the declining college premium:

  • A rapid expansion of universities in Turkey, which has led to a considerably larger supply of graduates, including some from potentially lower-quality institutions.

  • Stagnant educational quality combined with changing employer demands for skills.

This trend could have important implications for the value of higher education in Turkey and the career choices of young people. Will young people continue to see university education as a worthwhile investment if the wage benefits continue to shrink? To what extent will this exacerbate the brain drain Turkey already faces? These issues are particularly crucial in today’s knowledge-based economy, where human capital plays an increasingly vital role.

2. Income Inequality: A Complex Picture with Recent Reversals

While wage inequality has been decreasing, the story for overall income inequality is more nuanced. Income inequality also showed a general downward trend for much of the study period but has recently started to reverse.

The key difference lies in the rising inequality of non-labor income components, particularly capital income (from investments) and entrepreneurial income. This suggests that while wage earners are seeing more equality, those with significant investments or business income are pulling ahead.

Several factors contribute to this complex picture:

  • The introduction of Foreign Exchange-Protected Deposits: This policy, part of Turkey’s unorthodox economic approach, likely benefited wealthier households more, as they had the resources to take advantage of this scheme at the expense of Turkish taxpayers. This may have contributed to the recent uptick in income inequality.

  • Divergent trends in different income sources: While labor income (wages and salaries) has become more equally distributed, other income sources like rental income, interest earnings, and profits from businesses have become more concentrated among top earners.

  • Economic volatility: Turkey’s recent economic challenges, including high inflation and currency depreciation, may have disproportionately affected different income groups. Those able to hedge against these risks through investments or foreign currency holdings may have seen their relative income position improve.

We note that these trends highlight the importance of looking beyond just wage inequality when assessing overall economic disparities. Policies aimed at reducing inequality may need to consider not just labor market interventions but also measures addressing wealth concentration and investment income.

3. Consumption Inequality: A Surprising Surge

Perhaps the most striking finding is the recent surge in consumption inequality. For the first time in the period studied, consumption inequality has significantly surpassed income inequality. This means that the gap in what people are actually spending (rather than just earning) has widened significantly.

What’s behind this trend? We found that it was predominantly driven by increased spending on durable goods (things like appliances, vehicles, and electronics) among the top-income group. This could be a result of wealthier households trying to protect their wealth against high inflation by investing in physical assets.

Several factors may be contributing to this phenomenon:

  • Inflationary pressures: With Turkey experiencing high inflation rates, wealthier households may be more able to maintain or increase their consumption, particularly of durable goods, as a hedge against currency depreciation.

  • Credit access: Higher-income groups may have better access to credit, allowing them to finance large purchases even in economically uncertain times.

  • Expectations of future economic conditions: Wealthier households might be accelerating major purchases in anticipation of further economic challenges or price increases.

  • Uneven impact of economic policies: Some of Turkey’s unorthodox economic measures may have had unintended consequences, potentially fueling the increase in consumption inequality. For instance, policies aimed at stimulating economic growth might have disproportionately benefited those already in a stronger financial position.

This divergence between income and consumption inequality highlights how economic turbulence can affect different segments of society in unexpected ways. While some may be seeing their wages rise relative to others, the ability to maintain living standards or protect wealth through spending may be increasingly unequal.

What Does It All Mean?

This new research paints a complex picture of economic inequality in Turkey. On one hand, the narrowing of wage gaps and overall decline in income inequality for much of the period studied could be seen as positive developments. On the other hand, the recent uptick in income inequality and the surge in consumption inequality suggest that economic challenges and policy responses may be creating new forms of disparity.

As Turkey continues to navigate economic challenges, policymakers will need to carefully consider these nuanced trends in inequality. Addressing wage disparities is important, but so too is ensuring that all segments of society can maintain their standard of living in the face of economic uncertainty.

We believe this study provides valuable insights into the complex dynamics of inequality in an emerging economy facing significant challenges. As the situation continues to evolve, further research will be crucial to understand the long-term impacts of recent economic trends and policy choices on the financial well-being of Turkish citizens across the income spectrum.

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