Abstract
The accuracy of Turkish CPI as a price deflator is questionable especially when it comes to calculating real minimum wages. In this study we investigate the effect of different price indices on the relation between real GDP growth rates and real minimum wage growth rates by using a Granger causality analysis framework using VAR based granger causality tests. Result reveals that there is no causality between real minimu wage growth rates and real GDP growth rates in both directions. We also find a biderectional Granger causality between nominal minimum wage growth rates and COLI (an alternative price indice) growth rates. The results also showed that in line with our assumptions when an alternative deflator is used, the causality relations significantly differes.
Highlights
Minimum wages are important because their current or future expected values have impact on equilibrium market employment rates, price inflation rates or growth rates
It can be concluded that both Cost of Living Index (COLI) growth rates and nominal minimum wage growth rate series were non-stationary at 5% significance levels
Augmented Dickey Fuller (ADF) test was applied to COLI growth rate and nominal minimum wage growth rate series on their first difference levels
Summary
Minimum wages are important because their current or future expected values have impact on equilibrium market employment rates, price (nominal wage) inflation rates or growth rates. When employees who have earnings very close to minimum wage rates (within the range of maximum 10% more of minimum wages) are taken into account this ratio increases to 58% This roughly means that, more than 50% of the formal sector workers live on minimum wages as the numbers reveal. In our previous study we used TUIK’s (Turkish National Statistics Agency) price deflators to calculate real minimum wages. In that manner it can be observed that the accuracy of price deflators has long been debated internationally after The Stigler Committee Report (1961) and The Boskin Report (1996) In line with these debates in many studies (Costa, 2000; Hamilton, 1998; Barrett and Brzozowski, 2010; Beatty and Larsen, 2005) the official CPIs were found to be overestimating the true change in prices. In some other studies (Murphy and Garvey, 2004; Murphy and Garvey, 2005; Heineke, 1979; Moosa, 1997) it has been revealed that the official CPIs were an underestimate of the real change in price levels
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