Relationships among labour productivity, real wages and inflation in Turkey

Abstract

The main purpose of this paper is to examine the interrelationships among productivity, real wages and inflation in the Turkish manufacturing industry for the period of 1988: 1 to 2012:2. To that end, this paper employs both cointegration analysis and a Granger causality test. This paper finds that inflation has a greater effect on labour productivity than do real wages. Furthermore, the Granger causality test shows that there is a strong feedback between labour productivity and inflation, suggesting policy makers targeting inflation should follow labour productivity. This test suggests that there is no causal link running from productivity to real wages in the Turkish manufacturing industry. This absence of a link is largely due to lower bargaining power and structural problems, including high unemployment, a huge tax burden on wages and the large share of the informal sector.