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Economic populism and institutional changes in wage–labor relations

Abstract

John R. Commons emphasized the legislative role of governments in wage–labor relations, which instituted collective bargaining for labor organizations. Hence, workers largely abandoned ideas of cooperative production and socialism. This represented an institutional change in the balance power between the working class and industries. The present work discusses the case of the Turkish economy. When wage–labor relations were institutionalized in the 1960s, a strong bond between the working class and the government was established. The institutionalization of the wage–labor relationship gave considerable power to the working class, which in turn influenced government’s economic policies. This was the birth of economic populism. This institutionalization became a major obstacle to economic stability and caused a deep path dependency that resulted in chronic inflation and unstable exchange rates for decades.

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Fig. 5
Fig. 6
Fig. 7

Source: Nominal exchange rate was derived from the Federal Reserve Bank of St. Louis (the lira per US dollar). For real exchange rate see Appendix Footnote

In Ünal (2018), this goes back to 1973 input–output tables, and the rest of the tables from WIOD for remaining years indicated that the currency remained overvalued except in the period of economic downturn. For additional information also see Varol (2019) and Ünal (2016). The calculation of the real exchange rate for the period 1973–1985 and 1985–2003 is based on Ünal (2016, 2018). Logarithms were used for the periods of significant depreciations.

Fig. 8

Availability of data and materials

Various sources were used to collect data for the analyses. Each source of data and materials has been available and pointed through the paper.

Notes

  1. 1.

    The working class is defined as labor which is comprised of workers, public servants and minimum wage earners in all production sectors.

  2. 2.

    Source: Data werederived from TurkStat (employed persons by type of economic activity).

  3. 3.

    Source: Eurostat (Minimum wage statistics, proportion of minimum wage earners).

  4. 4.

    Source: Federal Reserve Bank of St. Louis (Economic Research).

  5. 5.

    Source: The UN database, “national accounts estimates of main aggregates” and “GDP by type of expenditure” categories (GDP constant US dollars, 2015 = 100).

  6. 6.

    Source: IMF (Central government debt, percent of GDP).

  7. 7.

    Source: IMF (Interest paid on public debt, percent of GDP).

  8. 8.

    For additional source: “Turkish prime minister loses vote in parliament” (CNN World News).

  9. 9.

    For additional source: “Turkey to raise minimum wage by 30 percent: Turkish PM” (Hürriyet Daily News).

  10. 10.

    In Ünal (2018), this goes back to 1973 input–output tables, and the rest of the tables from WIOD for remaining years indicated that the currency remained overvalued except in the period of economic downturn. For additional information also see Varol (2019) and Ünal (2016). The calculation of the real exchange rate for the period 1973–1985 and 1985–2003 is based on Ünal (2016, 2018). Logarithms were used for the periods of significant depreciations.

  11. 11.

    Deflators of Turkey and the US were derived and calculated from the UN database, “National accounts estimates of main aggregates” and “GDP by type of expenditure” categories. \({v}_{e}\) deflator was calculated from exports at current prices (US dollars) divided by exports at constant. \({v}_{n}\) deflator was calculated from domestic consumption at current price (US dollars) divided by domestic consumption at constant price (US dollars). Domestic consumption = GDP – export + import.

  12. 12.

    Export price was derived from the UN database. Export price can be calculated from exports at current prices (national currency) divided by exports at constant prices (national currency) for both Turkey and the US.

  13. 13.

    For additional information about PPP and the method used to calculate proportional nominal wage rate growth and negligible import material cost, see Ünal (2016).

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Acknowledgements

I would like to thank anonymous referees for their excellent comments and suggestions, and Robert Charles Perry for his input and efforts on this paper.

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Appendices

Appendix: How to calculate productivity growth in consumption goods and export goods

In calculating the productivity growth of consumption goods and export goods, input–output tables were used (Ünal 2018). In Fig. 4, for the period 1973–1985, TurkStat’s input–output tables and employment data from ILO were used. For the period 1995 to 2011, WIOD input–output tables released in 2014 were used. For the period 2011–2014, WIOD input–output tables released in 2016 were implemented. For productivity growth, the number of persons engaged in production was derived from the WIOD. The calculation was made by the following method:

$$Ax+y=x$$
(1)

In Eq. (1), A is the technological coefficients’ matrix, \(y\) is the vector of final demand and \(x\) is a vector that shows output.

$$y=x-Ax$$
(2)
$$x={(I-A)}^{-1}y$$
(3)

In Eq. (3), \(I\) is the unit matrix. The Leontief (1936) inverse matrix \({(I-A)}^{-1}\) is used to calculate the labor required to directly and indirectly produce one unit of each commodity.

$$y=\left(I-A\right)x$$
(4)
$$\emptyset x=L$$
(5)

In Eqs. (4) and (5), \(x\) is a column vector representing the total amount of output for each commodity, \(A\) is the input coefficient matrix, which shows the amount of domestic commodities used by an industry to obtain one unit of output. \(\emptyset\) is a row vector that shows the amount of labor that is directly used to produce one unit of output. In other words, it is the labor in each industry divided by output in each industry. Finally, \(L\) is a scalar that shows total labor.

$$\emptyset {(I-A)}^{-1}=v$$
(6)

\(v\) is a row vector that shows the amount of labor that is directly and indirectly required to produce one physical unit of each commodity.

$$vy=v\left(N+E\right)=L$$
(7)

Total domestic consumption is indicated by \(N\), and total export is indicated by \(E\). The shares of each commodity in this total are indicated as column vectors \(n\) and \(e\), respectively.

$${v}_{n}={\sum }_{k=1}{v}_{k}{n}_{k}\mathrm{ and }{v}_{e}={\sum }_{k=1}{v}_{k}{e}_{k}$$
(8)

In Eq. (8), \({v}_{n}\) and \({v}_{e}\) are the vertically integrated labor input coefficients of domestic consumption goods and export goods, respectively. These coefficients were multiplied by price deflators.Footnote 11 If the coefficients decrease, the productivity of domestic consumption goods and export goods increases.

How to calculate the real exchange rate

Purchasing power parity (PPP) was assumed to be a hypothetical real exchange rate. For the real exchange rate, the prices of export goods and services are utilized. \({p}_{e}\) is the export price,Footnote 12\({v}_{e}\) is the vertically integrated labor input coefficient of export goods, and its inverse is productivity of export goods \({q}_{e}\). \(w\) is the nominal wage. The mark-up rate is indicated by \(1+{m}_{e}\), and the import cost is \({c}_{im}\) as follows:

$${p}_{e}=\left(1+{m}_{e}\right)\left(w{v}_{e}+{c}_{im}\right)=\left(1+{m}_{e}\right)\left(w/{q}_{e}+{c}_{im}\right)$$
(9)

By using export prices, the real exchange rate can be calculated thus:

$${PPP}^{A}\left({p}_{e}^{A}\right)= {(p}_{e}^{B})$$
(10)

\(A\) shows the country A, and \(B\) shows country B. ∆ shows the growth rate.Footnote 13 If the import cost is negligible in both countries, Eq. (9) can be described as follows:

$${\Delta PPP}^{A} =\left[\Delta \left(1+ {m}_{e}^{B}\right)+{\Delta w}^{B }- \Delta {q}_{e}^{B}\right]- \left[\Delta \left(1+ {m}_{e}^{A}\right) + {\Delta w}^{A}-\Delta {q}_{e}^{A}\right]$$
(11)

Equation (11) indicates the change in the real exchange rate. In Fig. 7, The Turkish real exchange rate was calculated by taking the exchange rate of the US into account.

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Ünal, E. Economic populism and institutional changes in wage–labor relations. Evolut Inst Econ Rev 18, 407–433 (2021). https://doi.org/10.1007/s40844-021-00219-z

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Keywords

  • Economic populism
  • Input–output analysis
  • Institutional changes
  • Path dependency
  • Turkey

JEL Classification

  • B25
  • D57
  • P16