By Sergiusz Prokurat

Free market economists frequently see minimum wage legislation as a pure political intervention because it causes inflation and unemployment. However, some economic theories show that, under certain circumstances, increasing the minimum wage can be beneficial because it makes workers more productive. 

Raising the minimum wage can be described both as relief for those affected by inflation and as a pro-inflationary factor. The real irony of the minimum wage regulations is that they are supported by well-intentioned groups who simply want to reduce poverty. Meanwhile, those who would seemingly benefit most from an increase in the minimum wage are those who will suffer the most from its negative impacts.

A significant increase in Poland’s minimum wage in 2023, during galloping inflation (anticipated to hit almost 20%) and an ongoing energy crisis, will negatively affect business activities. Due to higher labor costs and higher premiums, enterprises will shift some of their employment costs onto consumers, which will translate into higher prices and impact employees. A too-high minimum wage increase will lead to further strengthening and long-term anchoring of inflation in the economy amid negative real interest rates.

Of course, the inflation is also driven by Russia’s war with Ukraine, rising energy prices, and the COVID-19 pandemic and the government’s responses to it–aid programs, and funds fueling idle time benefits. Moreover, there are studies confirming that during COVID-19 productivity decreased rather than increased. Raising the minimum wage in this type of situation could cause inflation. This is especially true when the increase in the minimum wage rises faster than the increase in labor productivity. Studies by Akgül, Bükey (2020) carried out on Turkey from 1987 to 2018, even before the current crisis, show that an increase in the minimum wage does, indeed, translate into inflation. 

Recently, this dependence has become more visible in Turkey, even to the naked eye. In November 2021, inflation in Turkey was around 20%. In December 2021, President Erdogan made a politically motivated decision to raise the minimum wage from 1 January 2022, by as much as 50.4% to 4,250 lira. The effect was an increase in inflation already in December 2021 (36% year-on-year), and, in the following months, the upward trend continued: January 2022 (48.5% year-on-year), February (54.5% year-on-year), March (61% year-on-year), April (70% year-on-year). Moreover, in Turkey, in mid-2022, there was a second increase in the minimum wage in the six months following the previous one–by another 30%, from 1 July 2022. In September 2022, inflation in Turkey reached 83% year-on-year. These racing wages and inflation contributed to a massive decline in the purchasing power of the Turkish lira, amid dramatically negative interest rates (amounting to only 12%). Clearly, falling real wages and high inflation are spelling disaster for Turkish society. 

However, Poland is not Turkey. Even if Polish proponents of “Erdoganomics” (President Erdogan’s approach to economics in Turkey) exist, there is still an ongoing fundamental public debate about which policies are best for this difficult period. However, this does not change the fact that failure in the fight against inflation will translate into costs that will be borne by Polish society. This means higher interest rates in the future and a decline in the purchasing power of wages, including a decline in the purchasing power of the Polish zloty.