Despite strong output growth, the Turkish economy is struggling to create enough jobs. Turkey has enjoyed an impressive macroeconomic turnaround in the past four years, with accelerating economic growth and declining inflation rates, that has raised per capita income from US$2,160 in 2001 to US$4,172 last year. Unfortunately, such a vibrant performance has not been sufficient to catch up with the country’s growing labour force. Indeed, the number of employed increased by 936,000 (or 4.7% year on year) in the last twelve months — a decent improvement, especially, considering employment contraction in the agriculture sector. However, given 856,000 new entrants to the labour market, the unemployment rate improved a little from 12.4% in the first quarter of 2004 to 11.7% this year. Moreover, the ‘real’ jobless rate is closer to 20% than the official rate, if we account for, at least, those are ready to join the labour market as unemployed.
Unemployment, not low wages, is the real source of poverty. Turkey may not suffer from absolute poverty at large, but labour-market rigidities certainly limit the country’s opportunity landscape and therefore social mobility. According to the latest figures, the number of people living below the absolute poverty line — that is, consuming less than the cost of a minimum food basket — declined marginally from 1.35% of the population in 2002 to 1.29% in 2003. Likewise, the number of people surviving on US$2.15 a day or less moved from 3.04% to 2.39% in the same period. On the other hand, people living below the poverty threshold including non-food items accounted for 28.12% of Turkey’s total population in 2003, up from 26.96% in 2002. Our analysis indicates that formal employment and educational attainments are the most important determinants of income growth and the overall exposure to poverty risk. In other words, artificial wage adjustments have no lasting effect on the level and distribution of income in Turkey.
Turkey needs higher participation in the labour market to eradicate poverty. The productivity surge is an indication of structural changes that will bring prosperity to all, but may have also been somewhat responsible for the country’s lacklustre employment growth. In our opinion, unemployment and the resulting problem of poverty stem from structural factors as well as policy mistakes. First, the labour-force participation rate stands at 46.8%, which is significantly below international norms, due to an extremely low female participation (23.3%) in the labour market. Second, 82% of Turkey’s poor work in the unregistered economy without a social safety net. Third, educational attainments are rising, but the prevailing ‘average’ is not enough for today’s globalizing economic structure. Last but not least, arbitrary increases in the minimum wage reduce the labour demand, especially when the cost of capital is on a downtrend trend, and thereby harm the poor by keeping young and unskilled workers off the labour market (see Minimum Wage, Maximum Pain, May 12, 2005).
Labour costs exceeding the marginal productivity of labour result in insufficient labour demand. In our view, the minimum wage is not an effective instrument to alleviate poverty and promote social welfare. In fact, such a rigid system restricts employment opportunities for, and accordingly increases unemployment among, low-skilled workers. Thus, raising the minimum wage, without an equivalent productivity increase, can incapacitate workers from acquiring better wages in the future. Turkey’s own experience shows that the nation-wide minimum wage scheme is an artificial barrier that encourages companies to increase labour-augmenting investment spending. Moreover, firms respond to the higher starting wage by flattening the wage profile for workers in subsequent years and cutting back on productivity-enhancing job training.
A wider wage spread reflecting productivity differences would boost employment growth. The problem really arises from Turkey’s tax wedge, which is one of the highest among OECD countries. Employment taxes and social security contributions increased from 23% of gross wages to 54% last year, lowering the economy’s labour-absorption capacity. This is why we have long argued in favour of a comprehensive tax reform and a regional minimum wage model that would reflect productivity differences. The normalisation of the macroeconomic landscape is certainly very important for sustainable economic growth, but the country can realise its long-term potential by addressing institutional shortcomings and microeconomic weaknesses. In addition to greater labour-market flexibility and lower tax burden that would contribute to employment growth, we believe that making poverty history and improving income and wealth distribution require higher educational attainments and the emergence of an entrepreneurial class
By Morgan Stanley Equity Research