Astonishing decrease in unemployment

ISTANBUL (CIHAN)- The last paragraph of my Tuesday column was as follows: “To sum up, I can say the growth forecasts below 3 percent seem to be quite pessimistic given the growth under way. That said, a growth rate of over 4 percent does not seem very likely. A key political economic factor in these circumstances would be developments in the unemployment rate.

While you are reading this article, the labor market figures of January will have already been published. I will comment on them on Saturday, but I expect that the unemployment rate will remain almost unchanged, at least for the time being.”

Well, I was mistaken. Unemployment decreased in January (the December-January-February period) for the fourth consecutive period. In the aftermath of the very low growth period in 2012, unemployment increased slightly. The unemployment rate reached its peak in August of last year at 10.2 percent. Then, it began to decrease. Gradually, the seasonally adjusted unemployment rate reached 9.4 percent in December. In January, we witnessed a rather big jump down to 9.1 percent. This decrease has been due to a strong increase in employment, particularly manifest in the construction sector and in services to a certain extent.

While we have been passionately discussing the fate of economic growth, which could be over 3 percent, this decrease in unemployment is quite astonishing. What is happening? We cannot solve the mystery fully at the moment, but we can make some observations. Economic growth accelerated last autumn as domestic demand enjoyed a revival. The yearly growth rate reached 4.4 percent in the last quarter of 2013. We know that employment follows economic growth, but with a time lag. So, it is not very surprising to observe decreasing unemployment figures, but this is not the whole story. At the same time, the economic growth has created a disproportionate number of jobs. The growth rates both of gross domestic product (GDP) and employment have had almost an equal impact. This phenomenon is not new. The job creation capacity of economic growth increased tremendously in the aftermath of the Great Recession. One should note that female employment in the service sector rose strongly in January of this year. I have dealt with this topic in my previous articles. Female labor force participation is now over 30 percent, while it was about 23 percent 10 years ago.

Admittedly, this new dynamic in the Turkish labor market is good for employment, but this reveals at the same time stagnation in labor productivity. This is certainly bad news for helping Turkey avoid the middle income trap, but this is a problem for the medium term that must be discussed in another context. At the moment, the Justice and Development Party (AKP) government, particularly Prime Minister Recep Tayyip ErdoIan, should be quite satisfied with the decreasing unemployment despite the rather low economic growth.

This satisfaction strengthens the government’s hand in fighting both increasing inflation and the high current account deficit. As I explained in my recent articles, Ali Babacan, deputy prime minister for the economy, as well as the central bank management try to keep domestic demand under control while they target a GDP growth close to 4 percent. If the current job creation capacity of economic growth continues, this growth level would suffice to prevent unemployment from rising.

There are two critical questions at this point. Will GDP growth continue to rise toward 4 percent, or decline to below 3 percent as many economists forecast? Will the low growth and high employment policy be maintained in the near future? The direction unemployment will take depends on the answers to these questions. To be frank, I have no clear-cut answers at the moment.