Labor markets in Turkey: The worst of both worlds

Last week the Turkish Statistics Institute (TurkStat) released its latest statistics regarding the labor force.

According to TurkStat, the rate of unemployment was 11.2 percent in February, 1 percent higher than the same month last year. On the other hand, the seasonally adjusted unemployment rate was slightly below its peak value in the fourth quarter of last year.

The labor market is an area where the Justice and Development Party (AKP) government has been the least successful. First, the unemployment rate never returned to pre-crisis levels after 2002. It was around 6 percent before the crisis hit Turkey hard in 2001. Although there were strong comebacks in other aspects of economic activity, the unemployment rate never fell below 8 percent, lingering mostly around the 9 to 11 percent range.

On the other hand, the AKP government has been somewhat successful when reducing the relative share of the informal sector. The ratio of people who worked without receiving social security from their primary employer decreased from 50 percent of the total Turkish labor force in the early 2000s to the current 30 percent.

Still, this level is very high for a country at Turkey’s stage of development. Working informally brings all kinds of abuses and insecurities. I will discuss the causes of these a little later, but first let me share a few more statistics. The labor share of national income is 34 percent in Turkey, the lowest ratio among any country in the Organization for Economic Cooperation and Development (OECD), even lower than Mexico.

As real wages rise at a much slower pace than national income, the labor share is in a further decline. Moreover, statistics also show that Turkish workers have much longer working hours than their average counterparts in other OECD countries. Finally, workplace safety is certainly not a priority for either employers or regulators in Turkey, and, due to the lack of decent employment opportunities, it cannot be a priority for workers either.

According to a recent empirical study by Sezgin Polat of Galatasaray University, there are no statistically significant risk premiums on wages of workers in risky jobs. This is especially true for low-paying jobs. Workers are not in a position to demand higher wages for riskier jobs, and, partly as a result, fatal workplace accidents are very common in Turkey. This disturbing fact alone suggests that something is fundamentally wrong in Turkish labor markets.

On the other hand, employers also complain bitterly about labor regulations. For example, they claim that the required severance payments are very excessive. It is very odd that neither employees nor employers are happy about the status quo. Last year, Dr. Anil Duman of Yaiar University prepared a report on this issue for the Economic Research Forum, a joint initiative of Koc University and the Turkish Industrialists and Businessmen’s Association (TuSiAD), titled “Labor Market Institutions, Policies and Performance: Flexibility and Security in Turkey.” Duman utilizes the relatively recent concept of “flexicurity” as a way to optimally combine labor market security for workers and flexibility for employers. She notes that Denmark has been especially successful at achieving the best of both worlds by combining low levels of dismissal protection and high unemployment benefits. Duman concluded that “Turkish labor markets have been found to be both inflexible and insecure, which is the least desirable combination, as neither the employees nor the employers could benefit from such a setting.”

According to the report, rigid regulations on outsourcing and reliance on temporary or part-time employment make it very difficult for companies to adapt to changes in underlying market conditions. Naturally, this makes companies more reluctant to recruit, something especially true for established firms that are very keen to comply with all regulations.

At the other end of the spectrum, there are many small enterprises that do not comply with any regulations. The personnel in these unofficial firms do not get any protection from formal regulations: They do not have the protection of social security — most of the time they can be dismissed without any legitimate cause — and receive neither severance pay nor any unemployment benefits. Sometimes the dismissals are due to the health-related issues, and when this is the case, the misery is multiplied. Even if the workers were eligible for formal unemployment benefits, the duration of these is short and the financial benefits are very small. Moreover, Labor Minister Faruk celik has revealed that only one in 10 workers are eligible for severance payments.

Selective implementation of labor market regulations reinforces the dual character of the Turkish labor market. In the formal sector, where all regulations are complied with, employers cannot enjoy any flexibility. In the informal sector, workers do not enjoy any social protection, and are usually at the mercy of their bosses. So labor markets in Turkey provide the worst of both worlds, offering neither security for employers nor flexibility for employees.