Population growth has outpaced employment growth for many years in Turkey, dating as far back as the 1960s. Taking just the period from 1980–2003, the working-age population grew by 20 million, but only 3.4 million jobs were created (Figure 10.1). As a result, by 2003, Turkey’s employment rate of 43.2 percent—that is, the percentage of the adult population that is employed—was one of the lowest in the world. Most countries, with exceptions largely in the Middle East, have employment rates in excess of 50 percent. The European Union average was 63 percent in 2002.
Adult Population, Labor Force, and Employment
(In millions)
Source: State Institute of Statistics.The unemployment rate, at 10.3 percent in 2003, is not as much of an outlier as the employment rate by European standards. The discrepancy is because of one of the striking features of the Turkish labor market, which is the low labor force participation rate. Figure 10.1 shows the increasing divergence between the adult population and the labor force—a growing share of people not employed were not looking for work and thus not counted as unemployed. As will be seen in the next two sections, low labor force participation is particularly pronounced for women. Both supply and demand considerations are also factors.
Low wages have kept Turkish labor costs internationally competitive. Labor value added, at $7,345 in 2002, was relatively low, but so was labor compensation at $2,297 (Table 10.1). The labor cost per unit value-added of 0.31 is substantially less than the other European Union and accession comparators. However, the increase between 1995 and 2002 in Turkey’s labor costs per unit value added in manufacturing and services—5 percent and 4.2 percent, respectively—was substantially higher than any of the other comparators.
International Competitiveness
(Labor cost per value-added unit in current U.S. dollars)
Per employee, expressed in U.S. dollars.
Compound average annual growth.
Portugal data for 1995 and 1997 only.
Data for 1995 and 2001 only.
International Competitiveness
(Labor cost per value-added unit in current U.S. dollars)
| 2002 | Total Economy | Agriculture | Manufacturing | Services, Including Public | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Value added1 | Compensation1 | 1995 | 2002 | Percent change2 | 1995 | 2002 | Percent change | 1995 | 2002 | Percent change | 1995 | 2002 | Percent change | |
| Turkey | 7,345 | 2,297 | 0.25 | 0.31 | 4.5 | 0.08 | 0.09 | 1.4 | 0.19 | 0.25 | 5.0 | 0.33 | 0.41 | 4.2 |
| Portugal3 | 16,233 | 8,626 | 0.53 | 0.53 | 0.2 | 0.17 | 0.2 | 6.0 | 0.58 | 0.57 | −0.2 | 0.56 | 0.55 | −0.4 |
| Spain | 36,416 | 19,275 | 0.52 | 0.53 | 0.5 | 0.17 | 0.21 | 4.5 | 0.62 | 0.68 | 1.8 | 0.51 | 0.51 | −0.1 |
| Greece | 29,654 | 10,902 | 0.35 | 0.37 | 1.0 | 0.09 | 0.11 | 4.9 | 0.50 | 0.46 | −1.7 | 0.36 | 0.38 | 1.1 |
| Poland | 18,589 | 9,278 | 0.48 | 0.50 | 0.7 | 0.19 | 0.23 | 4.0 | 0.54 | 0.61 | 2.2 | 0.49 | 0.49 | −0.2 |
| Hungary4 | 9,755 | 5,060 | 0.53 | 0.52 | −0.6 | 0.38 | 0.39 | 0.8 | 0.59 | 0.57 | −0.6 | 0.53 | 0.51 | −0.8 |
| Mexico | 15,750 | 5,544 | 0.32 | 0.35 | 1.8 | 0.17 | 0.19 | 1.8 | 0.27 | 0.32 | 3.1 | 0.35 | 0.37 | 1.3 |
| Korea | 33,544 | 15,179 | 0.47 | 0.45 | −0.9 | 0.10 | 0.10 | 0.9 | 0.45 | 0.39 | −2.9 | 0.52 | 0.50 | −0.5 |
Per employee, expressed in U.S. dollars.
Compound average annual growth.
Portugal data for 1995 and 1997 only.
Data for 1995 and 2001 only.
International Competitiveness
(Labor cost per value-added unit in current U.S. dollars)
| 2002 | Total Economy | Agriculture | Manufacturing | Services, Including Public | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Value added1 | Compensation1 | 1995 | 2002 | Percent change2 | 1995 | 2002 | Percent change | 1995 | 2002 | Percent change | 1995 | 2002 | Percent change | |
| Turkey | 7,345 | 2,297 | 0.25 | 0.31 | 4.5 | 0.08 | 0.09 | 1.4 | 0.19 | 0.25 | 5.0 | 0.33 | 0.41 | 4.2 |
| Portugal3 | 16,233 | 8,626 | 0.53 | 0.53 | 0.2 | 0.17 | 0.2 | 6.0 | 0.58 | 0.57 | −0.2 | 0.56 | 0.55 | −0.4 |
| Spain | 36,416 | 19,275 | 0.52 | 0.53 | 0.5 | 0.17 | 0.21 | 4.5 | 0.62 | 0.68 | 1.8 | 0.51 | 0.51 | −0.1 |
| Greece | 29,654 | 10,902 | 0.35 | 0.37 | 1.0 | 0.09 | 0.11 | 4.9 | 0.50 | 0.46 | −1.7 | 0.36 | 0.38 | 1.1 |
| Poland | 18,589 | 9,278 | 0.48 | 0.50 | 0.7 | 0.19 | 0.23 | 4.0 | 0.54 | 0.61 | 2.2 | 0.49 | 0.49 | −0.2 |
| Hungary4 | 9,755 | 5,060 | 0.53 | 0.52 | −0.6 | 0.38 | 0.39 | 0.8 | 0.59 | 0.57 | −0.6 | 0.53 | 0.51 | −0.8 |
| Mexico | 15,750 | 5,544 | 0.32 | 0.35 | 1.8 | 0.17 | 0.19 | 1.8 | 0.27 | 0.32 | 3.1 | 0.35 | 0.37 | 1.3 |
| Korea | 33,544 | 15,179 | 0.47 | 0.45 | −0.9 | 0.10 | 0.10 | 0.9 | 0.45 | 0.39 | −2.9 | 0.52 | 0.50 | −0.5 |
Per employee, expressed in U.S. dollars.
Compound average annual growth.
Portugal data for 1995 and 1997 only.
Data for 1995 and 2001 only.
Real wage growth has been well below labor productivity growth since the mid-1990s. During the first half of that decade, real wages outpaced labor productivity by a wide margin (Figure 10.2). Following the economic crisis in 1994, real wages fell sharply and then remained relatively constant, with some fluctuation. Real wages fell sharply again in 2001 following another economic crisis. Wages started to recover in 2003, but at the end of the year were still 15 percent below end-2000 levels. Labor productivity has been on an increasing trend consistent with the steady transformation of the economy from low-productivity agriculture to higher-productivity sectors. More recently, this trend also reflects falling real wages and an increase in average working hours.
Productivity and Real Wages in Private Manufacturing
Source: State Institute of Statistics.A strong legal framework to protect the rights of workers does not protect workers against risks of unemployment and income loss. This framework includes the Social Security system, labor legislation that restricts the rights of employers to fire workers, unemployment insurance, and proactive labor market policies. In practice, however, relatively few workers have access to the mandated social protection, and one effect of this system appears to be a growing informal sector. Depending on the data source, from 42 to 49 percent of the employed labor force belongs to one of the Social Security organizations. Coverage is higher in urban areas at 63 percent. Unemployment insurance is available to about 20 percent of the employed workforce. Employment protection laws such as severance payments are reported to be widely flouted. While the informal sector contributes to the flexibility of the labor market, it brings down aggregate productivity and contributes to the imbalances in the Social Security system.
Labor Supply
The ongoing demographic transition in Turkey has led to a significant increase in the working-age population. This has generated large numbers of young, inexperienced workers who have been difficult to absorb into productive employment. Population growth slowed from 2.7 percent in 1950 to 1.6 percent currently, and is expected to be near zero in 2050 (Table 10.2). However, because of the falling infant mortality rate, the age structure of the population becomes skewed toward younger ages.
Population Growth and Shares by Decade
(In percent)
Population Growth and Shares by Decade
(In percent)
| 1950–60 | 1960–70 | 1970–80 | 1980–90 | 1990–2000 | 2000–10 | 2010–20 | 2020–30 | 2030–40 | 2040–50 | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Growth rate | ||||||||||||
| 0–14 | 3.4 | 2.3 | 2.2 | 1.2 | 0.2 | −0.3 | −0.6 | −0.6 | −0.3 | −0.6 | ||
| 15–64 | 2.3 | 2.5 | 2.6 | 3.0 | 2.3 | 2.0 | 1.3 | 0.7 | 0.1 | −0.2 | ||
| 65+ | 3.5 | 4.8 | 3.1 | 1.4 | 4.4 | 2.5 | 3.3 | 4.1 | 3.5 | 2.5 | ||
| Share | ||||||||||||
| 0–14 | 41.2 | 42.2 | 41.2 | 38.6 | 34.1 | 29.1 | 24.9 | 21.4 | 19.4 | 17.9 | ||
| 15–64 | 55.5 | 53.9 | 54.4 | 57.1 | 61.0 | 65.0 | 68.2 | 69.4 | 68.0 | 65.7 | ||
| 65+ | 3.3 | 3.9 | 4.4 | 4.3 | 4.9 | 5.8 | 6.9 | 9.2 | 12.6 | 16.4 | ||
| Memorandum items: | ||||||||||||
| 15–64 population in less developed countries, excluding China | ||||||||||||
| Of which: | ||||||||||||
| Growth rate | 2.0 | 2.3 | 2.7 | 2.7 | 2.4 | 2.2 | 1.7 | 1.3 | 0.9 | 0.6 | ||
| Share | 56.0 | 54.3 | 54.5 | 56.3 | 58.3 | 61.1 | 63.5 | 64.9 | 65.7 | 65.9 | ||
Population Growth and Shares by Decade
(In percent)
| 1950–60 | 1960–70 | 1970–80 | 1980–90 | 1990–2000 | 2000–10 | 2010–20 | 2020–30 | 2030–40 | 2040–50 | |||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Growth rate | ||||||||||||
| 0–14 | 3.4 | 2.3 | 2.2 | 1.2 | 0.2 | −0.3 | −0.6 | −0.6 | −0.3 | −0.6 | ||
| 15–64 | 2.3 | 2.5 | 2.6 | 3.0 | 2.3 | 2.0 | 1.3 | 0.7 | 0.1 | −0.2 | ||
| 65+ | 3.5 | 4.8 | 3.1 | 1.4 | 4.4 | 2.5 | 3.3 | 4.1 | 3.5 | 2.5 | ||
| Share | ||||||||||||
| 0–14 | 41.2 | 42.2 | 41.2 | 38.6 | 34.1 | 29.1 | 24.9 | 21.4 | 19.4 | 17.9 | ||
| 15–64 | 55.5 | 53.9 | 54.4 | 57.1 | 61.0 | 65.0 | 68.2 | 69.4 | 68.0 | 65.7 | ||
| 65+ | 3.3 | 3.9 | 4.4 | 4.3 | 4.9 | 5.8 | 6.9 | 9.2 | 12.6 | 16.4 | ||
| Memorandum items: | ||||||||||||
| 15–64 population in less developed countries, excluding China | ||||||||||||
| Of which: | ||||||||||||
| Growth rate | 2.0 | 2.3 | 2.7 | 2.7 | 2.4 | 2.2 | 1.7 | 1.3 | 0.9 | 0.6 | ||
| Share | 56.0 | 54.3 | 54.5 | 56.3 | 58.3 | 61.1 | 63.5 | 64.9 | 65.7 | 65.9 | ||
The fertility rate fell from 6.9 per 1,000 population in 1950–55 to around 2.4 currently, and is expected to decline slightly further to a little over 2 within the next five to 10 years. But the population is expected to continue to grow beyond that point because of a disproportionate number of women of child bearing age, and eventually stabilize at around 100 million in the second half of the twenty-first century.
The bulge in the economically productive age group constitutes a demographic window of opportunity. For Turkey, the peak growth rate of the working-age population occurred in the early 1980s (Table 10.2), when an especially sharp surge coincided with a reversal in net migration. Working-age population growth in the range of 2.5 to 3 percent is rapid in historical perspective, and during 1980–2003, the total increase was 20.5 million persons. By 2020, more than 21 million new workers—today’s under-15 cohort—will have reached working age. If the economy cannot generate productive jobs for these workers, the public policy challenge by 2050 will be to support the bulge in the population that will be dropping out of the labor force.
The quality of the work force as measured by educational attainment has been improving. The system of primary and secondary education provided free by the state was extensively revised in the late 1990s, and compulsory schooling was raised from five to eight years. Higher education opportunities also grew during the 1980s and 1990s through new universities, both public and private, and distance learning programs. Enrollment in higher education, though at comparatively low levels, registered strong gains, particularly for women. Results are apparent: a decline in the share of those who are illiterate or without basic education, a roughly constant share of those with primary education, and a rapidly growing share, though still small, of those with a higher education (Table 10.3).
Educational Attainment
(In percent of population)
Educational Attainment
(In percent of population)
| Total Population | Men | Women | ||||
|---|---|---|---|---|---|---|
| 1988 | 2001 | 1988 | 2001 | 1988 | 2001 | |
| Illiterate | 22.9 | 13.4 | 11.6 | 5.4 | 33.9 | 21.4 |
| No diploma | 9.1 | 4.5 | 9.6 | 4.3 | 8.6 | 4.7 |
| Primary | 47.2 | 48.1 | 51.8 | 47.7 | 42.8 | 48.4 |
| Junior | 8.1 | 10.2 | 10.5 | 13.2 | 5.7 | 7.1 |
| Junior vocational | 0.7 | 0.2 | 1.0 | 0.2 | 0.5 | 0.2 |
| High | 6.0 | 10.7 | 7.1 | 12.7 | 5.0 | 8.6 |
| High vocational | 2.7 | 5.2 | 3.8 | 6.9 | 1.7 | 3.5 |
| College+ | 3.2 | 5.7 | 4.7 | 7.2 | 1.8 | 4.2 |
Educational Attainment
(In percent of population)
| Total Population | Men | Women | ||||
|---|---|---|---|---|---|---|
| 1988 | 2001 | 1988 | 2001 | 1988 | 2001 | |
| Illiterate | 22.9 | 13.4 | 11.6 | 5.4 | 33.9 | 21.4 |
| No diploma | 9.1 | 4.5 | 9.6 | 4.3 | 8.6 | 4.7 |
| Primary | 47.2 | 48.1 | 51.8 | 47.7 | 42.8 | 48.4 |
| Junior | 8.1 | 10.2 | 10.5 | 13.2 | 5.7 | 7.1 |
| Junior vocational | 0.7 | 0.2 | 1.0 | 0.2 | 0.5 | 0.2 |
| High | 6.0 | 10.7 | 7.1 | 12.7 | 5.0 | 8.6 |
| High vocational | 2.7 | 5.2 | 3.8 | 6.9 | 1.7 | 3.5 |
| College+ | 3.2 | 5.7 | 4.7 | 7.2 | 1.8 | 4.2 |
Turkey still lags comparator countries in levels of human capital. The secondary enrollment rate is 58 percent compared to an average of 67.9 percent for middle-income countries and 67.7 percent for Middle Eastern and North African countries. Turkey also lags Eastern Europe, including the new European Union members where education systems are already at near industrial country levels.
High unemployment rates for educated youth suggest that there is not yet sufficient demand for skilled labor. In 2002, unemployment was 45 percent for high school graduates and 31 percent for college graduates ages 20–24, but only 12 percent for primary school graduates. This probably reflects educated workers having a higher reservation wage. But it also reflects a paradox (also seen in many other countries): those who are educated and should be in high demand are unemployed. Not only does this have implications for productivity, it also creates considerable dissatisfaction among an important segment of the population. Over time, it may reduce the incentives to seek education.
Labor force participation in Turkey is exceptionally low by international standards and has been in long-term decline. The overall participation rate of 48.3 percent in 2003 was the lowest among member countries of the Organization for Economic Cooperation and Development (OECD) and 20 percentage points below the OECD average (Table 10.4). Participation and employment rates differ significantly with respect to gender and location. Rural participation rates are higher than urban ones, and men’s rates are higher than women’s. Women’s labor force participation in urban areas, at only 18.6 percent, is exceptionally low, although educated urban women are much more likely than uneducated ones to participate in the labor force. For the overall economy, the male participation rate of 70.4 percent is nearly three times the female rate of 26.6 percent.
Labor Force Participation and Employment in 2003
Data from OECD Economic Outlook, December 2003, is not strictly comparable to Household Labor Force Survey.
Labor Force Participation and Employment in 2003
| Population, 15+ | Labor Force | Employment Rate | Participation | Employment Rate | |||
|---|---|---|---|---|---|---|---|
| In millions | In percent | ||||||
| Total | 48.9 | 23.6 | 21.1 | 48.3 | 43.2 | ||
| Of which: | |||||||
| Female | 24.7 | 6.6 | 5.9 | 26.6 | 23.9 | ||
| Male | 24.3 | 17.1 | 15.3 | 70.4 | 62.9 | ||
| Urban | 29.9 | 13.1 | 11.3 | 43.8 | 37.7 | ||
| Of which: | |||||||
| Female | 14.9 | 2.8 | 2.3 | 18.6 | 15.1 | ||
| Male | 15.0 | 10.3 | 9.0 | 68.9 | 60.3 | ||
| Rural | 19.0 | 10.6 | 9.9 | 55.5 | 51.9 | ||
| Of which: | |||||||
| Female | 9.7 | 3.8 | 3.6 | 39.0 | 37.4 | ||
| Male | 9.3 | 6.8 | 6.2 | 72.9 | 67.1 | ||
| Memorandum item: | |||||||
| OECD total1 | … | … | … | 69.4 | 64.1 | ||
Data from OECD Economic Outlook, December 2003, is not strictly comparable to Household Labor Force Survey.
Labor Force Participation and Employment in 2003
| Population, 15+ | Labor Force | Employment Rate | Participation | Employment Rate | |||
|---|---|---|---|---|---|---|---|
| In millions | In percent | ||||||
| Total | 48.9 | 23.6 | 21.1 | 48.3 | 43.2 | ||
| Of which: | |||||||
| Female | 24.7 | 6.6 | 5.9 | 26.6 | 23.9 | ||
| Male | 24.3 | 17.1 | 15.3 | 70.4 | 62.9 | ||
| Urban | 29.9 | 13.1 | 11.3 | 43.8 | 37.7 | ||
| Of which: | |||||||
| Female | 14.9 | 2.8 | 2.3 | 18.6 | 15.1 | ||
| Male | 15.0 | 10.3 | 9.0 | 68.9 | 60.3 | ||
| Rural | 19.0 | 10.6 | 9.9 | 55.5 | 51.9 | ||
| Of which: | |||||||
| Female | 9.7 | 3.8 | 3.6 | 39.0 | 37.4 | ||
| Male | 9.3 | 6.8 | 6.2 | 72.9 | 67.1 | ||
| Memorandum item: | |||||||
| OECD total1 | … | … | … | 69.4 | 64.1 | ||
Data from OECD Economic Outlook, December 2003, is not strictly comparable to Household Labor Force Survey.
Labor Demand
The slow pace of employment generation has persisted despite relatively strong economic growth in Turkey. From 1980–2002, annual real GNP growth averaged about 4 percent, compared to employment growth of 0.8 percent (Table 10.5). Real per capita GNP growth, though not spectacular, averaged 2 percent, and per capita GNP in current U.S. dollars more than tripled, from $1,593 to $5,315.
Output, Employment, and Productivity Growth
(Average annual percent change)
Sectoral contributions calculated using 1980 shares of total employment as weights.
Output, Employment, and Productivity Growth
(Average annual percent change)
| Output Per Worker | Growth Rate, 1980–2002 | ||||||
|---|---|---|---|---|---|---|---|
| 1980 | 2002 | Output | Employment | Productivity | |||
| (In 1987 U.S. dollars) | (In percent) | Contribution to Productivity Growth1 | |||||
| Total | 3,302 | 6,329 | 3.8 | 0.8 | 3.0 | 3.0 | |
| Agriculture | 1,641 | 2,492 | 1.1 | −0.8 | 1.9 | 1.0 | |
| Industry | 6,059 | 10,045 | 5.2 | 2.8 | 2.3 | 0.3 | |
| Construction | 3,946 | 6,537 | 2.5 | 0.2 | 2.3 | 0.1 | |
| Services | 4,720 | 7,855 | 4.3 | 1.9 | 2.3 | 0.8 | |
Sectoral contributions calculated using 1980 shares of total employment as weights.
Output, Employment, and Productivity Growth
(Average annual percent change)
| Output Per Worker | Growth Rate, 1980–2002 | ||||||
|---|---|---|---|---|---|---|---|
| 1980 | 2002 | Output | Employment | Productivity | |||
| (In 1987 U.S. dollars) | (In percent) | Contribution to Productivity Growth1 | |||||
| Total | 3,302 | 6,329 | 3.8 | 0.8 | 3.0 | 3.0 | |
| Agriculture | 1,641 | 2,492 | 1.1 | −0.8 | 1.9 | 1.0 | |
| Industry | 6,059 | 10,045 | 5.2 | 2.8 | 2.3 | 0.3 | |
| Construction | 3,946 | 6,537 | 2.5 | 0.2 | 2.3 | 0.1 | |
| Services | 4,720 | 7,855 | 4.3 | 1.9 | 2.3 | 0.8 | |
Sectoral contributions calculated using 1980 shares of total employment as weights.
Slow employment growth may be partially explained by the decline in employment in the agriculture sector. Agriculture was the largest employer in 1980, accounting for 9 million jobs or 50 percent of the total. By 2002, agricultural employment had declined in absolute terms, shedding 1.6 million jobs to 7.4 million or 35 percent of the total. At the same time, despite a fall in output per capita, the sector continues to satisfy most domestic demand for crops and livestock, while supplying traditional exports such as dried fruits and nuts. Countries with large shares of agricultural jobs often generate employment more slowly because workers are concentrated in the slowest growing sector.
Industry and service sector jobs are likely to be the key to employment generation in the years ahead. Industry accounted for 2.1 million jobs in 1980, only 12 percent of the total, but showed the fastest growth over the period, adding 1.8 million jobs to reach 3.9 million in 2002. The sector consists mostly of manufacturing of a wide variety of outputs for both domestic and export markets, including cement, petrochemicals, steel, textiles and clothing, automotive parts, household durables, and consumer electronics. Export-oriented automotive and electronics products have been the fastest growing categories. Service employment also rose from 5.9 million to 9 million, with its share of employment rising from 33 to 41 percent. Tourism services are a major export earner, plus the sector also produces financial services, transportation, and trade earnings.
The pace of investment in manufacturing, however, has been slower than in other sectors. While private investment rose as a share of GNP following the reforms of the 1980s, much of this was associated with a speculative residential investment boom triggered by high inflation (Figure 10.3). By contrast, structural reforms had only a limited impact on manufacturing investment, which barely reached 5 percent of GNP in the mid-1990s before losing ground again during the ensuing crises. The recent increase in manufacturing investment is a positive sign.
Gross Fixed Private Investment
(In percent of GDP)
Source: State Institution of Statistics.While employment growth has been slow, aggregate employment does not appear to fall significantly, even during crises. In 1994, GNP fell by 6.3 percent while employment continued to grow. That may partly reflect a tendency for agriculture to act as a social safety net, as indicated by a sharp increase in agricultural employment in 1995. In 2001, GNP fell by 9.9 percent, while employment fell by just 0.8 percent. In this case, employment in industry and services continued to grow despite sharp declines in output in these sectors, and while employment in agriculture fell, the elasticity was not exceptionally high. The construction sector—which accounts for only 5 percent of GNP and employment—did shed a significant number of jobs in 2001 and 2002, though this is more likely related to the aftermath of the construction boom of the late 1990s than to any short-term volatility. There are widespread reports that employers are able to adjust informally to the crisis through measures such as unpaid leave.
Increased working hours partly explains the limited response of employment to growth. The number of hours worked per week is high in Turkey and has been increasing. Urban wage and salaried employees worked an average of 46 hours per week in 1988, and by 2001 this had increased to over 50 hours. Casual workers in urban areas were already working 56 hours a week in 1988 and this rose to 60 hours a week by 2001. This increase in working hours may also partially explain the measured increase in labor productivity. Employers and employees are choosing to respond to changes in business conditions by adjusting the number of hours rather than the number of workers.
Lowering the costs of hiring and firing workers may encourage employers to hire new workers as the economy expands. Under current regulations, the labor market may not be sufficiently flexible going forward (see below). In addition, as inflation declines, sustaining real wage adjustments will be more difficult. Further, there is a natural limit to increasing working hours rather than hiring new workers.
Labor Market Regulation
The Labor Code passed in May 2003 introduced important changes in the regulation of labor. Part-time and fixed-term contracts were placed on an equal legal footing with full-time and indeterminate forms of employment. Flexibility was introduced in terms of working time. Collective dismissals were regulated in detail for the first time. In the area of job security, there was increased protection for workers in firms with 30 or more employees.2 The major changes brought about by the law for these workers are that employers cannot terminate a contract without just cause, and that the burden of proof rests with the employer. Courts or arbitrators may declare a termination invalid and order reinstatement of the worker with compensation.
Statutory employment protection legislation remains costly by comparative standards. The cost of complying with the legislation (which includes severance pay and other regulations concerned with dismissal) is more than double the OECD average. The impact of these regulations is to create a duality in the labor market. They increase the stability of existing jobs, but at a price—more long-term unemployment and nonparticipation in the labor force and less opportunity for regular employment in the formal sector. This tends to increase the vulnerability of certain groups of workers, including women and youth who are less likely to get these “good” jobs. Many of these workers, then, will be relegated to the informal sector or out of the labor force.
Labor taxes are high and likely to encourage the informal sector. Social security, health insurance, and unemployment insurance premiums for regular workers—paid by both employees and employers—are between 36 and 42 percent of insurable earnings, depending on the occupational risk. Relative to wages, this forms a high tax rate when compared with other countries. It is also likely to be a key factor in moving employment to the informal sector. As discussed earlier, less than half the employed population belongs to one of the Social Security organizations, and there is believed to be widespread underreporting of earnings. International experience suggests that cutting rates will not, by itself, lead to be better compliance in the short term.
With a high premium and low payout, the unemployment insurance fund has a large surplus. Despite an increase in claimants in 2002 and early 2003—an increase which has since reached a plateau—the number of unemployment insurance beneficiaries remains small. Currently, less than 2 percent of unemployed workers are receiving benefits. A survey finds five Eastern European countries with coverage rates between 25 and 50 percent, and OECD countries with rates between 25 and 75 percent. Newly established unemployment insurance systems, such as those in Korea (14 percent) and Hong Kong SAR (8 percent), have coverage rates well above those of Turkey. The low level of coverage is explained partly by the extent of informality—only premium paying members who were registered as being laid off rather than having quit are eligible—and partly by tight eligibility criteria.
A carefully designed package of labor reforms currently being prepared by the World Bank in cooperation with Turkish authorities could help reconcile the two sometimes conflicting objectives of employment generation and worker protection. Such a package could include severance pay reform, unemployment insurance reform, proactive labor market policies, collective bargaining reform, job security regulations, and dispute resolution mechanisms.
This chapter draws on an upcoming study of the labor market in Turkey by the World Bank in cooperation with Turkish authorities.
This threshold applies to an employer with at least 30 employees in the same industry, even where a particular workplace has less than 30 employees. The increased job security provisions only apply to indeterminate employees with at least six months in the workplace.
