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April 29, 2012, Sunday

On employment and labor market reforms

Today Bahçeşehir University is hosting an international conference on Activation and Employment Support Programs jointly organized by the Institute for the Study of Labor, Germany (IZA), Georgia State University and Bahçeşehir University Center for Economic and Social Research (BETAM).

The conference will discuss important aspects of unemployment, which has become, apart from its dramatic humanitarian aspects, a big threat to the social and political stability of democratic regimes.

Economists know very well that the most effective way to fight unemployment is to have strong and employment-friendly economic growth. But unfortunately nowadays economic growth is severely impeded in many countries and the structural aspects of unemployment cannot and must not be neglected. In each economy many structural barriers exist, to varying degrees, preventing firms from hiring as many workers as they would wish, but also preventing the unemployed who are willing to work from finding or looking for decent jobs.

There are multiple reasons for this: High firing costs can put constraints on employment; the unemployed and employer cannot agree because of mismatches between the available skills and the skills required. Local labor markets can have very different labor supply and demand dynamics because of regional disparities, therefore requiring different employment policies. Reservation wages (wage levels asked for by potential workers to accept a job) can be too high regarding wages offered by employers because of the existence of disincentives to work or employers' unwillingness to pay more and so on. Therefore, activation policies, such as vocational training, that aim to improve the employability of the unemployed, policies lowering labor costs through tax breaks as well as reshaping severance pay regimes, are very important in fighting structural unemployment.

Thanks to high growth over the last two years, the current unemployment rate in Turkey has declined to only around 10 percent. Growth is expected to slow down appreciably this year, and it will probably continue to be moderate in the near future. A growth around 4 percent will not be sufficient to absorb the increasing Turkish labor force. So, the structural aspects of unemployment are naturally on the policy agenda. The National Employment Strategy (NES), which was prepared more than a year ago by the Ministry of Labor, aims to implement comprehensive reforms in order to remove barriers to job creation and skill mismatches as well as barriers against willingness to work. The critical areas of reform defined by NES are education-employment linkages and labor costs.

The education system in Turkey needs comprehensive reform in order to make available a much more skilled labor force in the future than the current one. Albeit crucial for a highly competitive and innovative economy, this is in any way a long-term process. But the most urgent reforms are obviously those addressing labor costs that are as high as the Organization for Economic Cooperation and Development (OECD) average, but quite high compared to those of our competitors from Eastern Europe.

Turkey does not need to lower wage earnings like Greece; a recent OECD report revealed that average nominal wage decreased by 22 percent in this county. In the case of Turkey there are three basic tools to lower labor costs: the so-called fiscal devaluation, severance pay reform and regional minimum wage. Government, being not courageous enough, decided to push the regional minimum wage idea out of the NES. This is harmful. Nevertheless, it introduced the new investment incentives system tax breaks on labor at a regional level. Better than nothing. Weeks ago I discussed in this column (“A fiscal devaluation for Turkey”) the willingness of the Ministry of Finance to fight severe tax evasion and spend the expected extra income on decreasing social security premiums. This is a very good idea but not easy to implement.

The most difficult reform would certainly be the severance pay reform. Labor and Social Security Minister Faruk Çelik as well as Deputy Prime Minister Ali Babacan revealed very recently the main guidelines of this reform. The current rate of severance pay, one month's pay for every year worked, will be lowered and transformed into monthly paid premiums in workers' individual accounts. This new regulation would allow all formal workers to benefit from severance pay while actually only about 8 percent of them, working mostly in state-owned enterprises and in big private corporations, can effectively receive severance pay. The reform is likely to run into strong reactions from workers' unions as well as from employers, particularly from those managing small and medium-sized enterprises, which are able to avoid severance pay through many ways, legal and illegal.

So the task of the government is not easy, but there is no other way to fight unemployment when you have a sluggish growth caused basically by weak competitiveness.

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