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October 18, 2012, Thursday

Unemployment can be headache for government

Labor market statistics for July revealed on Monday by the Turkish Statistics Institute (TurkStat) point to a turning point in the unemployment rate, which has been in decline since the economy's strong recovery in the aftermath of the crisis in 2009. The seasonally adjusted unemployment rate rose from 8.9 percent in June to 9.1 percent in July in line with a decrease of 0.4 percent in employment -- within a month employment has declined by 102,000 people, adding 48,000 to the ranks of the unemployed. If the labor force had not been decreased slightly, the unemployment increase would have been even stronger.

On the side of the government, the reaction to what must be considered a major event was either silence or diversion. We heard nothing from Deputy Prime Minister Ali Babacan, in charge of economic affairs, while Economy Minister Zafer Çağlayan preferred to remind us of the yearly drop in unemployment, from 9.1 percent July 2011 to 8.4 percent in July of this year. This is, admittedly, an irrefutable fact, but it is at the same time a useless fact. Indeed, it is quite normal that employment had shown growth during the last year given the fact that Turkish economy was expanding, albeit at a slower rate. So, the decrease in the unemployment rate in July compared to last year is not surprising at all. The problem is that the yearly approach is unable to inform us on what is currently happening in the Turkish labor market. As such, we have to look closely to the seasonally adjusted figures -- since both employment and the labor force are subject to strong seasonal fluctuations in Turkey -- if we would like to understand the current changes in unemployment.

As I noted above, these seasonally adjusted figures show an increase in unemployment. Having said that, is it possible to conclude that the rate of unemployment has reached its height? I do not think so. This is my opinion, but I am required, of course, to provide support for it as well. During the first half of this year, the gross domestic product (GDP) growth rate declined to 3 percent. The estimations for the third quarter indicate an even slower rate prospect. These days, a growth rate near 3 percent is considered miraculous in Europe, but for Turkey this is rather bad news. This degree of growth is not sufficient to create enough jobs in order to absorb the regular rise of the labor force. Indeed, the trend for the labor force's yearly increase is between 500,000 and 600,000 people. On the other hand, the GDP growth necessary to create that many jobs is estimated at around 5 percent, or at the least 4 percent, assuming that the capacity of such growth to create jobs is at its highest.

Obviously Turkey's economy is not growing this fast today, but could it reach these levels in the coming years? Let me point out that this is exactly what the last Medium-term Economic Program (OVP), the government's official roadmap for the economy, assumes. Sustained growth in the Turkish economy, as I have explained many times in this column, depends on two basic factors: A solid improvement in the competitiveness of Turkish industries and an increase in domestic savings. Both of these factors require difficult structural reforms, such as more flexibility in the labor market, lower energy costs, a tough attack on tax evasion, perseverance on budget discipline and, last but not least, a decrease in inflation.

Actual debate on how to encourage domestic demand in order to boost growth is in vain. Growth in the Turkish economy can no longer continue to rely on the domestic demand exclusively, for the simple reason that the current account deficit, albeit narrowed to 7.5 percent of GDP thanks to a decrease in domestic demand, has hit the brakes at an unsustainable level. Despite this fact, exports must carry on at a higher rate than imports, as they did last year, in order to have more balanced growth. This cannot be achieved without a quick implementation of all the structural reforms I mentioned above.

Here emerges the political dilemma. Next October, Turkey will have three successive elections within less than two years in the order of the local, presidential and then general election. For any democratically elected government, elections are not suitable moments for implementing reforms, which imply winners but also plenty of losers -- many of which may be supporters of the incumbent. In that case we can expect that the government will be squeezed between the unpopularity of a rising unemployment and the anger that structural reforms risks provoking. If I had to decide, I would opt for the reforms -- if, of course, I believe that the rise in unemployment is unavoidable.

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