Unemployment up as expected

The seasonally adjusted unemployment rate increased to 9.4 percent from its previous level of 9.2 percent. According to Center for Economic and Social Research (BETAM) estimates, non-agricultural unemployment rose from 11.4 percent to 11.8 percent. To these figures should be added the fact that, for the first time since the global crisis began, the yearly change in the unemployment showed an increase: There is now 140,000 more unemployed compared to last year.

This upturn in unemployment might not be a surprise for my readers. In October and November I wrote articles titled “Unemployment can be a headache for the Government” and “House Holds Survey confirms a turning point in unemployment.” Now the Justice and Development Party (AK Party) is facing this unpleasant reality, and is hoping for economic improvement in 2013. The medium-term program forecasts a growth rate increase to 4 percent. The Central Bank has eased its monetary policy and its governor, Erdem Başçı, expects an easing in banking loan rates in turn. I should say that these rates are already on a decreasing path.

So, two questions have to be answered at this point. Will growth be able to resume? And even if it is the case, can the rise in unemployment be stopped? Not only the government, but some economists, including those of the OECD, believe that the growth rate can reach 4 percent or more next year, based on a revived domestic demand. BETAM's first estimate for the last quarter of this year (“Revival in the fourth quarter,” Economic Outlook & Forecasts, December 2012) is rather optimistic. It forecasts 3 percent yearly growth, while the third quarter growth rate has been limited to 1.6 percent.

Personally, I have some doubts about the possible strength of the revival in domestic demand. Households have been indebted during the last two years but they seem to be in a correction process regarding their balance sheet. Some difficulties selling household loans are already perceptible in the banking sector. As for investment, the low level of use of existing capital stock does not give too much hope for an upturn in investment volume that has been declining for a while. However, Zafer Çağlayan, minister of economy, could be right saying that the new incentive scheme will soon start producing its positive effects.

Growth will probably resume to a certain extent and a growth rate of around 4 percent could be considered likely in 2013. But this might not be sufficient to reverse the pattern in unemployment. The non-agricultural labor force increases in average by approximately 550,000 people each year. Just to keep unemployment rates at its current level (roughly 2.5 million), the growth rate must reach at least 5 percent. This condition is rather an optimistic one since it assumes a high capacity of job creation for the growth: 5 percent growth causing approximately 3 percent increases in non-agricultural employment. The growth-employment elasticity can be computed as 0.6 (3/5) which equals more or less the recent past growth-employment elasticity. But let me reiterate that this elasticity was around 0.5 before the crisis of 2008-2009.

What I am trying to assert is that even a growth of 5 percent would not be sufficient to get unemployment under control. In fact, economic growth only creates jobs in the service sectors. Indeed, for months, employment has been more or less stagnating in agriculture, industry and construction. However, employment in the service sectors increased by 657,000 within a year, most of it created in the education, health, administration and defense sectors. Obviously, the state created a lot jobs but the tight budget for 2013 will not allow it to continue to do so in the future. Alternatively, it might be obliged to abandon its fiscal stance, as the local elections will be held in March 2014, followed by the presidential elections in July.

The task of the government will not be easy in 2013, being squeezed between rising unemployment and risking the strong macroeconomic fundamentals. I think that quite a difficult year, full of uncertainties, awaits Turkey.