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January 18, 2013, Friday

Too little growth, too much employment

The Turkish Statistics Institute (TurkStat) has published the labor market statistics for October. Unexpectedly the seasonally adjusted unemployment rate showed a limited decrease of 0.1 percent from 9.4 percent to 9.3, in comparison to September. We observe a similar decrease in the nonagricultural unemployment rate also. According to the estimation of the Bahçeşehir University Center for Economic and Social Research (Betam), the nonagricultural rate decreased from 11.7 percent to 11.5. This limited decrease is rather surprising in the context of low economic growth but not very unlikely. Time to time decreases in employment could be observed even though the dominant tendency is upward oriented. I continue to think that unemployment will increase as long as there is not a sizable revival in economic growth, which does not seem to be the case at the moment.

Today I would like to focus on a very striking feature of Turkish labor market dynamics regarding the evolution of employment. According to TurkStat, employment increased precisely by 1,023,000 during the last year (from October 2011 to October 2012). This increase corresponds to a growth rate of 4.2 percent. Now, almost all forecasters admit that gross domestic product (GDP) growth is less than 3 percent. This fact points out an astonishingly high job creation capacity in the Turkish economy. However, the striking point is not only here.

The employment increase in agriculture remained quite modest: It rose by only 30,000. This is rather good news since agricultural employment is still too high (about 25 percent of total employment) compared to its share of GDP (about 8 percent). This fact is the sign of very low average labor productivity in Turkish agriculture. The employment increase in industry has been also very limited: only 75,000. This corresponds to a 1.6 percent increase in employment. This evolution is not surprising since industrial production grew by 3.9 percent in the same period. The increase in industrial production has been mostly due to an increase in productivity. This is also good news. The construction sector created a lot of jobs -- 100,000 -- compared to its size (7.4 percent in total employment). However, the employment increases in these three sectors represent only 20 percent of the total increase. Thus, the remaining 80 percent was the work of the service sector.

Indeed, the service sector created about 800,000 net jobs in a year. The rate of increase is 6.9 percent, while the value added in the service sector increased only by 1.4 percent in the same period. At this point we are faced with a puzzle. The fact that employment increased much more than the value added means that average productivity in the service sector has declined. This kind of development could occur in the short term, particularly when the public sector hires many people. Indeed when we look at the subsectors, we observe that the greater part of the employment increase came from administration and defense, education, health and social support activities.

However, the growth-employment imbalance observed in the service sector is not economically sustainable in the long run. There could also be errors in measurements. TurkStat could overestimate the employment increase or underestimate the growth in the service sector. In any case, I think there is an anomaly regarding the increase of employment in the service sector and that this cannot continue in the future. We have on the one hand rather low growth and on the other growth that is creating too many jobs. I am afraid the Turkish labor market is accumulating an unrevealed unemployment.

Indeed, the labor force is permanently increasing due to the increase in population and the growing labor force participation of woman. The critical factor determining unemployment will be the evolution of employment. Even a growth rate evolving from 3 to 4 percent could not create enough jobs in order to absorb the labor force increase if the employment increase in the service sector would revert to a more balanced path. Therefore, it would not be surprising if a more pronounced unemployment rate increase occurs in the coming months.

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