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Cablegate: Unemployment: Turkey's Other Crisis

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ISTANBUL 001364

SIPDIS


SENSITIVE


STATE FOR E, EB/IFD AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
NSC FOR BRYZA
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO


E.O. 12958: N/A
TAGS: ECON EINV EFIN PGOV TU
SUBJECT: UNEMPLOYMENT: TURKEY'S OTHER CRISIS


REF: 02 ANKARA 7237


1. (U) Sensitive but Unclassified. Not for internet
distribution.


2. (SBU) Summary: While market attention is focused on IMF
program implementation and the sustainability of Turkey's
debt, joblessness and underemployment remain the key
preoccupations of the bulk of the Turkish population. 2003's
second quarter brought some improvement, according to
official figures-- though these are distorted both by the
scale of the informal economy and disguised unemployment in
the agricultural sector-- with the unemployment rate
declining from 12.3 to 10 percent. But 2.4 million Turks are
still officially listed as being unemployed, and most experts
believe the true figure is far higher. Recent studies by
TUSIAD and the Turkish Employers Association (TISK) attribute
continuing high unemployment to both supply and demand
factors and warn that if the structural problems facing
employment are not addressed, the country's unemployment rate
could double by 2010. End Summary.


3. (SBU) Labor Market Snapshot: New statistics from the State
Statistics Institute show that at the end of the second
quarter of 2003 there were 2.418 million unemployed workers
in Turkey, while 21.6 million people were working in the
labor force, translating to a 10 percent unemployment rate
and a 49.4 percent labor force participation rate. The
figures represent a slight deterioration from second quarter
figures in 2002, but an improvement from 2003's first
quarter, when 2.84 million people were unemployed and the
total employment figure was only 20.25 million, for a labor
force participation rate of 47.5 percent. Among educated
young people, the rate is significantly worse, however, with
25.9 percent unemployment. The rate is particularly high for
high school graduates, Galatasaray Professor Seyfatten Gursel
argues, because shortcomings in the Turkish educational
system leave students unprepared for the working world.
While unemployment rates are lower for college graduates, the
recent recession has impacted them as well. Yilmaz Argudan,
a leading management consultant, told us in a recent meeting
that whereas his MBA students at Istanbul's elite Koc
University each received an average of 3 or more good job
offers in years past, now they are averaging less than one
per student.


4. (SBU) Underestimating the problem: Two key factors
complicate any attempt to understand the scope of
unemployment in Turkey: the fact that nearly 40 percent of
the population remains engaged in agriculture, and secondly,
the fact that 40 percent of all economic activity is
unregistered. Turkey's high level of agricultural employment
masks the severity of the country's unemployment problem, in
that agricultural "employment" for many is simply a disguised
form of underemployment or unemployment, while the low
official unemployment rate in agricultural brings the overall
rate down. Most analysts thus use the more meaningful
non-agricultural unemployment rate, which more dramatically
illustrates the impact of the 2001 crisis. From an already
high level of 9 percent in 2000, it jumped to over 16 percent
in 2002, and has not improved significantly since.


5. (SBU) Unregistered workers: The issue is further
complicated, however, by the size of Turkey's unregistered
economy, which a recent State Statistics Institute study
suggests accounts for 40 percent of Turkey's gross domestic
product. That level is nearly twice as large proportionally
as the unregistered economy's share of GDP in most developing
economies. Hence while 5.3 million workers are officially
registered with Turkey's Social Security Fund (SSK), another
3.4 million workers are not registered. These workers fall
outside of Turkey's social security net and receive no legal
protection. As Ankara Finance Ministry officials recently
told the Embassy, the 2001 crisis reinforced this tendency.
With few employment options, workers are willing to accept
whatever employment they can get. Tackling the unregistered
economy is viewed by most economists as another key part of
any permanent solution to the unemployment, since the forty
percent of workers who fall outside the social security
system not only do not contribute to it, but their firms
compete "unfairly" with those who do. Reduction of this
shadow economy is another key goal of organizations like the
Turkish Employers' Association (TISK) and and the Turkish
Ready-Wear Makers Association (TGSD).


6. (SBU) Structural Problems: If the precise level of
unemployment is difficult to assess, there is little
disagreement about the poor record of the Turkish economy
over the past decade in creating new jobs. A recent report
by TISK noted that between 1996 and 2002, while Turkey's
population increased by eight million, overall employment
fell by over 100,000 to 20.28 million people. Most
economists attribute this poor record to structural problems
in the labor market, particularly high tax and social
security rates. Many argue Turkey's newly passed job
security legislation, aimed at harmonizing Turkish standards
with those of the E.U., will compound the problem.
Industrialists in Bursa recently argued to us that the law's
requirement that employers "justify" any lay-offs will in
fact make them more hesitant to hire new workers. The
criticism led the government to delay implementation of the
legislation and to try to make it more "employer friendly" by
exempting firms employing less than 30 workers. In a July
letter to the government on unemployment, the Turkish
Ready-wear Manufacturer's Association (TGSD) commented
ironically that the harmonization effort to bring Turkey in
line with Europe should not stop with employment standards,
but should extend to tax rates as well. The association
pointed out that with recent increases, Turkey's total tax
burden on wages is 47 percent, well above the OECD average of
26 percent, and exceeding even the levels in Scandinavia.


7. (SBU) Tax Incentives: TGSD's proposed solution, one echoed
by many other organizations and economists, is to provide
meaningful tax incentives for employers. As additional
workers are taken on, the organization suggests, tax and
social security payments should increasingly be shared by the
government, with the employer paying a lower rate. In early
August, Labor Minister Basesgioglu indicated that his
Ministry was working with the Finance Ministry and Treasury
to develop a program along these lines, under which 20
percent of the social security tax and a similar percentage
of the income tax for each new employee would be paid by the
government. TGSD also proposed regional incentive programs,
modelled on measures adopted to encourage economic
development in Turkey's Southeast, however, the IMF opposes
these geographic incentives, believing they lead to market
distortions. (Comment: In our view, Turkey tends to resort
too often to tax incentives. The solution to the high tax
rate problem is for Turkey to continue to work with the IFIs
on tax reform that broadens the tax base, enabling it over
time to reduce marginal rates. End Comment.)


8. (SBU) Labor Supply: At the same time that Turkey is having
difficulty creating new positions, it faces the challenge of
an increasing number of entrants to the labor force. High
birth rates have led to demographic pressure on labor
markets. TUSIAD's recent labor market study pointed to a
number of other factors, including the end of early
retirement, and the increasing number of women entering the
labor market. In addition, experts predict that the gradual
decline in the percentage of men participating in the labor
force that has occurred over recent years will reverse itself
in coming years. (Galatasaray Professor Seyfettan Gursel, an
author of the TUSIAD study, points out that one reason for
Turkey's relatively good unemployment performance in the
early 1990s was not growth or "brilliant" economic
performance, but the fact that the declining level of male
participation in the labor force held down the overall
participation rate.)


9. (SBU) Growth Requirements: According to TUSIAD, only
sustained growth of six percent over the next eight years can
allow Turkey to bring unemployment to an "acceptable" level
of 6.5 percent. Five percent growth leaves unemployment at
10 percent, while anything less further compounds the
problem. Study authors point to the importance not just of
steady macroeconomic policy to achieve this goal, but also to
the need for the kinds of microeconomic reforms advocated by
TGSD and other organizations to address the structural
problems that make the labor market inflexible. (Comment:
Turkey also nees to pursue additional microeconomic reforms
desgned to encourage competition and entrepreneurship End
Comment.)


10. (SBU) Comment: Until strog economic growth begins to
create significant ne employment, most Turks will remain
sceptical abut whether a recovery has truly begun. While
ideas abound about how to make Turkey a more
employment-friendly place, budget pressures will likely limit
the government's ability to implement all the incentive
programs-- or tax reductions-- that business would like to
see. End Comment.


ARNETT

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