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Cablegate: New Data Continue Pattern of Stubbornly-High

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

121423Z May 05

UNCLAS SECTION 01 OF 02 ANKARA 002737

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - C. PLANTIER AND MMILLS

E.O. 12958: N/A
TAGS: EFIN ECON ELAB SOCI TU
SUBJECT: New Data Continue Pattern of Stubbornly-High
Unemployment Rates


1. Summary: The National Statistics Office (SIS) announced
that the unemployment rate was 11.5 percent in January,
higher than the year-end 2004 rate of 10.3 percent.
Seasonal factors and the use of a new methodology, however,
mean that it is not clear the higher rate reflects a
worsening unemployment trend. The workforce in Turkey is
growing by more than 1 percent per annum, and is expected to
grow at that rate for another decade. The GOT hopes that its
economic policies will create at least 600,000 new jobs per
year to start bringing the unemployment rate down.
Unemployment remains high due to a combination of high
employment taxes, population growth, and improved
productivity. End Summary.

New Methodology Produces Higher Unemployment Rate:
--------------------------------------

2.The SIS announced its January 2005 work force survey
results on April 25. Using a new methodology (see below),
the survey found an unemployment rate of 11.5 percent,
compared to final 2004 unemployment of 10.3 percent. Though
the reasons for the large difference are not clear, they
appear to stem from some combination of seasonality and the
change in methodology. The seasonality arises from higher
unemployment in the winter, particularly in construction.

3. As for the methodological difference, this is the first
time that the SIS announced its data on a monthly basis,
using a moving average of the survey results for the
December 2004 - February 2005 period. The SIS used to
announce its data on a quarterly basis. The averaged January
2005 data put the employment rate at 41.3 percent and size
of the workforce at 23.5 million. The number of unemployed
was recorded as 2.7 million, under-employment at 3 percent
and non-agricultural unemployment at 15.2 percent.

The Downside of Improved Productivity:
-------------------------------------

4. Echoing many economic analysts, IMF Europe Director
Michael Deppler, was recently quoted saying that the
extraordinarily high increases in productivity in the last
three years explained the failure of Turkey's strong growth
to bring down the rate on unemployment. According to the
SIS productivity index labor productivity increased an
average of 6.6 percent for each quarter since 2002. Turkish
Labor Minister Basesioglu predicted on April 20 that despite
improved productivity companies would begin to start hiring
new employees.


High Tax Wedge:
--------------

5. Another factor in Turkey's high unemployment rate is the
high tax "wedge"-i.e. employment taxes, including social
security premia. Turkey's tax wedge is above the OECD
average. When GOT officials raise the issue of tax
reductions, the preferred tax reduction in the IMF's view
would be a cut in employment taxes. However, social
security premia cannot be cut because of the need to rein in
huge social security deficits. The IMF has reflected the
desirability of lower employment taxes in its new program,
which calls for consideration of cuts in employment tax
rates down the road, fiscal situation permitting. TUSIAD
(Turkish Industrialists and Businessmen Association)
President Omer Sabanci was quoted saying that the GOT should
rapidly start implementing job-creation remedies and urged
the GOT for a employment-tax cuts. According to a TUSIAD
report a 10 percent decrease in employment taxes would lead
to significant decrease in the manufacturing industry cost
of production, and would increase employment rate by 2 pp in
the long-run.

The Unregistered Economy Problem:
--------------------------------

6. According to the official SIS data, of the 20.8 million
work force only 10.6 million employees are registered under
the social security system. The unregistered employees are
estimated to cost the Turkish state around TRY 19.5 billion.
According to the 2004 OECD Economy Survey report, Turkey
faces a serious dilemma in employment policy: Will the GOT
cut labor taxes in the formal sector to stimulate labor
demand and supply, or let the non-taxed informal economy
continue to play a buffer role and absorb employment at the
low end of the labor market?

Hopes of Job Growth?
-------------------

7. Going forward, the slow pace of employment growth is an
increasingly high-profile political issue for the
Government, and one on which the GOT hopes there may be some
modest improvement. A TUSIAD report on unemployment also
supports the view that despite some capital growth in 2005,
there would be a surge in the employment rate, increasing by
1.5 - 2.0 percent - an increase below the threshold needed
to prevent the 2005 unemployment rate from coming in above
10 percent. Deputy Prime Minister Abdullatif Sener
announced on April 27 that the GOT would discuss employment
creation remedies --the GOT is aware of the social and
political danger of the unemployment rate worsening, as
signaled by the January 2005 data. Prime Minister Tayyip
Erdogan already said on April 4 a 10.3 percent unemployment
rate was still high for Turkey, and the GOT would implement
policies primarily in the construction sector to create
600,000 new jobs every year. The GOT projects unemployment
rates of 9.6 percent and 10 percent for 2006 and 2005,
respectively, corresponding to 23.7 million and 23.1 million
employed people.


8. A survey carried out by the Istanbul Chamber of Industry
among its members also reveals that 62 percent of the
enterprises have reached new investment decisions. ISO
President told Econ specialist that industrialists were
generally hopeful about 2005, but increasing productivity
means there may be no improvement in the unemployment rate.
On the other hand, according to State Minister Ali Babacan,
the unemployment rate could decrease to 7 percent in the
next three years with a 5 percent growth rate. Minister
Babacan said in a conference he attended in February 2005
that the GOT expected a total of 1 million 650 thousand
people to be employed in 2005, 2006 and 2007 given a 5
percent growth rate.

Underemployment:
---------------

9. Some analysts believe that official unemployment data
underestimate the problems in the Turkish labor market, as
suggested by Turkey's substantial underemployment. Fourth
quarter 2004 data showed that underemployment constituted
4.1 percent of the work force, whereas this rate dropped to
3 percent in the January 2005 data, using the new
methodology. This shows that as of January 2005, about 14.5
percent of the work force is either unemployed or
underemployed in Turkey. A Turkish labor market risk
analysis report by the Economic Intelligence Unit points out
that unskilled and semi-skilled labor is abundant and wages
are low in Turkey. The lack of a good skills match between
what employers want and the available supply of workers also
contributes to "structural unemployment" in Turkey.

10. Comment and conclusion: Turkey is growing at an
impressive rate, inflation is decreasing, but the
unemployment rate is not coming down, given that labor force
is also growing, and productivity is increasing. The GOT is
aware of the problem, but trying to find solutions without
being in conflict with the economic reform program. Taxes
and social security contributions that are seen as key
barriers to employment creation put the GOT in a dilemma
between employment tax rate cuts and revenue collection.
Edelman

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