VZCZCXYZ0000
RR RUEHWEB

DE RUEHAK #6513/01 3311628
ZNR UUUUU ZZH
R 271628Z NOV 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0083
INFO RUEHFR/AMEMBASSY PARIS 5328
RUEHIT/AMCONSUL ISTANBUL 1698
RUEATRS/DEPT OF TREASURY WASHDC
RUEHBS/USEU BRUSSELS

UNCLAS ANKARA 006513 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE, MNUGENT 
PARIS FOR USOECD 
 
E.O. 12958: N/A 
TAGS: EFIN TU
SUBJECT: LABOR MARKET REFORMS COULD HELP TURKISH 
UNEMPLOYMENT PROBLEM 
 
REF: ANKARA 6410 
 
¶1. (SBU) Summary: Turkey has relatively low wage levels in 
relation to comparator countries yet strong growth has not 
made much of a dent in high unemployment.  Rapid growth in 
the working-age population contributes to low employment 
rates, but so do labor market problems including high 
severance payments, rigid rules impeding temporary 
employment, and high employment taxes.  The IMF, World Bank 
and OECD have all called for reforms in these areas although 
the IMF has been hesitant to reduce payroll taxes to avoid 
worsening the Social Security deficit.   New data suggests 
the fiscal cost may be worth paying because lower payroll 
taxes would bring more employment into the formal sector. 
The Government is reportedly considering these reforms but 
may not take them on until after next year's elections. 
Labor reforms are just one of several areas of structural 
reform the Government will need to tackle if wants to deepen 
and sustain its economic success.  If the next Government is 
a coalition, it will be much harder.  End Summary. 
 
---------------------------------------- 
Turkey's Persistent Unemployment Problem 
---------------------------------------- 
 
¶2. (SBU) Despite four years (2002 through 2005) of 7.5% real 
GDP growth, Turkey's unemployment rate remains stubbornly 
high.  Recently released data for August 2006 show an 
unemployment rate of 9.1%, slightly better than the 9.4% 
recorded in August 2005, but still high.  Most economists 
agree that the unemployment rate is not that meaningful in 
Turkey and understates the extent of the problem, since such 
a large share of the working-age population is either 
underemployed or has given up looking for work. A more 
meaningful indicator is the employment rate, which has crept 
up slightly, from 43.7% of the working-age population in 2004 
to 45% in August, 2006.  It is still, however, far below that 
of comparator countries: the EU-15, for example have an 
average employment rate of 65%. 
 
¶3. (SBU) Turkish Government officials point to the large 
number of jobs created by Turkey's growth: roughly one 
million last year, but this job growth fails to make a dent 
in the unemployment rate because of the demographics: 
Turkey's high birth rates in the 1980's have meant a 
continued flooding of the work force with new entrants.  In 
addition, substantial rural-urban migration has meant people 
formerly counted as employed in the agricultural sector -- 
even though most of them worked on inefficient small-scale 
farms -- are now in the urban work force.  The latter 
phenomenon helps explain why employment rates for women in 
Turkey are less than half of employment rates for women in 
western Europe (EU-15).  The women were considered employed 
when they were on the farm, but tend to stay home more than 
men when Turkish families move to the city. 
 
---------------------- 
Despite Low Wage Costs 
---------------------- 
 
¶4. (SBU) The price of labor is not the problem. Despite the 
strength of the lira in recent years, Turkish wage costs 
continue to be low in relation to comparator countries.  The 
World Bank has analyzed Turkish wage costs in terms of cost 
per value-added and found Turkish wages compare quite 
favorably to other OECD countries.  By this measure, for 
example, Turkish wages were only two-thirds of Mexico's, 
suggesting substantial room for both wage and employment 
growth.  Our sense from talking to Turkish subsidiaries of 
multinational companies is that the Turkish labor force is 
attractive to employers: reasonably priced, educated and with 
relatively low absentee rates.  This also helps to explain 
the continued growth of Turkish manufacturing exports despite 
the strong lira: i.e. Turkish labor costs in manufacturing 
remain competitive. 
 
¶5. (SBU) Although average wages are relatively low by 
international standards, the legal minimum wage is relatively 
high.  According to the OECD, the minimum wage in Turkey is 
substantially higher than in Poland, Slovakia, Estonia, 
Bulgaria or Romania.  The ratio of the minimum wage to the 
average wage in the formal sector was higher in Turkey (48%) 
than in any other OECD country.  The OECD report points out 
that the relatively high minimum wage magnifies the negative 
impact of the labor tax wedge on employment in the formal 
 
sector, as the wage costs of low-skilled workers often exceed 
their productivity levels. 
 
------------------- 
Rigid Labor Markets 
------------------- 
 
¶6. (SBU) The IMF and World Bank have been pointing out for 
some time that some features of Turkey's labor market are 
exacerbating the unemployment problem and should be reformed. 
The OECD, in its recent review of the Turkish economy, made 
similar points.  Turkey is tied with Portugal as having the 
highest severance payments -- one month pay for each year 
worked -- in the OECD.  This prohibitive cost is one 
deterrent to firms hiring, in case they ever have to cut 
staff.  Turkey's rules on temporary employment also hindr 
labor market flexibility: according to the ECD report, 
Turkey's temporary employment ruls are the most rigid in the 
OECD by a signifiant margin.  Firms employing more than 50 
workers are also required to hire 6% of their workforce from 
"socially assisted" groups (ex-convicts, handicapped people, 
victims of terrorist attacks). 
 
------------------ 
High Payroll Taxes 
------------------ 
 
¶7. (SBU) Turkey's high payroll taxes also discourage hiring. 
Many analysts and local pundits have picked up on Turkey 
having the highest tax "wedge" -- i.e. the difference between 
what an employee receives and an employer's total payment 
(including taxes) -- in the OECD.  In fact, State Planning 
Organization officials have explained to us that the truth is 
a bit more nuanced: calculations of the tax wedge depend on 
family size and what is included in the calculation. By one 
calculation, for an employee with a family of four, Turkey 
has the highest tax wedge in the OECD.  But this nuance 
doesn't change the main point: that payroll taxes are 
relatively high in Turkey and act as a deterrent to hiring. 
 
¶8. (SBU) The OECD and the World Bank have been recommending 
some reduction in the tax wedge to spur employment.  The IMF, 
on the other hand, fears that a reduction in payroll taxes 
will exacerbate the outsized deficit in the social security 
system, since most payroll taxes are really social security 
taxes.  World Bank officials told us that with Economy 
Minister Babacan's support, they have been able to access 
company-level data at the Turkish National Statistics Agency 
that suggests a high elasticity of labor demand in Turkey. 
In other words, the Bank officials believe the data suggest 
that reductions in payroll taxes will have a big impact in 
terms of employers leaving the informal economy and beginning 
to pay their social security taxes.  This, in turn means that 
the fiscal cost of a payroll tax cut will be partially 
recouped from higher participation rates. 
 
------- 
Comment 
------- 
 
¶9. (SBU) The Government seems to be catching on to the 
importance of attacking these labor market problems: the 
World Bank officials told us the Government is considering a 
package of labor reforms but might opt to wait until after 
next year's elections.  Labor market reforms are one of 
several areas of reforms that the Government will need to 
address if it wants to sustain and deepen its four-year track 
record of economic success.  It will need to tackle a "second 
generation" of structural reforms if it wants to sustain high 
per capita growth rates and permanently end the Turkish 
economy's vulnerability to boom-and-bust cycles.  Labor 
market reforms -- if they produce more jobs -- will also help 
provide the political support to sustain economic reform. 
These kinds of reforms will be politically difficult for the 
current government but if the November 2007 elections produce 
a coalition government, it will be much harder, if not 
impossible. 
 
 
 
 
 
Visit Ankara's Classified Web Site at 
http://www.state.sgov.gov/p/eur/ankara/ 
 
WILSON