Is Productivity in Decline?
- December 21, 2015
- Oguz Erkol
In the years since the global financial crisis many economies have face slower expansions in some key components of potential output growth, and following that, lower potential growth has emerging as a new reality for the global economy. In advanced economies it has been driven by slower capital accumulation and labor growth which has been primarily due to adverse demographic. In developing economies slower productivity growth has been the underlying cause.
Encouraging innovation, improving education quality, higher infrastructure spending, enhancing business conditions, and promoting labor force participation -particularly among female workers- are some policy actions to take for positively changing the future trajectory of potential output. These actions, better known as the structural reforms, are needed for strengthening prosperity and stability in developing economies as well as in Turkey. Reforms that address the structural problem of the Turkish economy is expected to be on the agenda following the general elections which resulted in an AK Party coming to power without the support of a coalition partner. It is widely believed that in Turkey a single party government would act in the decision making process without causing a political turmoil. But for now it is also hard to make sure about AK’s readiness to return to reform agenda.
The September jobs report provided an important hint about how Turkish economy is doing in terms of its level of productivity. With broad strokes, Turkey’s unemployment rate increased to 10.3% in September from 10.1% in August as the labor participation rate was up to 52.1%. On a positive note, Turkey added 207K non-agricultural job in seasonally adjusted terms, the highest figure since February 2014, and the third highest over the past ten years.
In a recent post, we highlighted that monthly average of 65K new non-agricultural jobs (in seasonally adjusted terms) would be an explicative threshold for the economic outlook as the economy averagely grew by 6% once it was reached. With the strong September data, we saw the economy averagely generated 75K new jobs per month in 3Q 2015. Not surprisingly, GDP growth was 4% during the same time frame surprising to the upside. However, historically, Turkish economy was proved to be stronger with such an ability to create jobs, put it differently, newly created jobs had helped the economy much more in the past than it did in the last quarter. What this means is simply a decrease in marginal product of labor, which can be defined as the change in output that results from employing an added unit of labor.
Turkey’s Ministry of Science, Industry and Technology releases Index of Production per Person Employed quarter which gauges the level of productivity across the board. As visualized below, productivity in Turkey apparently lost it momentum after 2009, peaked in Q4 2011, then again sharply rose in the second quarter this year. In 3Q 2015 the index stood below where it was in 2009. Overall, 2005-2009 performance was a shining light for the future of economy, however, since then, we have seen an unnerving trend.
The following is from McKinsey’s report on Turkey in 2003:
Turkey has a watershed decision to make. Policymakers can remove the fundamental roadblocks to faster productivity growth. Or they can maintain the status quo, allowing productivity to limp along at 40 percent of best practice levels, holding Turkey back from a breakthrough to sustained rapid growth.
In order to proceed to the next step of its development story, singing the same tune after twelve years, Turkey now has a watershed decision to make, again.