Turkish Labor Market: The Lean Times

Turkish statistics office released December 2016 jobs report which suggested that the unemployment rate at 12.7% hit a 7-year high as well as a seasonally adjusted figure at 12%. More importantly, the number of unemployed people stood at 3.87 million which was the higher figure ever recorded in that regard.

When the agriculture sector excluded, the adjusted unemployment rate also climbed considerably to 14.3% which was a result of the weaker economic activity and deteriorating expectations. Last year also marked a lean period for the youth of the nation as the youth unemployment rate revealed that almost one fourth of young people were without a job.

There are some important points to gleam from the latest jobs reports in many aspects to make an inference about the worsening economy.

First, we feel the need to put some emphasis on women participation in labor market as we consider it as one of the most challenging issued ahead of Turkish economy. The contribution of Turkey’s female workforce to the economy remained low given the participation rate of 32% which is among the lowest among the OECD countries. That said, the unemployment rate for the women with higher education jumped remarkably to 19.1% from 15.3% y/y in 2016. This, in our view, proves that women jobs are under bigger threat with economic conditions getting severe. The other key finding is that this is locking some important part of the country’s potential as women are prevented from adding value economically, culturally, and socially.

Second, when the non-agricultural jobs broken down into industries, we observe that the share of industry jobs dropped to 24.2% in 2016 from 25.2% in 2015 which already had been on a declining trend since 2005 when it provided 29% of the total non-agricultural jobs. At this stage, we refer to our previous research where we analyze the sectoral breakdown of the jobs and their contribution to the output generation (see Service Jobs: Structural Headwind?). Provided that the possibility of a sea-change here is low, we expect the economy to perform below its historical standards.

Thirdly, and finally, we believe that the current conditions in the labor market would potentially lead a major deterioration in asset quality of the banks. Consumers being destitute of regular income does not bode well particularly in Turkey given the heavy concentration on retail lending of the financial institutions. NPL ratios had already been on the upward trend until late last year and started to show some signs of improvement. However, to our thinking, we may see the impact of the weaker labor market on loan payment as of Q2 2017.

Is Productivity in Decline?

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.

Turkey - Productivity

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.

Jobless Growth is What’s Next for Turkey?

Today Stats Office reported an unemployment rate of 9.9% in September, slightly lower than the 10% threshold. A rate of workforce without job about to reach a 2-digit number is consequently worrisome for the economy but unnatural when the output measured in terms of GDP rises.

Before starting, I intent to put a chart as a supporting to my opinion that the what is going on in Turkey is jobless growth. Since the mid-2010, the trends of both real GDP and unemployment signal a jobless growth.

Turkey Real GDP Growth & Unemployment

What generally policy makers do is to concern much concentrated in income growth which is viewed as essential for employment generation. However, it is not a sufficient condition. Capital goods industry was alwyas viewed as the engine of growth but this did not generate non-agricultural employment at a rapid rate. All aside, there are demographic and structural grounds that the phenomenon of jobless growth is attributed to as well as they are what I would like to accentuate in this article.

The Gender Composition of Workforce in Turkey

From the title, it is easy to figure out where I will point. Female workforce participation is a explicative notion but on the other hand is a prove that the rising unemployment rate is just “statistical illusion”. Many researchers have come up with the importance of female participation when it comes to analyze the whole economy.

The awesome chart prepared by OECD shows the gender compositions of workforce on some countries. Needless to say, women participation in extremely weak compared to OECD countries. Some empirical work suggests that it is usually women workforce turning out to be self-employed. Consequently, women participation appears to decreasing while self-employed women generate the output that lifting the GDP growth. According to official data, the number of self-employed people was 4.2 million in Jan 2009 and had risen to 4.8 million until Aug 2013. Further research is needed in this area to extent the analyze of the effect of decreasing women participation, but, with broad strokes, the data seems like not to fully reflecting the facts.

Turkey - Labor Force Participation by Genders

Inadequate Education System

Recently, there has been arguments for Turkish students’ poor scores in PISA exams. Overall, Turkey was ranked at 39th among 62 countries. The results has been severely criticized by many whom generally has contrary politics visions to government, but this is ignoring the fact that Turkey was one of the the two fastest-progress-making countries, along side with Brazil. Non-contradictiously there are some advances in Turkish education but not good enough to push it forward. This is the point where I find the criticizers right. Despite the recent performance, the education system is still inadequate compared to OECD countries. The chart below is telling us a horrible story.


Theoretically speaking, inadequate educations system results in an acute shortage of skilled manpower. Today this is the most popular research area among economists covering Africa. The continent is the home for some countries with extraordinary fast growth rates but poor job numbers that resemble Turkey.

The Bottom Line

To sum up with, I consider to flash the key facts one more time necessary. The gender composition and educational background of both are key drivers of the recent deterioration of outlook for labor market in Turkey. The country requires social policies to encourage women to join the workforce. On the education side, government expenditure should increase in order to built the system more relevant to labor market demands.