Turkey: February Job Report

Good News or Bad News

Labor market data for February 2016 was released early this week. The unemployment rate was down 20 basis points on monthly basis to 10.9% according to the official figures. The employment rate also saw a pick-up and stood at 45.3% while workforce participation rate was 10 basis points higher at 45.3% compared to January. In non-adjusted terms, Turkish economy added 181K jobs of which 117K was in non-farm industries. However, manufacturing jobs decreased by 24K in the month while it was more than offset by the strong performance in services.

We see its fit to analyze the adjusted data when it comes to study the dynamics of Turkish labor market and its relationship with the overall economy. According to the report, Turkey added 50K jobs in non-farm industries, and again 24K job lost in manufacturing was compensated by 55K new hires in services. The unemployment rate fortunately dropped to a single-digit level at 9.9% with non-farm and youth unemployment rates at 11.9% and 17.4%, respectively.

A while ago we mentioned that Turkey lacked the ability to create jobs despite recording positive growth. Not surprisingly, the policy makers came under fire against this backdrop. February saw the first single-digit unemployment rate since May 2014 when calendar effects excluded, could be signaling a new era for Turkish labor market but first we need to see to continuation of the recent trend.

But it is not all rosy and here is the bad point we gleamed from the labor market. Manufacturing job which are normally the main source of a healthy economy, continue to plunge. For the fourth consecutive month, the industry lost 20 basis points share in total unemployment as only 24.3% of the total workforce was employed in manufacturing, down from 25.1% in October 2015. This is critically important for any economy since non-manufacturing jobs are considered as less paying jobs, that is to stay, increasing manufacturing job is developing economies’ gateway to being a high income society.

Turkey - Share of Employment by Industries

On the economic expansion front, 171K non-farm jobs created in only two months was clear sign of solid performance in Q1 2016. We recently studied the relationship between the new hires in non-farm industries and the GDP growth, and found that the number of 185K (or 65K monthly) could function as a threshold to assess the overall economy. Yet, Turkey’s strong economic performance is evidenced by the newly added payrolls in the first quarter. With broad strokes, this is in line with our positive views about economy.

Turkey - GDP Growth and New Jobs Added

Considering that Turkey watchers have been concerned about credit metrics in Turkish financial system, we need to put some emphasis on the impact of unemployment on asset quality in consumer loans. Anecdotally, Turkish banks do not receive a major deterioration unless the rate of jobless people remain above 12%. Thus, we are of the opinion that the current developments in the labor market will not have negative consequences for lenders.


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.

Which Industries Create Most Jobs in Turkey

The day before I posted this article Turkey’s Finance Minister Mehmet Simsek had been complaining that state is growing in Turkey by giving the number of people employed in public utilities. Surprisingly he had been criticizing employment policies, and consequently the government while changes in the Cabinet is on the agenda. But then we saw tweeting about ongoing street clashes in Ferguson indicating that things got back to normal (#DirenFerguson).

One should ask which industries have created most jobs in Turkey recently. Surely and evidenced by the comments of a Cabinet member, the state has been one of the top employers in Turkey providing itself a sustainable power which is also a policy mostly run by less developed countries. Monthly job creation by industries data compiled by the Central Bank of Turkey shows significant trends in Turkey’s labor market between Jan 2009 and Jan 2014. Materialized, the chart below indicates contribution of each industry to new jobs.

Turkey Contribution to Employment by Sectors

Firstly, despite the remarkable growth in the market, poor employment performance in mining industry shows why Erdogan compared the Soma disaster to mining accidents in 19th century Britain and nonchalantly observed that accidents are “what happens in coal mining”.

As expected, the role the construction played in creating jobs is absolutely nonignorable. Concerns around prosperity bubble are rising in Turkey which would ultimately lead the labor market to collapse. Since Jan 2009, the employment in construction has grown by 65% adding 655k new jobs.

More than 20% of the workforce is employed in agriculture in Turkey proving the country has a lot of challenges to face to be able to reach its high-tech export targets. Relatively, South Korea only employs 7% of its workforce in agriculture according to the World Bank data.

Finally, and most importantly, Turkey’s civil service is continuing its steady expansion making the Turkish public sector’s weight on the country’s economy is quite considerable when compared to other nations. According to Mehmet Simsek, Turkish public sector accounts for 3.37 million people as of the end of June. Tragically securing a government job in Turkey is not an easy task thanks to the high level of politicization.