Service Jobs: Structural Headwind?

One of the key issues the world economy faces today is declining productivity. At this juncture, Turkey seems to be obliged to deal with a structural headwind stemming from its weakness labor market of which dynamics have changed radically. As this is the case in advanced economies, particularly in the U.S., services jobs now have a larger share in employment while manufacturing has had a percentage shrinking over the past decade (see June Jobs Report: Not Encouraging).

As of the end of September, industry (manufacturing) jobs accounted for only 24% of total employment which meant a 5 percentage points lost in eleven years, with services and construction continued to boost recruiting. Below is the chart for average shares of each industry on annual basis.

The following also visualizes the relationship between the employment and the economic output in services. It is simply not nice at all.

Keeping the labor market at this dependence on services job is no recommendation for policy makers.

Why Core Inflation Will Stay High?

Turkish central bank has been failed to use its monetary policy tools to maintain low inflation. The headline inflation rate has been extremely volatile due to fluctuating food prices, while core inflation has remained stubbornly above the target rate of 5% over the past five years. Recently, Turkish economy has seen a glimmer of hope for inflation as annual CPI growth has lowered to 6.6% by 300 basis points in May from 9.6% in January, mostly driven by the impact of lower food prices which is likely to reverse starting June. Meanwhile, the core indicator known as I-index was up 8.77% on annual basis, down almost 1 percentage point since February. Turkish bond markets have enjoyed the indisputably favorable developments on the inflation front. However, we expect this to come to an end being of the opinion that the long-term trend still signals a high core inflation.

Turkey - Headline and Core Inflation

Long-Term Core Inflation Trends

The long-term core inflation trend estimated trend via Hodrick-Prescott filter where lambda value is assumed to be 14,400 as generally accepted while analyzing the monthly data, shows that prices still move upwards in Turkey. More importantly this malign cycle in core inflation is unlikely to finish soon unless the I-index posts large decreases in a short while. With that being said, the cycle, which is shown in dark color and digitized at the right axis, suggests that there still may be some downside potential in the core indicator before a new peak is in the making. We foresee the continuation of the easing in core inflation over the next three months but a high possibility that yearend core inflation rate will be around 9%.

Turkey - Core Inflation Trends

Higher Real Wages to Blame?

One of the most important generalization of the science of economics is that wages are positively related to productivity. And, in a frictionless economy, if wages increase faster than increase in labor productivity, we will have inflation in the economy, equal to that differential. The following is the chart showing how real wages and output per worker has changed since 2010.

Turkey - Real Wages and Producivity

In a previous post we addressed the declining productivity as to what underlies the par below growth in Turkey (see it here: Is Productivity in Decline?). It was many years ago when Marx claimed that productivity growth would eventually reduce wages, apparently, if he was alive, he would be extremely astonished to see the relationship of these two phenomena in Turkey. You may guess the gap will wildly widen after the minimum wage hike. Interestingly, higher wages are expected to lead higher productivity for a number or reasons including motivation to work harder, more capable and productive workers being attracted, lower turnover. The theory simply does not work in Turkey. This is a triumph for workers but a defeat for the central bank as well as the economy after all.

Labor Market in Southeastern Turkey

The link between extremism and unemployment has been a long-standing debate. Some sees the deterioration in the labor markets as one of the major causes behind the spread of terrorism and extremism worldwide, while the opponents argue that the idea of poverty causing terrorism is an utterly unscientific, and people who stubbornly clings to this idea, just wants to believe that they hold the key to terrorism in their own hands. Sociologists surely keep discussing for a longer time whether it is real or just a wishful thinking.

The same arguments can also be set out in the decades long conflict between the Turkish state and the PKK. And all eyes on the southeastern Turkey again as the conflict renewed after two years of so-called Peace Process, which simply failed.

Can factors such as poverty and education be portrayed as fundamental drivers of the violence? Some geography, I think, may be helpful here: (from MFA’s A Case Study of the PKK in Turkey)

Turkey’s southeastern region, due to a variety of geographic and historical factors, is far less developed than the western part of the country. The southeast is very mountainous and arid with hot and cold temperature extremes. Much of the region’s economy is based on animal husbandry and its distance from the main population centers in the west, has made it relatively less attractive for industrial development.

Through the process of development in Turkey, significant part of Anatolia, which include southeastern part of course, in other words Kurdish provinces, lacked big infrastructure investments. The clashed between the state and the terrorists made the climate of investment even more gloomy as reflected by growth figures, but more important the labor market.

The never-ending violence and the lack of jobs together created a vicious circle that lead the pain deepening for the Turkey’s Kurds. In the recent years, we saw talks started in the issue, and the Peace Process initiated which, however, seemed to fail. Yet, I find the experience of trying to solve it by talking rather than fighting important for the country, and a reason to be hopeful for the future.
Politics aside, I have been curious as to how the labor market in the region performed, and summarized the jobs figures based on the cities as can be seen below.

Labor Market in Southeastern Turkey

Here are my takes:

  • First of all, the population growth in Batman, Sirnak, and Diyarbakir outpaced the rest of the country, and total population growth in the selected nine cities were slightly below that of country. The immigration from those cities to other areas of the country seemed to fasten after 2011.
  • In terms of the workforce participation rate, the catch-up process continued, yet still, a remarkable gap still existed at 2013 yearend. In other respects, the data showed more people being hopeful for finding a job, and more women joining the labor market.
  • 2013 was a horrible year when the gap in unemployment figures diverged significantly, after the promising developments between 2008 and 2012.
  • In the total number of people employed, there was still a big difference, which appeared to be slowly made up until 2012.
  • The index below shows the developments in general, which is simply calculated via the differences in workforce participation rates, (minus) unemployment rates, and the employment rates. The higher is the index, the worse is the situation. Things got ugly there after 2011.
  • Syrian refugee crisis is very likely to be a source of rising unemployment.
  • Overall, I believe, the region has considerable need for capital investment, given its tremendous infrastructure requirements and unexploited potential, but I do not see this happening anytime soon due to ongoing clashes in Middle East which postpones the political stabilization.
  • Finally, it is a crazy idea to separate the region which such an economic outlook, most probably no one has that idea anymore.