Mustafa Sönmez – Hürriyet Daily News  July/20/2015

Unemployment has started climbing again after the 2012-2014 period, which can be called a “low-growth period” with an average growth of 3 percent. There are signs that unemployment will climb further in the coming months.

Unemployment is likely to rise in all non-agricultural sectors, but the climb may start earlier in industry and construction. The reason for this is associated with the disharmony between the past growth rates of industry and construction, and the employment opportunities they have generated that are expected to return to normal in the coming period. It is likely that the rate of people who have been kept in their jobs, even though there was not adequate growth, will drop along with growth. Downsizings are likely to speed up in workplaces. There are a series of domestic and international factors affecting this.

Growth and employment

After the 2001 crisis, Turkey’s economic program, worked out with the IMF, brought relative stability and the economy experienced an intense foreign capital inflow after 2003. With this significant foreign capital inflow reaching an average of $40 billion yearly, the economy grew at an average of 5 percent annually, also increasing employment rapidly. Employment, which was 19.6 million in 2005, was approaching 26 million in 2014. This increase in employment of 6 million over 10 years corresponds to 33 percent or more. In other words, an average of 600,000 people were able to find jobs every year.

If we focus on industry, we can see that from 2005 to 2014, the annual growth rate reached an average of 4.8 percent, with employment rising from 4.2 million to 5.3 million. This means an increase in employment of more than 1 million.

This picture looks like an employment-friendly one. It looks like economic growth is generating jobs. Does this reflect the truth, or is there an employment surplus that is not compatible with growth?

Up, down, up in unemployment 

Drops in employment were caused by the economic shrinkages caused by the severe waves of the 2008-2009 global economic crisis hitting Turkey, prompting hikes in unemployment.

The total unemployment rate in the first quarter of 2008 was 11.9 percent, while the non-agricultural unemployment rate was around 14.2 percent. The negative effects of the global crisis started to be seen in Turkey in the second quarter of 2008, but later a sharp fall in unemployment was experienced along with rapid growth starting in 2010.

The lowest point of the crisis before 2010 was the first quarter of 2009, when unemployment rates were 16.1 percent overall and 19.3 percent in non-agriculture. The tempo fell in following quarters. As a result, the annual average of official unemployment in 2009 was 13 percent and non-agricultural unemployment was 16 percent. In 2010 and 2011, unemployment dropped to 11 percent and 9 percent respectively, falling 4 points from the 2009 average. In non-agriculture unemployment, it fell 5 points from its 2009 average.

The effect of high growth experienced in 2010 and 2011, as well as the unexpected increase in the job-generating capacity of growth, played an important role in this drop.

The role of the surprising increase in agricultural employment in the decline of unemployment has been discussed in abundance in public policy and academic circles. Even though the agriculture sector did not itself grow, its employment rate rose. Leaving aside this strange situation, when the relationship of non-agriculture employment and growth is reviewed, we can observe a drop in unemployment and striking rises in employment.

When compared to before the 2008 crisis, a prominent increase was experienced in the job-generating capacity of growth in the 2009-2011 period. It was also seen that the growth-employment relationship may differ hugely across sectors.

Employment elasticity 

The coefficient of elasticity – in other words, the indicator of the employment-generating capacity of growth – is obtained by taking the gross domestic product (GDP) growth rates in the non-agriculture sector before and after a crisis, as well as the employment growth across sectors, and dividing these variables with each other, reveals interesting data.

When non-agriculture is taken as a whole, annual GDP growth was 5.1 percent on average in the three years before the crisis and growth in employment was 3 percent. In this situation, the elasticity coefficient (calculating the employment-generating capacity of growth) was 0.59.

According to the International Labor Organization (ILO), the average of elasticity coefficient calculations is 0.42 in Western  Europe and 0.23 in North America. Elasticity in industry is lower than elasticity in the service sector – 0.5 and 0.74 in Western Europe and 0.26 and 0.60 in North America, respectively.

Turkey’s elasticity level was 0.6 before the crisis; not so low in terms of the employment-generating capacity of growth.

We can see that in the two years after “crisis year 2009,” the employment-generating capacity of growth increased to a great extent. During this period, non-agricultural GDP grew by 4.9 percent and non-agricultural employment growth by 3.8 percent, meaning that the employment/growth elasticity coefficient was 0.8. Simply put, this means with current GDP and employment levels, economic growth of 10 percent creates an increase of around 8 percent in employment.

However, more important is what was experienced from 2012 to 2014, known as the low-growth term. In this period, despite non-agriculture growth averaging 3.7 percent annually, the increase in employment rose to 4.7 percent. Thus, the employment-generating capacity of growth had climbed to almost 1.3.

For the elasticity coefficient to climb from 0.6 before the crisis to 0.8 after the crisis, and to stay around 1.3 over the past three years, the increase in total factor productivity must have seriously slowed down in order for growth to have become so employment-friendly.

New unemployment wave?

Now, Turkey has entered a growth path leaning toward 3 percent and lower annually, starting in 2012. Considering global developments, then the time spent on this path may be long. This situation, amid the shrinkage of the employment-generating capacity especially in the industry and construction sectors, may force companies to downsize.

With expected new regulations, with a new “micro-reform,” such downsizings are likely to take off.

April workforce data show that the official unemployment rate seasonally adjusted is 9.9 percent, while the non-agriculture unemployment rate is 11.3 percent. The same data show an increase of 5 percent in employment over the past 12 months in the service sector. It is worth discussing just how healthy a 5 percent increase in the service sector is when the growth rate is expected to be around just 2 percent in 2015.

Especially starting from the second half of 2015, we should expect a rise in the number of unemployed people in Turkey, as a result of downsizing.

Written by Mustafa Sönmez