Seyfettin Gürsel and Mine Durmaz
Our second research brief studying the problem of informality focuses on regional disparities. There are large differences in regional rates of informal employment. According to 2013 data, while the country’s informality rate of 37 percent is soaring to 70 percent in Southeast region, it recorded about 16 percent in Ankara and Istanbul. The rate of informality for wage earners, which is reported as 20 percent overall, is more than 40 percent in Southeast region and ranges between 10 and 16 percent in highly industrialized western regions. In addition, significant decrease in overall informality at country level in the period 2005-2013 has been unequal through regions. While the overall informality rate decreased by 38 percent, it has been reduced by more than half in western regions. Correspondingly, decreases are more limited in other regions, but also in some regions informality increased.
The main force behind regional disparities in terms of informality is regional differences in structural determinants of informality such as average level of education, average firm size, or sectoral distribution of employment- that affect the level of informal employment. In last eight years, this unequal improvement in informality across regions arises from unequal regional changes in these structural determinants.
Seyfettin Gürsel, Zümrüt İmamoğlu and Barış Soybilgen
ECONOMY CONTRACTED IN THE SECOND QUARTER
Turkey’s real Gross Domestic Product (GDP) increased at a rate of 2.1 percent in the second quarter of 2014 from the same quarter of the previous year. Seasonally adjusted GDP declined by 0.5 percent in the second quarter from the previous quarter. The economy contracted for the first time since the first quarter of 2012.
The contraction was caused by declines in consumption, investment, government expenditures and exports in the second quarter compared to the previous quarter. Private consumption and investment declined by 0.4 percent and 0.7 percent, respectively. Government spending and exports fell 3.3 percent and 0.7 percent, respectively. The contribution of net exports to the growth was negative. The only component that increased in the second quarter was inventory investment. It increased by 1.0 percent. In the first quarter of 2014, growth was strong, 1.9 percent qoq, due to high foreign demand. Private domestic demand, on the other hand, had shrank in the first quarter. We see that domestic demand continued to decline in the second quarter. In addition foreign demand also decreased causing the economy to contract.
Low growth reduced the current account deficit. The 12-month current account deficit to GDP ratio which was 7.5 percent at the end of the first quarter fell to 6.5 percent at the end of the second quarter. Gold excluded current account deficit fell to 5.9 percent from 6.4 percent.
Seyfettin Gürsel and Mine Durmaz
During the period of 2005-2013, informal employment declined significantly. Overall informality rate decreased from 48.2 percent to 36.8 percent and informality in non-agricultural sectors fell from 34.3 percent to 22.4 percent. The main force behind this improvement is the decline in informality among wage earners. However, the decrease of informality rate for self-employed workers is limited. Hence, the problem of informality in Turkish labor market requires studying these two categories of employment separately. The main reason for the decline in informality among wage earners is that newly created jobs in recent years are mostly formal jobs. Informal employment is substantially a consequence of social and structural features of labor force. In addition, the level of informal employment is affected by economic conjecture. According to seasonally adjusted monthly data over last eight years, overall informality rate followed a fluctuating trend. In next research brief, trend in the rate of informality over time will be discussed.
The main structural features studied in this research brief point out that the problem of wage earners’ informality is associated with the problem of small size of the firms. According to 2013 data, third-fourth of informal wage earners is employed in micro firms (0-9 workers). When informal employment in SMS’s (10-24 workers) is added to this share, it reaches 85 percent. Findings of this study reveal that policies aimed at reducing structural informality in the employment category of wage earners need to prioritize reducing out-of-labor costs, encouraging firms in size enlargement, and increasing frequency of inspection.
Seyfettin Gürsel and Barış Soybilgen
Recently, “the Middle Income Trap” has become one of the mostly debated topics on Turkish Economy. In the last decade, per capita income increased from $3,000 to $10,500 in Turkey. But the question is, will this striking increase continue in the next decade, and lead Turkey to the group of high income countries, or will the increase in per capita income decelerate, and force Turkey to remain in the group of middle income countries? The government, optimistically, predicts that per capita income in Turkey will reach $25,000 in 2023. However, some economists argue that the increase in per capita income will be much slower from now on, and Turkey will get stuck in the Middle Income Trap. In this research brief, we try to contribute to the discussion by decomposing GDP growth into employment ratio, labor productivity and working age population ratio components.
There are three sources of growth considering the factors of production: capital accumulation (in other words the increase in production capacity through investment), the increase in employment, and productivity gains. In the early stages of economic development, capital accumulation and increases in employment are main sources for growth. However, when per capita income exceeds $10,000, high productivity gains are needed to sustain high growth rates. In this stage (Middle Income), the contribution of capital accumulation and labor force decelerate due to diminishing returns. If productivity gains per worker remains low, per capita income growth also slows down. Before the global crisis (2002-2008), Turkey experienced high growth rates due to strong investment spending (high capital accumulation), increase in non-agricultural employment, and large productivity gains. In addition to these developments, the appreciation of Turkish Lira against USD also helped per capita income to increase quickly. After the crisis until 2012, contributions of the increase in employment ratio and labor productivity gains to high growth were equal. However, per capita income growth declined sharply in the last two years. In the same period, labor productivity first fell and then increased again. In spite of last increases, the contribution of labor productivity to per capita income growth was null in the last two years. If we ignore the limited contribution of the increase in working age population ratio, the increase in employment ratio has been the sole positive contributor to per capita growth in the last two years.
If economic actors and policy makers can’t find a way to increase labor productivity in the coming years, per capita income growth will remain low. This means that it could take a very long time for Turkey to escape from the middle income trap.
NON-AGRICULTURAL EMPLOYMENT INCREASED DUE TO INCREASE IN SERVICES EMPLOYMENT
Seyfettin Gürsel, Gökçe Uysal and Ayşenur Acar
Seasonally adjusted labor market data shows that non-agricultural unemployment rate remained the same at 11.0 percent in the period of Mart 2014 compared to the period of February 2014. Increases observed in employment for the period of March 2014 were mostly due to the strong increases in services employment. The increase in the services sector was the strongest increase observed in the last two years. However, job growth in other sectors remained weak. Employment increases in manufacturing decelerated, while employment in the construction sector decreased in this period.