US embassy cable - 03ISTANBUL1364

UNCLAS SECTION 01 OF 03 ISTANBUL 001364 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, EFIN, PGOV, TU, Istanbul 
SUBJECT: UNEMPLOYMENT: TURKEY'S OTHER CRISIS 
 
 
REF: 02 ANKARA 7237 
 
 
1. (U) Sensitive but Unclassified.  Not for internet 
distribution. 
 
 
2. (SBU) Summary: While market attention is focused on IMF 
program implementation and the sustainability of Turkey's 
debt, joblessness and underemployment remain the key 
preoccupations of the bulk of the Turkish population.  2003's 
second quarter brought some improvement, according to 
official figures-- though these are distorted both by the 
scale of the informal economy and disguised unemployment in 
the agricultural sector-- with the unemployment rate 
declining from 12.3 to 10 percent.  But 2.4 million Turks are 
still officially listed as being unemployed, and most experts 
believe the true figure is far higher.  Recent studies by 
TUSIAD and the Turkish Employers Association (TISK) attribute 
continuing high unemployment to both supply and demand 
factors and warn that if the structural problems facing 
employment are not addressed, the country's unemployment rate 
could double by 2010. End Summary. 
 
 
3. (SBU) Labor Market Snapshot: New statistics from the State 
Statistics Institute show that at the end of the second 
quarter of 2003 there were 2.418 million unemployed workers 
in Turkey, while 21.6 million people were working in the 
labor force, translating to a 10 percent unemployment rate 
and a 49.4 percent labor force participation rate.  The 
figures represent a slight deterioration from second quarter 
figures in 2002, but an improvement from 2003's first 
quarter, when 2.84 million people were unemployed and the 
total employment figure was only 20.25 million, for a labor 
force participation rate of 47.5 percent.  Among educated 
young people, the rate is significantly worse, however, with 
25.9 percent unemployment.  The rate is particularly high for 
high school graduates, Galatasaray Professor Seyfatten Gursel 
argues, because shortcomings in the Turkish educational 
system leave students unprepared for the working world. 
While unemployment rates are lower for college graduates, the 
recent recession has impacted them as well.  Yilmaz Argudan, 
a leading management consultant, told us in a recent meeting 
that whereas his MBA students at Istanbul's elite Koc 
University each received an average of 3 or more good job 
offers in years past, now they are averaging less than one 
per student. 
 
 
4. (SBU) Underestimating the problem: Two key factors 
complicate any attempt to understand the scope of 
unemployment in Turkey: the fact that nearly 40 percent of 
the population remains engaged in agriculture, and secondly, 
the fact that 40 percent of all economic activity is 
unregistered.  Turkey's high level of agricultural employment 
masks the severity of the country's unemployment problem, in 
that agricultural "employment" for many is simply a disguised 
form of underemployment or unemployment, while the low 
official unemployment rate in agricultural brings the overall 
rate down.  Most analysts thus use the more meaningful 
non-agricultural unemployment rate, which more dramatically 
illustrates the impact of the 2001 crisis.  From an already 
high level of 9 percent in 2000, it jumped to over 16 percent 
in 2002, and has not improved significantly since. 
 
 
5. (SBU) Unregistered workers: The issue is further 
complicated, however, by the size of Turkey's unregistered 
economy, which a recent State Statistics Institute study 
suggests accounts for 40 percent of Turkey's gross domestic 
product.  That level is nearly twice as large proportionally 
as the unregistered economy's share of GDP in most developing 
economies.  Hence while 5.3 million workers are officially 
registered with Turkey's Social Security Fund (SSK), another 
3.4 million workers are not registered.  These workers fall 
outside of Turkey's social security net and receive no legal 
protection.  As Ankara Finance Ministry officials recently 
told the Embassy, the 2001 crisis reinforced this tendency. 
With few employment options, workers are willing to accept 
whatever employment they can get.  Tackling the unregistered 
economy is viewed by most economists as another key part of 
any permanent solution to the unemployment, since the forty 
percent of workers who fall outside the social security 
system not only do not contribute to it, but their firms 
compete "unfairly" with those who do.  Reduction of this 
shadow economy is another key goal of organizations like the 
Turkish Employers' Association (TISK) and and the Turkish 
Ready-Wear Makers Association (TGSD). 
 
 
6. (SBU) Structural Problems: If the precise level of 
unemployment is difficult to assess, there is little 
disagreement about the poor record of the Turkish economy 
over the past decade in creating new jobs.  A recent report 
by TISK noted that between 1996 and 2002, while Turkey's 
population increased by eight million, overall employment 
fell by over 100,000 to 20.28 million people.  Most 
economists attribute this poor record to structural problems 
in the labor market, particularly high tax and social 
security rates.  Many argue Turkey's newly passed job 
security legislation, aimed at harmonizing Turkish standards 
with those of the E.U., will compound the problem. 
Industrialists in Bursa recently argued to us that the law's 
requirement that employers "justify" any lay-offs will in 
fact make them more hesitant to hire new workers.  The 
criticism led the government to delay implementation of the 
legislation and to try to make it more "employer friendly" by 
exempting firms employing less than 30 workers.  In a July 
letter to the government on unemployment, the Turkish 
Ready-wear Manufacturer's Association (TGSD) commented 
ironically that the harmonization effort to bring Turkey in 
line with Europe should not stop with employment standards, 
but should extend to tax rates as well.  The association 
pointed out that with recent increases, Turkey's total tax 
burden on wages is 47 percent, well above the OECD average of 
26 percent, and exceeding even the levels in Scandinavia. 
 
 
7. (SBU) Tax Incentives: TGSD's proposed solution, one echoed 
by many other organizations and economists, is to provide 
meaningful tax incentives for employers.  As additional 
workers are taken on, the organization suggests, tax and 
social security payments should increasingly be shared by the 
government, with the employer paying a lower rate.  In early 
August, Labor Minister Basesgioglu indicated that his 
Ministry was working with the Finance Ministry and Treasury 
to develop a program along these lines, under which 20 
percent of the social security tax and a similar percentage 
of the income tax for each new employee would be paid by the 
government. TGSD also proposed regional incentive programs, 
modelled on measures adopted to encourage economic 
development in Turkey's Southeast, however, the IMF opposes 
these geographic incentives, believing they lead to market 
distortions.  (Comment: In our view, Turkey tends to resort 
too often to tax incentives.  The solution to the high tax 
rate problem is for Turkey to continue to work with the IFIs 
on tax reform that broadens the tax base, enabling it over 
time to reduce marginal rates.  End Comment.) 
 
 
8. (SBU) Labor Supply: At the same time that Turkey is having 
difficulty creating new positions, it faces the challenge of 
an increasing number of entrants to the labor force.  High 
birth rates have led to demographic pressure on labor 
markets.  TUSIAD's recent labor market study pointed to a 
number of other factors, including the end of early 
retirement, and the increasing number of women entering the 
labor market.  In addition, experts predict that the gradual 
decline in the percentage of men participating in the labor 
force that has occurred over recent years will reverse itself 
in coming years.  (Galatasaray Professor Seyfettan Gursel, an 
author of the TUSIAD study, points out that one reason for 
Turkey's relatively good unemployment performance in the 
early 1990s was not growth or "brilliant" economic 
performance, but the fact that the declining level of male 
participation in the labor force held down the overall 
participation rate.) 
 
 
9. (SBU) Growth Requirements: According to TUSIAD, only 
sustained growth of six percent over the next eight years can 
allow Turkey to bring unemployment to an "acceptable" level 
of 6.5 percent.  Five percent growth leaves unemployment at 
10 percent, while anything less further compounds the 
problem.  Study authors point to the importance not just of 
steady macroeconomic policy to achieve this goal, but also to 
the need for the kinds of microeconomic reforms advocated by 
TGSD and other organizations to address the structural 
problems that make the labor market inflexible.  (Comment: 
Turkey also nees to pursue additional microeconomic reforms 
desgned to encourage competition and entrepreneurship  End 
Comment.) 
 
 
10. (SBU) Comment: Until strog economic growth begins to 
create significant ne employment, most Turks will remain 
sceptical abut whether a recovery has truly begun.  While 
ideas abound about how to make Turkey a more 
employment-friendly place, budget pressures will likely limit 
the government's ability to implement all the incentive 
programs-- or tax reductions-- that business would like to 
see.  End Comment. 
 
 
 
 
ARNETT