US embassy cable - 05ANKARA2737

UNCLAS SECTION 01 OF 02 ANKARA 002737 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - C. PLANTIER AND MMILLS 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, ELAB, SOCI, TU 
SUBJECT:  New Data Continue Pattern of Stubbornly-High 
Unemployment Rates 
 
 
1. Summary: The National Statistics Office (SIS) announced 
that the unemployment rate was 11.5 percent in January, 
higher than the year-end 2004 rate of 10.3 percent. 
Seasonal factors and the use of a new methodology, however, 
mean that it is not clear the higher rate reflects a 
worsening unemployment trend.  The workforce in Turkey is 
growing by more than 1 percent per annum, and is expected to 
grow at that rate for another decade. The GOT hopes that its 
economic policies will create at least 600,000 new jobs per 
year to start bringing the unemployment rate down. 
Unemployment remains high due to a combination of high 
employment taxes, population growth, and improved 
productivity. End Summary. 
 
New Methodology Produces Higher Unemployment Rate: 
-------------------------------------- 
 
2.The SIS announced its January 2005 work force survey 
results on April 25.  Using a new methodology (see below), 
the survey found an unemployment rate of 11.5 percent, 
compared to final 2004 unemployment of 10.3 percent.  Though 
the reasons for the large difference are not clear, they 
appear to stem from some combination of seasonality and the 
change in methodology.  The seasonality arises from higher 
unemployment in the winter, particularly in construction. 
 
3. As for the methodological difference, this is the first 
time that the SIS announced its data on a monthly basis, 
using a moving average of the survey results for the 
December 2004 - February 2005 period.  The SIS used to 
announce its data on a quarterly basis. The averaged January 
2005 data put the employment rate at 41.3 percent and size 
of the workforce at 23.5 million. The number of unemployed 
was recorded as 2.7 million, under-employment at 3 percent 
and non-agricultural unemployment at 15.2 percent. 
 
The Downside of Improved Productivity: 
------------------------------------- 
 
4. Echoing many economic analysts, IMF Europe Director 
Michael Deppler, was recently quoted saying that the 
extraordinarily high increases in productivity in the last 
three years explained the failure of Turkey's strong growth 
to bring down the rate on unemployment.  According to the 
SIS productivity index labor productivity increased an 
average of 6.6 percent for each quarter since 2002.  Turkish 
Labor Minister Basesioglu predicted on April 20 that despite 
improved productivity companies would begin to start hiring 
new employees. 
 
 
High Tax Wedge: 
-------------- 
 
5. Another factor in Turkey's high unemployment rate is the 
high tax "wedge"-i.e. employment taxes, including social 
security premia.  Turkey's tax wedge is above the OECD 
average.  When GOT officials raise the issue of tax 
reductions, the preferred tax reduction in the IMF's view 
would be a cut in employment taxes.  However, social 
security premia cannot be cut because of the need to rein in 
huge social security deficits.  The IMF has reflected the 
desirability of lower employment taxes in its new program, 
which calls for consideration of cuts in employment tax 
rates down the road, fiscal situation permitting.   TUSIAD 
(Turkish Industrialists and Businessmen Association) 
President Omer Sabanci was quoted saying that the GOT should 
rapidly start implementing job-creation remedies and urged 
the GOT for a employment-tax cuts. According to a TUSIAD 
report a 10 percent decrease in employment taxes would lead 
to significant decrease in the manufacturing industry cost 
of production, and would increase employment rate by 2 pp in 
the long-run. 
 
The Unregistered Economy Problem: 
-------------------------------- 
 
6.  According to the official SIS data, of the 20.8 million 
work force only 10.6 million employees are registered under 
the social security system.  The unregistered employees are 
estimated to cost the Turkish state around TRY 19.5 billion. 
According to the 2004 OECD Economy Survey report, Turkey 
faces a serious dilemma in employment policy: Will the GOT 
cut labor taxes in the formal sector to stimulate labor 
demand and supply, or let the non-taxed informal economy 
continue to play a buffer role and absorb employment at the 
low end of the labor market? 
 
Hopes of Job Growth? 
------------------- 
 
7. Going forward, the slow pace of employment growth is an 
increasingly high-profile political issue for the 
Government, and one on which the GOT hopes there may be some 
modest improvement.  A TUSIAD report on unemployment also 
supports the view that despite some capital growth in 2005, 
there would be a surge in the employment rate, increasing by 
1.5 - 2.0 percent - an increase below the threshold needed 
to prevent the 2005 unemployment rate from coming in above 
10 percent.  Deputy Prime Minister Abdullatif Sener 
announced on April 27 that the GOT would discuss  employment 
creation remedies --the GOT is aware of the social and 
political danger of the unemployment rate worsening, as 
signaled by the January 2005 data. Prime Minister Tayyip 
Erdogan already said on April 4 a 10.3 percent unemployment 
rate was still high for Turkey, and the GOT would implement 
policies primarily in the construction sector to create 
600,000 new jobs every year. The GOT projects unemployment 
rates of 9.6 percent and 10 percent for 2006 and 2005, 
respectively, corresponding to 23.7 million and 23.1 million 
employed people. 
 
 
8.  A survey carried out by the Istanbul Chamber of Industry 
among its members also reveals that 62 percent of the 
enterprises have reached new investment decisions.  ISO 
President told Econ specialist that industrialists were 
generally hopeful about 2005, but increasing productivity 
means there may be no improvement in the unemployment rate. 
On the other hand, according to State Minister Ali Babacan, 
the unemployment rate could decrease to 7 percent in the 
next three years with a 5 percent growth rate.   Minister 
Babacan said in a conference he attended in February 2005 
that the GOT expected a total of 1 million 650 thousand 
people to be employed in 2005, 2006 and 2007 given a 5 
percent growth rate. 
 
Underemployment: 
--------------- 
 
9. Some analysts believe that official unemployment data 
underestimate the problems in the Turkish labor market, as 
suggested by Turkey's substantial underemployment.  Fourth 
quarter 2004 data showed that underemployment constituted 
4.1 percent of the work force, whereas this rate dropped to 
3 percent in the January 2005 data, using the new 
methodology. This shows that as of January 2005, about 14.5 
percent of the work force is either unemployed or 
underemployed in Turkey.  A Turkish labor market risk 
analysis report by the Economic Intelligence Unit points out 
that unskilled and semi-skilled labor is abundant and wages 
are low in Turkey.  The lack of a good skills match between 
what employers want and the available supply of workers also 
contributes to "structural unemployment" in Turkey. 
 
10. Comment and conclusion: Turkey is growing at an 
impressive rate, inflation is decreasing, but the 
unemployment rate is not coming down, given that labor force 
is also growing, and productivity is increasing. The GOT is 
aware of the problem, but trying to find solutions without 
being in conflict with the economic reform program.  Taxes 
and social security contributions that are seen as key 
barriers to employment creation  put the GOT in a dilemma 
between employment tax rate cuts and revenue collection. 
Edelman