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The Turkish cost of labour is slowing employment growth. A high minimum wage in relation to the median wage is having negative effects on the labour market. Low-skilled workers are suffering in particular from the high labour costs, since businesses are reluctant to employ them.

Issue

Labour costs are an important part of the flexibility of a labour market. If labour costs are too high, particularly the low-skilled will be excluded from the labour market. Turkey has low productivity and raising labour input will stimulate economic growth:

  • As of January 1st 2007 the minimum wage in Turkey is €302.61 per month;
  • The ratio of minimum wage to regional GDP per capita peaks at well above 100% in some areas.

Not only does the employer have to pay high labour costs, the employees also suffer:

  • The relative tax burden for an employed person on low wages was 41.9% in 2005. This was above the EU-25 average of 39.4% in the same year, especially higher than other low-productivity countries (Portugal had 31.7% in 2005 and Greece 34.4%); this has caused growth of a large informal sector;
  • A one-earner married couple with children pays the largest amount of tax on earnings of all OECD countries (Turkey had a tax wedge of 42.8% in 2006, meanwhile, the OECD average was 27.5%).

Importance

Although the economy has made great advancements (real GDP growth averaged 7.0% between 2002 and 2006) the employment rate has hardly improved:

  • The unemployment rate in Turkey has been more or less unchanged in recent years (it averaged 9.9% between 2001 and 2006);
  • The official unemployment rate conceals the fact that unemployment is up to 70.0% in some rural areas;
  • Due to religious and cultural reasons, female employment is especially low in Turkey (in 2005 it was only 23.8%). It is often female employers that require low-wage or part time jobs;
  • In 2006, Turkey was ranked 148th out of 175 countries by the World Bank for its ease of employing workers. Firing costs are very high, with the OECD average being 31.3 weeks of wages and Turkey’s being 94.7 weeks.

Implications

So far, the Turkish government has undergone no reforms to tackle the problem of the minimum wage, although it implemented a reform of the tax system in 2002 to relieve it of its complexity. High labour costs will have a negative influence on the Turkish economy, especially on its competitiveness:

  • Low employment numbers combined with low productivity will harm Turkey’s position on a global scale : In 2006, labour productivity in terms of GDP in Purchasing Power Standards (a common measure for comparing countries’ GDP) per person employed was less than half of the EU-25 average (EU-25=100, Turkey=40.6);
  • GDP per capita could fall due to a growing population and a stagnating or declining labour market. GDP per capita is still considerably lower in Turkey than in Western European countries (in 2006, Turkey had a GDP per capita in Purchasing Power Standards in relation to the EU-25=100 of 28.2);
  • One of Turkey’s main attractions for investors is cheap labour compared to Western countries. However, if Turkey maintains a high minimum wage, investors may look to other countries, especially Eastern Europe;
  • To sustain the large amount of FDI that is flowing into the country, Turkey must show an adequate labour market which includes the abolition of the relatively high minimum wage (from 2005 to 2006 Turkey noted a year-on-year increase in FDI inflows of 76.3%). In 2006, FDI inflows made up 4.0% of total GDP, showing an increasing dependency of economic growth on foreign investment;
  • Turkey’s growth rates have slowed and are expected to remain at a stable 5% in 2007 and 2008, which could put pressure on the labour market and job creation;
  • Prospects to join the EU could be mitigated if the labour market remains rigid, including a relatively high minimum wage. One concern of the EU is that if Turkey becomes a member State, Turkish workers may migrate to Western Europe in hope of employment.

Future Scenarios

Despite being urged by the IMF and the World Bank, Turkey has not announced reforms of the minimum wage. So far, the corporate tax rate has been reduced from 30% to 20% (effective from January 2006). In terms of personal income tax, the top rate has been reduced from 40% to 35% (effective from January 2006). However, no reforms for low earners have been introduced.

Prospects to join the EU are slim if Turkey does not reform its labour regulations and it would seem unrealistic that it would meet EU targets. The employment rate target of the EU is 70.0% by 2010, while Turkey had an employment rate of only 46.0% in 2005.

Since Turkey’s population is growing rapidly, it does not need to fear immediate labour shortages, such as in Western European with ageing populations. This is especially so, since many workers are coming out of the traditional agricultural sector, wanting to be absorbed into the labour market in fields such as industry, construction and services. Turkey has a lot of potential in the labour market, which it is likely to take advantage of when reforms are implemented.

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