From "the Factory of Ideas" (Archive)
Deniz GÜREL KARATAŞ, TÜSİAD Social Policy Department, Senior Expert
Creating employment in order to reduce unemployment is, undoubtedly, an indispensable element of economic and social development. On a global scale nine out of ten jobs are supplied by the private sector. When this is taken into consideration the role of the private sector in creating employment can be grasped all the better. At this point what falls to the state is taking the lead in clearing the way for the private sector for growth by providing a favourable investment climate, analyse the reasons of the lack of adequate decent jobs and eliminate the obstacles preventing the increase of such jobs.1
The policy of increasing employment through incentives is one implemented by many states including Turkey. Herein certain questions spring to mind: By which policy instruments should employment be created? What are the difficulties to labour supply and what are the suitable incentive policies necessary to eliminate these difficulties? What kinds of effect do the implemented incentive policies have in creating employment? This article will aim to seek answers to the aforementioned questions.
The World Bank classifies countries on the basis of income levels into three main categories as low, middle (also subdivided into lower middle and upper middle) and high level income countries. Within this scope it has determined three common targets for the labour policies in middle and low level income countries. These can be listed as;
1) Providing incentives and conditions for individuals to work
2) Ensuring the creation of high quality decent jobs and
3) Managing the risks and facilitating transitions within the labour market.
The first two of these objectives can be accomplished by providing direct incentives to the self-employed and those wishing to be entrepreneurs in addition to creating sound macro-economic and a business-investment environment. On the other hand the third objective is related to preventing such risks as unemployment and income shocks which can be encountered by employees. In addition Active Labour Market Policies (ALMP) come to the forefront in terms of facilitating the transition of youth from school to work, the transition of adults between jobs and move them from a state of unemployment into jobs. Since Turkey is one of the countries classified as; “upper middle income country which is ageing and with reducing informality” according to the World Bank’s categorisation, the common objectives mentioned above are also valid for Turkey.2
In the OECD countries wanting to reach the targets stated for labour market policies, high levels of public expenditure are devoted to labour market programmes. OECD terms these expenditures in question as “active” and “passive” policies. ALMPs usually have five categories:3
1) Public employment services and administration: This can be defined as job placement, career consultancy, vocational guidance and the management of unemployment benefits
2) Labour Market training: Training aimed at providing unemployed adults with a profession, training intended at adapting the employed adults to the changing conditions of the labour market.
3) Youth Measures: Training and employment programmes for the unemployed youth, programmes such as apprenticeship training facilitating the transition from school to employment for the young people who have dropped out of school.
4) Subsidised Employment: Policies related to creating employment for the unemployed and to increasing the employment of other priority groups are subdivided into three categories:
o Recruitment incentive (Incentive paid to employers for employing the unemployed)
o Incentives and assistance for the unemployed who would like to open their own business
o Direct employment of the unemployed in the public and nonprofit sectors
5) Measures for the disabled: Vocational training aimed at increasing the employability of the disabled, programmes employing the disabled only.
On the other hand passive labour market policies are subdivided into two as unemployment benefits and early retirement payments. Since this article will only deal with incentive policies, ALMPs will be addressed but passive labour market policies will not be included.
By Which Policy Instruments is it Necessary to Create Employment?
According to the World Development Report published by the World Bank in 2013; since each country’s labour market is sui generis, different policies should be implemented. The report in question has assessed countries according to eight categories. These are; agrarian economies, conflict-affected countries, urbanizing countries, resource–rich countries, small island nations, countries with high youth unemployment, formalising countries and Ageing societies.
According to the World Bank’s categorisation Turkey is an “ageing country that has a decreasing rate of informality”. The World Bank’s recommendation for low and middle income European and Central Asian countries with ageing populations is to sustainably restructure their social security systems to be in harmony with incentives. Other recommendations include the widespreading of adult training, encouragement of entrepreneurship and incorporating the private sector into the process. Finally the World Bank mentions the significance of providing an investment climate favourable for creating employment and eliminating the inflexibilities in the labour market.
As a result of the fight against informal employment in Turkey, this phenomenon has regressed to 39% in 2012 from the 42% of the previous year.4 The World Bank’s policy recommendation for countries fighting against informal employment is the necessity of supporting jobs providing social benefit without burdening the public budget with a lot of cost and jobs which will not create a deficit in the social security system. Although informing, training and counselling the youth about suitable work is not a magic bullet, it does serve the purpose to a certain degree. Even more importantly is the necessity of a dynamic private sector in these sorts of countries which will be able to employ the youth newly entering the labour market. Informality also results in low level of productivity. In Turkey, the total factor productivity difference between formal and informal companies is 19% in the manufacturing industry and 62% in the services sector. To give some examples from other countries; according to a study conducted in six Latin American countries, labour productivity in formal companies is 30% more than the informal ones.5
Even though Turkey is not classified as such in the World Bank categorisation; it can actually be counted among the countries with a high level of urbanisation. While urbanisation rate in Turkey was around 60% in 2002, this has increased to 77,3% a decade later in 2012.6 The policy recommendations in the World Bank Development Report for countries with a high level of urbanisation such as Turkey are improving job opportunities for women, supporting jobs which will increase export and jobs intended for those who have migrated from their villages.
It is not possible to overlook the reality of Turkey’s youth unemployment rate which is around 17,5%. 7 What will create a difference in countries with a high youth unemployment rate such as Turkey is to encourage jobs not supported through rents and not allocated on the basis of connections. The reasons for this are; the fact that the youth do not have the accumulation to acquire unearned income and since it will not be possible for them to have a lot of connections without work experience there’s the risk of them being excluded from the labour market. Depending on the changing of habits and the culture; these recommendations can only be effective on a long-term basis. One of the prescriptions offered for the solution of youth unemployment and which can be effective on a short-medium term basis is active labour market policies.8
Difficulties to Labour Supply and Active Labour Market Policies 9
Skill mismatch in labour markets has become a chronic problem in Turkey as well as in many other countries. When qualification discrepancy is approached from a labour supply perspective, there are four significant obstacles to employment. We can list these obstacles as being; mismatch between the basic and behavioural necessities of the job, inadequacy of technical skills and lack of entrepreneurial ability. In order to overcome these inadequacies, vocational training and other ALMPs are presented as the remedy for cyclical and structural unemployment. We can term these ALMPs as; support for job seeking, private sector employment programmes (wage subsidies, entrepreneurship support/lifeline grants), public employment and vocational training. It is also possible for ALMP’s to backlash. This counter effect can be observed as the changing of existing employees with new ones in order to benefit from the incentives. Another counter effect is the temporary employment of the employees working in direct employment policies such as public employment and hence the obstruction of job seeking and decreasing the chance of finding new and permanent employment.
The cost of ALMP’s for the government is generally quite high. To mention the short and long term effects of the types of ALMP; even though the service of job seeker’s support and public employment can be seen to have positive effects in the short term, public employment is observed to have a negative effect in the long term due to counter effect. In addition, as can be estimated, although the ALMPs aimed at vocational training may have a negative effect in the short term, the benefit of such policies can be observed in the long term.
Many incentive programmes are implemented in Turkey within the scope of ALMP and in order to increase employment. These can be listed as follows:
• Employer’s national insurance contribution incentive aimed at enabling the participation of young and female to the labour force and at promoting vocational and technical training
• Employer’s national insurance contribution incentive aimed at increasing women’s and youth employment
• Employer’s national insurance contribution incentive for the ones employing workers receiving unemployment benefit
• A five points reduction in the employer’s national insurance contribution
• Employer’s national insurance contribution incentive for employing disabled people
• Employer’s national insurance contribution incentive for the ones hiring Research & Development personnel
• Employer’s national insurance contribution support for those with investment certificate.
Reduction of Non-Wage Costs: When evaluated from the perspective of demand in the labour market, social security programmes financed through the tax levied on wages do have a bearing on the behaviour of companies. There is data in World Bank studies showing that heavy duties and tax wedge do have the effect of increasing labour force costs and decreasing formal employment. In addition, once again studies conducted by the World Bank demonstrate that mandatory severance pay decreases labour turnover and slows down the creation of new employment. At the end of the day high labour force costs can be deterrent in terms of new companies entering the market. When it is taken into consideration that a majority of these companies tend to be innovative, it can be seen that social security systems which are not well designed do slow down, albeit indirectly, the growth of labour productivity.10 According to 2012 OECD data the tax wedge over wages is 38,2% in Turkey and this is higher than both the world and the OECD average. In 2012 there has been an increase of 0,1% in the tax wedge average of the OECD countries and this rate has increased to 35,6%. The main reason for this increase is the increase in the employer’s insurance tax wedge in eight OECD countries. The highest rate in the OECD is around 50% in Belgium, France, Germany and Hungary whereas the lowest is below 20% in such countries as Chile, Israel, Mexico and New Zealand.11
Impact of Incentive Policies
Measuring the degree of benefit yielded as a result of the incentives implemented with the aim of increasing employment is not very easy in practice due to the fact that many different incentives are being implemented in coordination. The Social Security Institution has presented the Employment Technical Committee of the The Coordination Council for the Improvement of Investment Environment (YOIKK) with an assessment-evaluation study it has conducted in this field. According to this study, it is stated that together with Provisional Article 10 of the Law on Unemployment Insurance Numbered 4447, the insurance premium incentive provided to those employing women, the youth and those with vocational qualification certificate has decreased the premium costs of employers by 55%. However the number of those benefitting from this incentive has remained below the expected. It is considered that this situation arises from the fact that the conditions for benefitting from the incentive are difficult and complicated. In addition to the average number of insured which is one of the most important conditions for benefitting from the premium incentive, there is the condition for recruitment and the comparison of the average number of insured at the date of the insured benefitting from the incentive is employed with the number of insured employed each month. These conditions especially introduce difficulties and bring along undesirable mistakes in terms of the employers.
Bahcesehir University Center for Economic and Social Research (BETAM) has published a study analysing the effects of the incentive for the employment of women, the youth and those with vocational competence certificate on the employment of women between the ages of 30-44.12 The result of this study demonstrates that the said premium incentive does indeed have an impact on formal employment. One of the findings of the study is that these incentives have been especially used in the employment of women working in the industrial sector and in jobs requiring qualified handcraft skills and in comparatively larger companies. It is particularly observed that there is a relative increase in the employment of women with an education level below high school. Another interesting finding of the study is that with the introduction of the impact of additional employees due to the global economic crisis, there is a relative improvement in the formal employment of married women. As a result, the state funding of the employer’s national insurance contribution has had a positive effect on women’s employment. However according to the results of the study; extending similar incentives towards all new employees within the same period and without any discrimination in terms of age and gender has actually significantly decreased the effect of women’s and youth incentives.13 Therefore the interplay between incentives is a phenomenon that must be taken into consideration by the policy makers.
As regards the other data presented by the SGK; the incentive programmes providing the highest rate of decrease in premium costs are the incentive aimed at the insured employed while they are on unemployment benefit and the incentive provided for the employers operating in the 6th Region in line with Decision Regarding State Aid in Investments. Both of these two incentive programmes generate approximately 90% of reduction in premium costs of employers. On the other hand; the incentive programme generating the lowest rate of reduction in the premium costs of employers is the 5 points premium deduction in the employer’s national insurance contribution. The reason why this is the most preferred incentive model in spite of the fact that it only generates a slight decrease of 10% in the premium costs of employers is the fact that it is relatively easy to implement and as well as the simplicity of its conditions for use.
Some Recommendations On Creating Employment Through Incentives:
• Easing the conditions for benefitting from the incentive programmes in force and collecting all the incentive programmes under e-Declaration system and moving on to an automation system will be useful. In the event that this system is enabled to convey warning messages to the employers when necessary the implementation can be eased and red tape and penal actions can be decreased.
• The ALMP’s carried out in Turkey, especially in the field of vocational training, have been described as successful by the World Bank. Hence enabling their continuation is important.14
• Institutions implementing the incentives and the ALMP’s should continuously follow up whether these programmes are beneficial or not via monitoring-evaluation activities and the impact evaluation of these programmes should be conducted.
• The production that takes place creates such employment fields as marketing and sales automatically in accordance with the scale of the production. Therefore concentrating on production and encouraging the production of products with high added value is of vital importance. Decreasing the burden of cost on the labour force is of significance both in terms of increasing production and facilitating the entry of new companies to the market. Decreasing the 38,2% tax wedge which exists over wages in Turkey initially to the 35,6% OECD average will contribute to increasing employment.
• It is important that the incentive programmes do not have a negative impact on each other. Therefore legal arrangements should be made taking into consideration the interplay between the incentives.
REFERENCES
* Translated by Gaye Coşar
[1] World Bank, “World Development Report: Jobs”, 2013.
[2] Y. Cho, D. Margolis, D. Newhouse and D. Robalino, “Labor Markets in Middle and Low Income Countries”, Background Paper for the World Bank 2012–2022 Social Protection and Labor Strategy, 2012.
http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2012/05/14/000350881_20120514145031/Rendered/PDF/676130NWP012070Box367885B00PUBLIC0.pdf
[3] John P. Martin and David Grubb, “What works and for whom: A review of OECD countries’ experiences with active labour market policies”, Swedish Economic Policy Review 8 (2001).
http://www.government.se/content/1/c6/09/54/34/e9a4be51.pdf
[4] Ministry of Development of the Republic of Turkey, General Directorate of Social Sectors and Coordination, Employment Assessment Report of 2012, 2013. (online) https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&ved=0CDEQFjAB&url=http%3A%2F%2Fwww.kalkinma.gov.tr%2FDocObjects%2FDownload%2F14875%2F2012_y%25C4%25B1l%25C4%25B1_%25C4%25B0stihdam_De%25C4%259Ferlendirme_Raporu.pdf&ei=RzzPUYlNroriBMPngfAG&usg=AFQjCNEurI9FOy9i5w-onFKyyHThkWb6cg&sig2=0j_OWNCgwX41F7LKUI28RA&bvm=bv.48572450,d.bGE
[5] World Bank, “World Development Report: Jobs”, 2013.
[6] Turkish Statistical Institute TÜİK (online) http://www.tuik.gov.tr/PreHaberBultenleri.do?id=13425
www.kalkınma.gov.tr/DocObjects/Download/3586/oik661.pdf
[7] TÜİK, 2012.
[8] World Bank, “World Development Report: Jobs”, 2013.
[9] Jochen Kluve, Berlin Humboldt Üniversitesi, “Activation Strategies And Active Labor Market Policies”, Sunum, The World Bank Labor Core Course, Washington, DC, 2013.
[10] David Robalino, “Designing Wage Subsidies: When And How?” Presentation, The World Bank Labor Core Course, Washington, DC, 2013.
[11] “Taxing Wages 2011-2012”, OECD Raporu, 2013 (online)
http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/taxing-wages-2013_tax_wages-2013-en
[12] Gökçe Uysal, Betam, Vice Director, “Incentives Provided for Women’s Employment do Work”, BETAM, 2013. (online) http://kanalfinans.com/raporlar/betam-kadin-istihdamina-verilen-tesvikler-ise-yariyor/
[13] Insurance premium incentives provided for women’s and youth employment have been initiated in July 2008 but the scope of the incentives have been extended to also cover men over the age of 29 as of a regulation dated February 2011.
[14] Diego Angel Urdinola, World Bank Senior Economist, presentation The World Bank Labor Core Course, Washington, DC, 2013.
"TÜSİAD Article Series"comprised of articles on current debates. The articles are prepared by TÜSİAD researchers. Opinions expressed belong solely to the author and do not represent the views of TÜSİAD."