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1 Introduction

Today, one of the most important economic and social issues facing Turkey is the high unemployment rate; its importance will be revealed only under a detailed analysis of the structure of unemployment and labour market dynamics. The unemployment rate, which has settled around 7–8 per cent for many years, rose gradually with the economic crisis in 2001 and became “structural” almost at the 10 per cent level. While the unemployment rate was 6.5 per cent in 2000, it increased to 8.4 per cent in 2001. In the following years, it continued to increase and reached 10.3 per cent in 2002 and 10.5 per cent in 2003. It decreased slightly, to 10.3 per cent, in 2004 and held steady in 2005. Then it decreased to 9.9 per cent in the following two years and remained stable.

Owing to the global financial crisis, however, the unemployment rate jumped significantly, hitting 14.8 per cent in 2009. In subsequent years, this trend reversed, and the unemployment rate retreated to 11.1 per cent in 2010, 9.1 per cent in 2011, and 8.4 per cent in 2012. However, because of the modest slowdown of the Turkish economy after 2013, the unemployment rate gradually increased to 9 per cent in 2013 and 10.9 per cent on average in 2016. In December 2016, the unemployment rate stood at 12.7 per cent.

Despite the rapid growth in the economy following the 2001 crisis, failure to achieve permanent and necessary improvements in the unemployment rate and its structural nature revealed the need for a comprehensive reform of the Turkish labour market. Because the unemployment rate in recent years has started to increase again as a result of the slowdown in the Turkish economy, the necessity of reforms in the labour market gained importance. To become more competitive, flexible, and high value-added, Turkey’s labour market is in need of long-lasting, efficient reforms.

In this chapter, we first examine labour market dynamics in Turkey and then discuss labour market reform and make some proposals for Turkey. Finally, we evaluate our main findings.

2 Turkish Labour Market Dynamics

Some details in the Turkish unemployment data are worth noting. Table 1 summarizes the 2016 Turkish labour force indicators and shows the unemployment rate reached 10.9 per cent owing to the modest slowdown in the economy in recent years. Recent statistics indicate that the unemployment rate among females is higher, the non-agricultural unemployment rate is higher than the overall unemployment rate (13 per cent), and youth unemployment (i.e. 15–24 age group) is quite high (19.6 per cent). In addition, the employment rate is 46.3 per cent and is higher among men than women. The labour force participation rate, one of the important labour market indicators, is 52 per cent; broken down into rates for men and women, though, the labour force participation rate of men is 72 per cent, which is significantly higher than that of women, which stands at 32.5 per cent.

Table 1 Basic labour force indicators, 2016
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It can be argued that the main reason behind the high unemployment rates in Turkey is the continuous expansion of the labour force as a result of rapid population growth and insufficient job creation in the economy. Even as the economy recovers and creates new jobs, the unemployment rate slowly falls because people become more optimistic about the economy and many of the marginally attached or discouraged workers re-enter the labour market, which keeps the unemployment rate high. Therefore, the unemployment rate converges to a level higher than its pre-crisis level. The rapid dissolution of jobs in the agricultural sector in recent years has also led to high unemployment rates in Turkey. In particular, despite the robust economic growth between 2002 and 2007, lack of progress in unemployment during the same period can be explained by the rapid population growth and increase in the labour force and decline in agricultural employment. According to data from the Organisation for Economic Co-operation and Development (OECD), from 2004 to 2013, the share of employment in the agricultural sector declined from 29.1 to 23.6 per cent, And data from late 2016 show further declines in the agricultural sector, falling below 20 per cent (19.4 per cent). However, it is still significantly higher than the OECD average of 4.6 per cent in the same period. All these data indicate that while the decline in agricultural employment is an inevitable result of development, employment growth in other sectors has not been sufficient to compensate for the decline (World Bank 2006).

There are also structural issues in the Turkish labour market. The labour market rigidity and educational system in Turkey are the key structural factors. In fact, the current educational system has fallen far short of increasing the labour force to the extent needed by the economy. Although it is not possible to solve the unemployment problem in Turkey solely through economic growth, the main reason why the unemployment rate has started to increase again in recent years is undoubtedly the observed slowdown in the economy. While the Turkish economy grew 8.5 per cent, 5.2 per cent, and 6.1 per cent in 2013, 2014, and 2015 respectively, real economic growth stalled in 2016, growing only 2.9 per cent. In particular, the unemployment rate declined to 9.3 per cent in April 2016 and then steadily increased up to 13 per cent in January 2017. In the same period, real GDP growth slowed down, growing 2.5 per cent on average in the third quarter (2Q16-4Q16).

Moreover, Turkey has among the lowest employment rates in the world (Fig. 1). In particular, according to the World Bank (2006), employment rates in many countries are above 50 per cent and 65 per cent on average in the EU-15, which are significantly higher than levels in Turkey. Selamoglu and Lordoglu (2006) listed structural factors, such as an inability to create sufficient jobs in cities for unskilled workers coming from agriculture, a higher growth rate of the working-age population than total population growth, a lack of ability of the labour force to meet the needs of the economy, and a failure to establish a relationship between the labour market and education, as the main reasons for the low employment rates.

Fig. 1
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Basic labour market indicators, 2005–2017 (Source: TURKSTAT; data were retrieved from the Central Bank of the Republic of Turkey (CBRT))

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Furthermore, it appears that the composition of the unemployment rate is also of concern. The unemployment rate among young people makes the problem even more worrisome. In 2016, the unemployment rate among the youth was 19.6 per cent (1.4 percentage points higher than the previous year), which demonstrates that the young population is the group most affected by labour market issues. The main reasons for high young unemployment rates are (1) the fact that the 15–24 age group is the first age group to enter the labour market, and they are not preferred by employers because this age group has no or limited work experience; (2) youth have limited knowledge or expertise; (3) employers have higher expectations; and (4) young people have not been trained to meet the needs of the labour market (Selamoglu and Lordoglu 2006). In addition, Sengul (2014) estimated that young workers are almost twice as likely to be unemployed than older workers and young workers are almost three times more likely to lose their jobs. Therefore, the author also argues that high separation rates are the main reason for the relatively high youth unemployment rate compared to adults.

As depicted in Fig. 1, the labour force participation rate in Turkey is also quite low, and this leads to a lower official unemployment rate. Considering that the average labour force participation rate in OECD countries is 68–70 per cent, the labour force participation rate in Turkey (52 per cent in 2016) is far below the OECD and EU averages. Moreover, while the rate of participation in the female labour force in OECD countries has increased since the 1980s, the labour force participation rate for both men and women gradually declined in the 1990s and 2000s due to increases in schooling and urbanization in Turkey. In particular, as Lordoglu (2006) points out, with the increase of urbanization, women have separated from unpaid family workers and earned a “housewife” status, which is not included in labour force statistics. However, as educated female workers in urban areas began to join the labour force, the labour force participation rate among women has started to increase in recent years (Onder 2013). With the upward trend in the labour force participation rate, the economy needs to generate more employment opportunities to even keep unemployment rate at current levels.Footnote 1

In addition, a high number of discouraged workers, or those not currently looking for work because they believe no jobs are available for them or there are none for which they qualify, reduces the labour force participation rate in Turkey and, therefore, lowers the official unemployment rate. For example, in 2016, the share of workers marginally attached to the labour force was measured at 8.6 per cent. In the same period, according to TURKSTAT, more than two million people were not looking for jobs and thus were out of the labour force, though they are willing to work.

Other important details in the Turkish unemployment data are worth noting. While the unemployment rate in 2016 was 10.9 per cent, detailed labour market statistics point to inefficiencies in the Turkish labour market. While the participation rate has been gradually increasing since 2007 (Fig. 1), the high underemployment rate indicates inefficiencies in the labour market. The underemployed are those who are employed but working less than 40 hours per week for two reasons: economic and non-economic reasons. The statistics show that while workers working part-time for non-economic reasons fluctuate between 1 and 2 per cent (of the total labour force), there have been some improvements in the ratio of those working part-time for economic reasons (Fig. 2). In total, the trend in the underemployment rate in Turkey indicates that the Turkish economy has not been entirely successful to shrink its underemployment problem and it must find other ways to resolve this issue.

Fig. 2
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Underemployment in Turkish labour market, 2009–2014 (Source: TURKSTAT (Data is retrieved from CBRT))

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Furthermore, in Turkey, the rates of unpaid family workers, employers and the own account workers are well above the EU and OECD averages. According to TURKSTAT’s 2016 statistics; the rate of the regular employee in the labour force in Turkey is 67.8 per cent, the rate of own account workers is 17.1 per cent, the rate of unpaid family worker is 10.5 per cent and the rate of employer is 4.6 per cent. In addition, in 2015, the ratio of self-employed (sum of unpaid family workers, own account workers and employers) to total employment in Turkey was 33.0 per cent while it was 15.6 per cent in the Euro area (OECD 2017). Considering that this ratio was 45.5 per cent in Turkey in 2004, it is self-evident that the share of self-employed has declined rapidly in recent years.

Although under Turkish law women and men enjoy equal opportunity, the employment rate among women is very low. For example, Lordoglu (2006) examines employment rates and asserts that women are mostly in the labour force in rural areas and mostly in skilled jobs in urban areas, or they are completely out of the labour force because they are recorded as housewives. Additionally, the labour force participation rate among women is lower than it is among men. Bilgin and Kilicarslan (2008) mention that the low rate of labour participation among women can be partially explained by social and cultural factors. In other words, cultural and educational traditions could be the major reasons that prevent women from participating in working life. The dense rural-to-urban labour migration and the fact that women living in cities do not have the necessary skills also limit their employment opportunities (Turkiye Kamu-Sen 2004). Furthermore, general unemployment, non-agricultural unemployment, and youth unemployment rates are also higher among women than men.

Furthermore, as TUSIAD (2002) points out, high population growth and an insufficient increase in employment opportunities in the formal sector (which remains below population growth) push people out of the formal sector and into the informal sector with low productivity and low wages. Therefore, unemployment in Turkey is able to hide within ‘artificial employment forms’ by creating low income and little contribution to national income (Ekin 1997). While in Western countries government and special employment agencies and unemployment insurance schemes that fully encompass labour markets have transformed various types of unemployment into involuntary unemployment , the various socio-economic features that exist in developing countries like Turkey have forced people to ‘work in non-productive artificial and informal forms of employment’ (Ekin 2003). Therefore, there is a large informal sector in Turkey, including in urban areas.

Indeed, it is understood that informal employment is still a major problem, although it has declined significantly in recent years. The official statistics in Turkey indicate that 32.7 per cent of workers had no form of social security in December 2016, a 0.6 percentage point increase compared to the same period in the previous year. It can be argued that the main reason why the informal labour market is so large is the high cost of non-wage labour costs. The burdens on employment have both adversely affected employment and increased the informal sector. In this framework, it is estimated that employment taxes have a larger impact on employment in labour-intensive sectors, in other words, where labour costs represent a greater share of total costs (TUSIAD 2004).

In addition, there is also the case of rapidly growing ‘illegal immigrant worker’ in Turkey in the 1990s. Immigrant workers, especially from neighbouring countries including eastern European countries, the former Soviet Union, and Iraq, are working illegally in sectors such as construction, weaving, leather, and hospitality. Since 2000, immigrant workers have come increasingly from African countries. In the last few years, it can be argued that more than two million Syrians who have escaped from the civil war in Syria and sought shelter in Turkey shook up Turkey’s labour market dynamics. It is estimated that hundreds of thousands of Syrians are working in low-skill jobs in the informal service sector.

3 Labour Market Reform to Boost Employment and Suggestions for Turkey

In this section, we discuss what Turkey needs to do in combating unemployment and make some suggestions. Within this framework, we list the necessary steps to take.Footnote 2

The main reasons behind the high unemployment rate in Turkey are the rigidities on both the supply and demand sides of the labour market. In other words, as Bilgin (2008) discusses, the main reason for the so-called structural unemployment is the inability to match labour supply with demand. This finding also indicates that a low unemployment rate cannot be achieved through mere economic growth (TUSIAD 2004). Thus, policies should focus on the labour market, which should be made more flexible, and encourage more employment with a comprehensive reform of the labour market, as suggested by the World Bank (2006) in its “Turkish Labour Market Report.”

In fact, in recent years, some steps have been taken towards creating employment in Turkey, and some have become law. For example, the 2008 Employment Package aimed at increasing employment among women and youth. In addition, many active and passive labour market policies, including unemployment insurance and education opportunities for young people, were also implemented (Duman 2014). Despite the so-called employment packages, however, limited progress has been made (Maliye Bakanligi 2011). In addition, after experiencing an upward trend in the unemployment rate in recent quarters, the Turkish government introduced new measures to stimulate employment in early 2017.

To reduce the unemployment rate, resolve the structural problems in the labour market, and increase productivity with higher employment in the coming period, the following regulations could be revised: minimum wages, severance pay, social security premiums, shortening of weekly average working hours, and flexible work contracts (Maliye Bakanligi 2011). In addition, the creation and development of human capital, along with regional minimum wage and comprehensive education reforms, are of great importance in this framework.

Economic growth is crucial to combat cyclical unemployment. However, dealing with unemployment at the macro level alone is not enough to address the unemployment problem. Indeed, structural unemployment is unlikely to be solved only though economic growth. On the other hand, as suggested by TUSIAD (2004), it is necessary to make growth ‘employment-friendly’, and this is possible only if the rigidities in the labour market are tackled. The growth performance of Turkey during the 2002–2007 period and the course of unemployment suggest that the solution should be sought elsewhere. The growth–unemployment relationship, like the countries of continental Europe, shows that the main reason for unemployment in Turkey lies far beyond growth.

In the context of a labour market reform, employment protection should transit from “protecting jobs” to “protecting workers”. In the current system, the barriers to offering severance packages and flexible work protect mainly those workers who actually have a job, not workers in general. Reforms should cover flexibility in hiring, setting wages, working time and forms and firing employees at will. Labour laws should focus on not only protecting jobs and employees but also creating employment. The idea put forward at this point is called ‘flexicurity’ (Tatlioglu 2012). This strategy, often referred to as ‘flexible security’, on the one hand, strengthens employees’ adaptability and improves their skills and, on the other hand, improves the flexibility of the labour market through regulatory reforms (Dunya Bankasi 2008).

One of the main reasons for structural unemployment in Turkey is that the legal framework and institutional structure are not ‘employment-friendly’. Existing legal frameworks – legislation and institutional structures – hinder job creation rather than encourage it. Therefore, it is also of great importance to make the legal and institutional structure employment-friendly. Although there is flexibility in hiring and firing, severance package and termination benefits severely limit this flexibility (Bilgin and Ari 2010). Furthermore, the law on severance payments, which was enacted in a period when where there was no disability and unemployment insurance and job security were provided only by the Labour Law, becomes a heavy burden for enterprises over time and causes employers to fall into payment difficulties, especially during economic downturns. It could also be argued that severance pay, which compels dismissals, negatively affects job creation. In particular, current job-security regulations both increase informal employment and hinder employment growth. Therefore, introducing more flexible legislation and reducing burdens on employers would reduce informal employment.

In terms of non-wage labour costs, Turkey’s labour market is also far from flexible. The data show that there are heavy burdens on employment. With regard to the mechanism of wage determination, there is also some rigidity in the labour market. As Selamoglu (2002) points out, while the inadequacy of wage flexibility causes an increase in the wage level, it makes it particularly difficult for groups such as low-skilled, young, and women to find jobs. Therefore, the wage determination mechanisms should be made more flexible by considering the realities of the economy, market, and competition conditions in the global economy. Karaca and Kocabas (2011) also found that inequality in education exists between men and women. On the other hand, the tax burden on the minimum wage should also be carefully assessed. As the gap between the cost of the minimum wage to employers and the income of employees grows, restrictions on employment opportunities for the low-skilled labour force become inevitable (Selamoglu 2002).

One of the most important structural reforms, especially stemming from regional differences, is the regional minimum wage. In this context, a new reform could be implemented that would set the regional minimum wage closer to the average wage in that region rather than a single nationwide minimum wage. In areas with low living standards and productivity levels, the transition to a regional minimum wage may be useful in combating unemployment (Maliye Bakanligi 2011).

Regarding flexible working styles, the Turkish labour market is far from flexible. Unlike in OECD countries, the share of part-time employees in Turkey is low. Employers and employees have not yet fully utilized the Turkish Labour Law 4857 (which came into force in 2003) on flexible jobs such as part-time work, temporary work, on-call work, and so forth. Hence, flexible forms of work should be facilitated and promoted. As seen from a global perspective, private employment agencies can play an important role in the fight against unemployment, so in Turkey private employment agencies should be used to increase employment. For example, according to TISK (2004), private employment agencies, which are permitted to operate under Turkish Labour Law 4857, can make important contributions to increasing the dynamism and effectiveness of the labour market by assuming an important role in the implementation of active labour market policies in Turkey through vocational education, retraining, adaptation training, and consultancy services over time. This is consistent with what Hirshleifer et al. (2016) found in their empirical paper. Their analysis indicates that the impact of training on employment is stronger when training is offered by private agencies.

The potential benefits of having a young population are quite large. However, if this large group of young people cannot find a place in the labour market and society today, risks will increase in coming years (Dunya Bankasi 2008). For example, high youth unemployment would urge young adults to postpone getting married, buying homes and begin families. In the long run, this trend would lead to slower economic growth, lower tax receipts and could cause social instability. In this context, an educational system that provides young people with new skills is one of the goals of youth employment policies in many countries. In reality, a lack of skills serves as a barrier preventing many young people entering the labour market. A better employment target for the future requires educational reforms that will equip all young people with the skills they need to find good jobs following graduation (Dunya Bankasi 2008).

In this context, it can also be stated that one of the major causes of unemployment in Turkey is the job-skills mismatch. Especially in recent years, the high unemployment rate among new graduates shows the necessity to focus on the seriousness of this situation. There is no doubt that this is due to poor planning in higher education and vocational-technical education in Turkey. Indeed, the current educational system falls far short of providing the kinds of qualifications needed in the economy and being compatible with the new technology (Bilgin 2008). A more recent empirical study by Hirshleifer et al. (2016) also found that Turkey’s vocational training programmes for the unemployed have statistically significant effects on the quality of employment, but after three years these effects disappear. Therefore, to meet the demand of the economy and labour market, and especially to improve the employability of young people, Turkey needs new employment mechanisms (DPT 2006).

In the fight against structural unemployment, educational reforms must be designed to resolve the mismatch between labour supply and demand, create and develop human capital, bring higher education and vocational-technical education to levels that create a workforce that meets the needs of the economy and business world. For this purpose, a plan should be made by taking into account future needs with the participation of relevant ministries, non-governmental organizations, the Union of Chambers and Commodity Exchanges of Turkey (TOBB), and the Council of Higher Education (YOK). In this context, cooperation between educational institutions and the private sector should be expanded, and models that encourage practical or on-the-job training should be developed. Also, in vocational education, practical education, which has an important place in the training of a qualified labour force, should be given priority. Such steps may contribute to reducing youth unemployment, in particular by harmonizing education with the needs of the labour market.

Various active labour market policies applied in many countries, especially in OECD and EU countries, should also be implemented in the fight against unemployment. Within these policies, projects for education and vocational training and retraining should be developed, and certain unemployed groups should be ensured that they will be able to find work. For example, unemployed people who lose their jobs during an economic recession or whose skills become obsolete owing to advances in technology or changes in market conditions should be trained in areas where they are needed and assisted in their job search. However, in practice, it could be more effective to subsidize private-sector companies that provide training and education rather than the public sector (Bilgin 2008).

Active labour market policies aim to increase employability by improving the skills and competence of the workforce. These policies include the development of workforce training, vocational education and workforce adjustment programmes, vocational guidance and counselling services, development of job search strategies, assistance to disadvantaged groups such as the unemployed, the disabled, women, and youth in job searches, and provision of entrepreneurship training and employment-guaranteed training programmes.

Within this framework, new active labour market programmes should be used, or resources allocated to these programmes should be increased, to improve the qualifications and skill sets of the unemployed, disadvantaged, and existing workers to free them up from the agricultural sector (DPT 2006).

On the other hand, country experiences show that active labour market policies are effective at decreasing unemployment. Within the framework of active labour market policies, Layard et al. (2005) recommend the following policies to combat unemployment:

  • Decrease duration of unemployment benefit,

  • Provide job-search assistance to unemployed workers,

  • Offer training programmes that target adults to increase the employability of unemployed workers and implement active policies to provide placement in high-quality jobs,

  • Revise employment protection laws.

In addition, as TISK (2004) suggested, the Turkish Labour Agency (IS-KUR) should move in the direction of active labour market policies. IS-KUR, which is responsible for implementing active labour force programmes, should be given sufficient funding and its institutional capacity should be expanded. In addition to supporting private offices that execute agency business, improvements in IS-KUR’s infrastructure and capacity would be crucial in the fight against unemployment by increasing IS-KUR’s effectiveness.

4 Conclusion

Today, Turkey’s most important economic and social problem is high unemployment. When the structure of the existing unemployment and labour market dynamics is examined, its importance becomes more apparent. While economic growth is crucial in fighting unemployment and creating jobs, it is unlikely that Turkey will be able resolve its unemployment problem solely through economic growth, since a significant portion of the current unemployment issue is structural in nature.

Despite its flexibility in some areas, the rigid structure of the Turkish labour market and the inability of the economy to generate sufficient employment make structural reform of the labour market inevitable. Moreover, the Turkish labour market has problems such as rigidities in both supply and demand. It is clear that these problems can only be overcome by structural reforms. Therefore, policymakers should focus on the labour market, implementing various labour market reform measures to make the market more flexible and encourage job creation. The first thing that Turkey needs to do is to make the labour market more employment-friendly. Comprehensive educational reform should also accompany labour market reforms in order to resolve the structural unemployment issue and increase job opportunities for certain groups such as young people. Furthermore, programmes that target bringing down the cost of employment by providing support and incentives to employers could be successful in the short term at fighting cyclical unemployment. However, it seems unrealistic that structural unemployment could be reduced without increasing labour market flexibility and undertaking comprehensive labour market reform.

Because economic activity in the Turkish economy slowed down in 2016 and current policies have failed to bring the unemployment rate closer to the natural rate, the Turkish government has focused on fighting unemployment and launched some sort of economic campaign. This campaign, which aims to reduce the cost of employment and provide incentives to employers, could reduce cyclical unemployment.