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Some observations about the labor market
What would the unemployment rate be if labor force participation rate sharply surged to a level close to that in the troubled countries of Europe?
Yesterday labor market statistics for October were released. As you might remember, following the global crisis, unemployment rate had reached as high as 15 percent (please note that I will refer to seasonally adjusted figures throughout the article). The rate started declining gradually after April 2009 and hit the lowest level since 2005 in June 2012, with 8.5 percent. This was perfect news as the unemployment rate seemed to be rigid around 10 percent from January 2005 to the global financial crisis.
Moreover, the record-low level was not enabled by a fall in labor force participation, that is, the exit of discouraged workers off the labor market. On the contrary, labor force participation tended upwards in the mentioned period, from 46 percent in the pre-crisis period to almost 50 percent.
Unfortunately, the movement proved temporary. Since then, unemployment rate has tended up, when we ignore slight monthly fluctuations. There is no marked upwards trend; but the current level of unemployment is 10 percent, at which it was rigid before the global crisis. The rate for October, as released yesterday, was 9.9 percent. What is more, the upwards movement in labor force participation also proved temporary. Since the record-high 51.2 percent achieved in April 2013, labor force participation rate has declined by almost one percentage point. The only good news is that the rate is only slightly lower than that in September.
There are four points worth noting. First, the figures include agriculture. Particularly during the crisis, figures might represent that some of the people who lost their jobs in cities switched to the rural agricultural sector. But since the same agricultural output would have been attained with the rural household labor, there is no significance in this urban-to-rural movement of labor. In addition, in the surveys spouses of these people also might have been considered in the labor force and in employment. Some part of the increase in labor force participation and the decrease in unemployment might be attributed to this phenomenon.
Second, what really matters is the employment rate which is the population in employment in proportion to the working age population. This eliminates the problem where unemployment rate is artificially understated because of discouraged workers, who are in the working age but not in the labor force (working age population is labor force plus in the working age but out of the labor force). We may claim that Turkey’s unemployment rate is low compared to the troubled European countries. For instance in 2012, unemployment rates were 24.2 percent in Greece and 25 percent in Spain compared to 9.2 percent in Turkey. Yet, each and every one of the troubled European countries has higher employment generation capacity than Turkey. According to the latest figures released by Eurostat (2011), employment rates were 64.2 percent in Portugal, 59.2 percent in Ireland, 57.7 percent in Spain, 56.9 percent in Italy, and 55.6 percent in Greece, with working age population taken as 15-65. With the same method, employment rate in Turkey was 48.4 in 2011.
Third, unemployment rate in Turkey is higher compared to counties in the same league as Turkey. Average unemployment rates for the 2003-2012 period were lower in Brazil, Russia, China, Argentina, Hungary, Mexico, Romania, and Korea than in Turkey, with 3.5 percent the lowest and 10 percent the highest. Their cumulative average was 6.9 percent, whereas Turkey’s was 10.8 percent. Of course some developing countries - South Africa, Poland, and Colombia for instance - have higher unemployment rates than Turkey.
This commentary was published in Radikal daily on 16.01.2014