Turkish Business Strengths and Weaknesses - Labor Market

From International Business Wiki

Perhaps one of the greatest resources that Turkey has to offer lies in the potential of its labor market. However, Turkey has been unable to reap the benefits of its labor pool because of taxes that are too high and restrictions that are too stringent. In fact, Turkey’s labor freedom is considered to be among the lowest in the world. This effectively changes the labor pool in Turkey from an asset to a drawback.

According to the Organization for Economic Cooperation and Development (OECD), Turkey has some of the most inflexible labor restrictions and laws in the world. Some examples of these laws would include tough hiring policies (for every 50 employees a firm must hire a specific number of lawyers), and high severance pay requirements. High severance pay makes it very difficult for companies to purge unnecessary or unproductive employees. These stringent regulations make it very expensive to maintain a large staff.

Another factor to take into consideration when calculating the cost of a Turkish employee is the tax that must be paid on that employee. The OECD has also ranked Turkey very highly for labor taxes. This means that Turkish companies pay more taxes on the employees that they hire than most other countries in the world. This has had a very detrimental effect on employment in Turkey; the long-term unemployment rate is nearly 40% and the regular unemployment rate is over 10%. Only 68% of males and 24% of females are employed.

Apart from such high unemployment rates, the restrictions and tax laws cause participation in a large informal sector. The informal sector employs almost 50% of all workers and is made up of many small businesses (kept small to avoid detection). The large informal sector is damaging to the economy because not only does it diminish government tax revenue, it also limits productivity and discourages economic growth.

Furthermore, Turkey has an extremely high minimum wage rate compared to average income. This means that Turkish labor is too expensive for foreign investors, and they will seek to manufacture and do business elsewhere. In addition to international implications, the high wage rates also pose a domestic problem. When wages are added to the non-salary costs of having an employee (ie: taxes), it suddenly becomes very expensive to hire anyone in Turkey at all.

Because of all these problems, the labor market in Turkey has become very damaging to the country’s ability for economic growth. The key to long-term success in Turkey is a reduction in labor market restrictions, a decrease in employment taxes, and a restructuring of minimum wage levels. If Turkey can reform these areas, it will be able to harness the power of its labor market and use that force to ensure economic development and success.



Resources: Fletcher, Kevin. "Unlocking Turkey's Labor Potential." IMF Survey Magazine. 26 July 2007. 26 Oct. 2007 <http://www.imf.org/external/pubs/ft/survey/so/2007/CAR0726A.htm>.

"Turkey." The CIA World Factbook. 18 Oct. 2007. 22 Oct. 2007 <https://www.cia.gov/library/publications/the-world-factbook/geos/tu.html>.

"Turkey Index of Economic Freedom." The Heritage Foundation. 2007. The Wall Street Journal. 24 Oct. 2007 <http://www.heritage.org/research/features/index/country.cfm?id=turkey>.