European Employment Policy Observatory. EEPO Review. Stimulating Job Demand: The Design of Effective Hiring Subsidies in Europe TURKEY.

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1 European Employment Policy Observatory EEPO Review Stimulating Job Demand: The Design of Effective Hiring Subsidies in Europe TURKEY Hakan Ercan March 2014 National articles are the sole responsibility of the author(s). The contents of this publication do not necessarily reflect the position or opinion of the European Commission or ICF GHK. Neither the European Commission nor any person/organisation acting on behalf of the Commission is responsible for the use, which might be made of any information contained in this publication.

2 1. Introduction: hiring subsidies as an active policy to stimulating job demand Hiring subsidies that have been geared to address unemployment, only recently appeared alongside investment incentives that have been prevalent in Turkey. During the 1980s and 1990s, Turkey had investment incentive programs that targeted priority development areas. These programs were designed and conducted by the State Planning Organisation (which is today s Ministry of Development). In terms of converging provincial incomes to the national average, these programs failed. 1 They have remained a staple of government policy for three decades, presumably because they were easy to design and implement, and politically positive as it showed the government was attempting to address the east-west income inequality in Turkey. They failed because they had no clear focus (e.g. sectoral priorities) and did not take into account the deficiencies of the target provinces in terms of access to raw materials, distance to market (northwest axis of Turkey), human capital (worker productivity), or industrial and transportation infrastructure. The basic concept of the investment incentive programs was the notion of addressing the outmigration (employment) problem of the province at the local level by building factories that the residents demanded to find employment. Turkey did not fully adopt an understanding of worker mobility in its design of hiring incentives. Turkey suffered from frequent crises during the 1980s and the 1990s. Turkey launched its final and eventually successful IMF-backed stabilisation program in This significant program aimed to implement structural adjustment and squeeze inflation out of the economy, at the expense of growth (employment). Contracting demand caused GNP to decrease by 8.5 % in the first half of 2001 relative to the same period in This was as large a contraction as Turkey suffered later in the 2009 crisis. The program succeeded in bringing inflation down and started a period of continuous growth that went on until Employment growth, however, did not keep up with the GDP growth. In fact, after going up in 2001, the unemployment rate stagnated during hovering at around 10 %. It fell to 8 % by 2008, increased to 14 % in 2009, and settled to 9-10 % again in 2012 and Youth unemployment rates were twice as high as these numbers. A main challenge in the Turkish labour market is that, working age population growth keeps outpacing employment growth in Turkey and educated young people have difficulty in finding jobs. 2 Another main challenge is that, as Turkey has urbanized and families have moved out of agriculture, employment rates for women have fallen significantly. Because of their low human capital levels, a significant number of women do not work or look for employment, after migrating into urban areas. This is a principal reason for the low labour force participation rates of women of prime working age. Note that, provincial investment incentives failed to deliver results for these two disadvantaged groups, women and young people, because the incentives were not appropriately targeted? There were no employment incentives in the larger metropolitan areas where the better educated (which means high school and above) youth were looking for jobs. There were no women or young people around to benefit from these investment incentives where they were provided, as many had already moved out of the areas. That said, in 2008, Turkey provided incentives that responded to the situation on the ground. Women and youth employment incentives were introduced regardless of place of residence. Regrettably, the global crisis hit Turkey hard, and these incentives did not have a chance to kick in. After the start of recovery in 2010, the government has extended these employment incentives until the end of 2015 (for applications). Benefits will remain in effect for another four years after Turkey has finally found a suitable path in providing employment incentives. Priority provincial investment incentives remain in effect, for the time being. 2. Hiring subsidies today: detailed description Turkey has implemented various employment incentives that target young people. In practice, it has been implementing the same package since 2008, amending and appending it as the necessity arises. It began with the so-called employment package in 2008 (law no. 5763). Employers, when 1 Sarı & Güven (2007). 2 World Bank (2006). 2

3 they hired young workers (18-29 year-olds) in addition to the previous year s employment, qualified for five years of social security contribution deductions, at a decreasing rate. These deductions were paid from the Unemployment Insurance Fund that kept accumulating, as the qualification criteria are stringent in Turkey. (In 2012, ten thousand new young hires qualified for this specific incentive as described in this original law.) Before the impact could be felt, this package unfortunately met with the global crisis in late 2008 and No new hires were envisaged by employers, subsidised or not. In response, the government improved the incentives in 2009 as an anti-crisis measure. These, predictably, had no discernible impact. After the recovery, however, the original package was boosted by the inclusion of women and by the inclusion of those who are holders of occupational qualification certifications (2011, law no. 6111). This had an impact. Employment incentives started at six months of benefits and lasted for up to 54 months. In its new form, in 2012, close to young workers qualified for these employment incentives. By the last quarter of 2012, Turkey had spent 328 million TL (EUR million) in the program. New hires must come from the ranks of the unemployed, which must be documented by at least a six-month old registration at ISKUR. These measures increased ISKUR enrolment in 2012 and 2013 (as discussed by this author in the latest, March, quarterly labour market report for Turkey). Interaction with other policy measures: In tandem with the above incentives, in April 2013, an additional six percentage points on top of the existing five points of incentives for priority province establishments, which was in effect since 2008, was legislated. In the 52 less developed provinces (out of 81; a priority provinces approach is still evident in Turkey), those establishments with ten or more workers will qualify for eleven points of their employment contributions to be paid by the state (their normal contribution is 20.5 % of monthly pay plus 2 % of monthly pay unemployment insurance). That is one-half of their tax amount is paid by the state. This is a stock subsidy and it is not part of the women and youth employment incentives. These establishments may also qualify for the women and youth employment incentives that require additional employment in order to avoid substitution and displacement effects. Turkey also provides employment tax incentives for research and development occupations in university techno parks and in the so-called SME development centres. The 2014 state budget allocation for all these private sector employment incentives amount to 8.4 billion TL (EUR 2.73 billion) in Turkey. In the women and youth scheme that also includes occupational certificate holders (the target group), benefit durations are 48 months for yearold men and all women above the age of 18 (with occupational certificates), 36 months for vocational school graduates or graduates of ISKUR training programs, 24 months for those with no qualifications. There is an additional six months in the 52 priority province regions. These incentives will remain in force until the end of Payments may thus continue until mid Although the measure is temporary in nature, its duration is long. Note that no conditionality is imposed on firms (e.g., there is no obligation to provide training). In addition, there are no complementary services offered to the beneficiaries (e.g. job counselling, follow-up by employment services). There is no monitoring and evaluation system regarding the measure, but there is an academic working paper available, and further analyses are pending publication (including one by this author). 3 Using micro-level data from the Household Labor Force Survey for the period, the authors evaluated whether the employment subsidies introduced in 2008 had an impact on employment prospects by demographic groups. Implementing the difference-in-difference method, they showed that the employment gap between the target group, which consists of males aged between and all females, and males above 30 years old, has narrowed by 1.4 percentage points. In terms of the subgroups, they have observed that this aggregate effect mostly came from the narrowing between the employment prospects of females above 30 years old and males above 30 years old by 2.6 percentage points. When improving the employment prospects of groups with low labor market participation is the concern, they conclude that, in light of these results, the subsidy program has produced satisfactory outcomes. 3 Balkan, Başkaya, Tümen (2013). 3

4 Further data, including micro data from ISKUR, are required to provide an assessment of possible deadweight, substitution or displacement effects. These studies should follow shortly as a small number of academics (including this author) were recently provided with access to micro data of ISKUR and (this author to the) quarterly data of LFS (that are not made available publicly, but one can go and work at Turkstat). Social security contribution incentives for women, youth, and occupational certification holders Summary Turkish government supports new hires in establishments (in addition to the previous year s employment level) by covering social security contributions at a decreasing scale over time (i.e. 100 % for the first year, 80 % for the second year and so on). Type of measure Government legislated hiring subsidy Financing source(s) of the subsidy Annual budgetary allocation of 8.4 billion TL (EUR 2.73 billion) allocated in 2014 for all employment subsidies (the bulk is apportioned to an across the board employment incentive measure for less developed provinces) Duration of the measure The measure will be in effect until the end of 2015, benefits will expire by mid-2020 Description (target group, design features, stakeholders involved) In this women and youth employment incentive scheme that also includes occupational certificate holders (the target group), benefit durations are 48 months for year-old men and all women above the age of 18 (with occupational certificates), 36 months for vocational school graduates or graduates of ISKUR training programs, 24 months for those with no qualifications. There is an additional six months in the 52 priority province regions. Policies that complement the measure (e.g. training, job-search assistance etc.) Evaluation results Preliminary analysis is favourable. Lessons from the initiative (strengths of the initiative, but also including a discussion of possible negative policy experiences) To be seen yet. 4

5 3. Conclusion 1) The use of hiring subsidies in the country (target group, form), the main types of incentives used, their relative significance as an active labour policy; Hiring subsidies that have been geared to address unemployment, only recently appeared alongside investment incentives that have been prevalent in Turkey. During the 1980s and 1990s, Turkey had investment incentive programs that targeted priority development areas. These have failed to bring meaningful results in terms of converging regional incomes. In 2008, Turkey provided incentives that reflected the situation on the ground. Women and youth employment incentives were introduced regardless of place of residence. These were amended and expanded in later years. 2) The level of evaluation evidence available. One favourable academic paper thus far, more on the way. 3) Relevant positive or negative policy examples for lessons to be drawn from Turkey may have successfully challenged its long-standing employment problem concerning women and young people. Incentives are for those new hires that are in addition to the existing employment level. However, this does not mean that there will be no displacement or substitution effects further down the line. There will be evaluations of these issues. 4) Success factors, including any complementary measures that may be contributing to success and/or possible shortcomings. It is too early to tell as yet. One should evaluate the impact of ISKUR training programs in terms of permanent employment after first hire with these incentives. This will be done. 6) Possible elements of transferability, i.e. the pre-conditions for measures/strategies to be replicated successfully in other countries. The basic requirement for the measure is a significant budgetary allocation. 4. Bibliography Balkan, B., Başkaya, Y.S.; Tümen, S. (2013), 2008 İstihdam Teşvik Programının Etkilerinin İncelenmesi, (Investigating the Effects of the 2008 Employment Incentives Program). Ankara. Internet: Sarı, R. & A. Güven, (2007), Kalkınmada öncelikli yöreler uygulamasının iller arası gelir dağılımı üzerindeki etkisi (The impact of the development priority regions policy on the income distribution between provinces), METU Studies in Development, 34(1), Internet: World Bank (2006), Turkey Labor Market Study. Washington DC; 137 pages. Internet: 5

6 Annex 2: Measure Description Tables Measure Title Type of measure: hiring subsidy, conversion of temporary contracts, voucher scheme, etc. Target Group No. of beneficiari es Amount of subsidy and duration of subsidy Permanent or Temporary measure and dates of implementati on Conditionality imposed on firms Funding source and total budget Describe any measures complementi ng the initiative (e.g. training, job search assistance etc.) Please indicate if other stakeholders are involved either at the design stage, in the delivery of the measure or in its monitoring Monitoring arrangements in place Assessment of the measure: Please give as much detail as possible on the assessment of the measure. Please indicate whether the initiative causes either deadweight, replacement and/or substitution effects. Please be sure to indicate the source of information for the assessment (i.e. is it based on an existing evaluation or is it the experts own assessment?). Social security contribution incentives for women, youth, and occupational certification holders Hiring subsidy Women above 18, men between years of age, occupati onal certifica te holders in 2013 Up to 48 months (plus six months in priority areas). Social security contributi ons are paid from the unemploy ment insurance fund. Temporary (until the end of 2015). Benefits will expire in mid State budget (8.4 billion TL (EUR 2.73 billion) allocated in 2014). Pure government initiative. Using micro-level data from the Household Labour Force Survey for the period, researchers from the Central Bank evaluated whether the employment subsidies introduced in 2008 and amended a few times, had an impact on the employment probabilities by demographic groups. They showed that the employment gap between the target group, which consists of males of age and all females, and males above 30 years old has narrowed by 1.4 percentage points. In terms of the subgroups, they have observed that this aggregate effect mostly came from the narrowing between the employment probabilities of females above 30 years old and males above 30 years old by 2.6 percentage points. When improving the employment prospects of the groups with low labour market participation is the concern, they concluded that, in light of these results, the subsidy program has produced satisfactory outcomes. Further data, including micro data from ISKUR, are required to provide an assessment of possible deadweight, substitution or displacement effects. These studies should follow shortly as a small number of academics (including this author) were recently provided with access to micro data of ISKUR and (this author to the) quarterly data of LFS (that are not made available publicly, but one can go and work at Turkstat). 6