Strong fall in unemployment

According to December labor statistics published by the Turkish Statistics Institute (TurkStat) on Monday, all forms of unemployment decreased significantly.
The annual reduction in the unemployment rate was limited to 0.1 percentage points (from 10.1 to 10 percent) because of a sizable fall in agricultural employment (179,000) while the non-agricultural unemployment rate fell from 12.4 percent to 12.1 within a year thanks to a very strong increase in non-agricultural employment (675,000). The strong performance of employment in the last period (from November to December) greatly contributed to this astonishing annual increase. Indeed, from November to December, non-agricultural employment increased by 159,000 according to seasonally adjusted figures. This is the highest increase observed by far in the last 12 periods. The fall in non-agricultural employment in the seasonally adjusted series was even stronger: It fell by 0.4 percentage points from 12 percent in November to 11.6 percent in December. In fact, seasonally adjusted unemployment had already been falling in November and October though it was on an upward trend for almost a year. I think one can now talk about the changing trend on the unemployment front. Two questions deserve our attention at this point. How do we explain this trend change? Will the fall in unemployment be a long-lasting trend or it is just an ephemeral spring in winter? I am not sure I can provide definitive answers to these questions but I can at least share additional information on this matter and give my personal opinions based on my dedicated experience in the Turkish labor market. First, how can we explain the fall in unemployment in the last quarter of 2013? The two key factors regarding changes in unemployment are gross domestic product (GDP) growth performance and the job creation capacity of this growth -- in other words, the level of growth employment elasticity. Usually, a third factor, a change in the labor force, also matters. But in the Turkish context, the labor force, particularly the non-agricultural one, has quite a stable structural trend to which a cyclical component should be added. In an economic crisis, the labor force grows more than its structural trend, causing strong increases in unemployment, all the more since employment falls during these periods of crisis. On the other hand, during, let's say, normal periods, upward shifts in the labor force depend on employment changes. In other words, mostly employment increases drive labor force increases during these normal periods. So let's focus on economic growth and the job creation capacity. Considering the fact that the impact of growth on employment experiences some time lags, I prefer to focus on the second half of 2013. We know that economic growth accelerated after a mediocre first half. Bahçeşehir University's Center for Economic and Social Research (BETAM) estimates annual growth in the second half to be 4.8 percent. As for non-agricultural employment, it grew by 3.3 percent in the same period. The elasticity of growth to employment (the employment growth rate for 1 percent GDP growth) is close to 0.7 percent. This figure indicates a rather high job creation capacity of growth but it remains in the range observed after the economic crisis of 2008-2009. We know the job creation capacity of economic growth increased significantly in the last few years thanks to strong increases in the service sector, literally populated by women. Let me note that out of the 675,000 net jobs created in non-agricultural sectors, 269,000 were held by women and most of these jobs were created in the service sector. Finally, one can assert that the relatively strong growth in the second half reinforced by high growth-employment elasticity explains quite well the fall in unemployment for three consecutive periods. Will this fall continue? The answer will depend basically on growth performance because I think the high growth-employment elasticity can last several years due to high employment increases in the service sector. Do not forget that the share of the service sector in employment is just over 50 percent, while this share is more than 70 percent in developed countries. So, the critical point is growth performance. In my last few columns I claimed that I expect a low growth rate, around 2.5 percent, this year. The leading indicators of the first quarter confirm this forecast. Nevertheless, we should realize that even in the case of a deceleration in the growth rate, a change in the unemployment trend will take some time.