Monday, August 17, 2009

Unemployment down for the first time

TURKSTAT just released its labor force statistics for May (April-June period). Let me play the soothsayer, and tell you tomorrow's newspaper headlines: Unemployment down for a third consecutive month. While technically, correct such an approach totally ignores seasonal effects, as I had explained last month. The easiest way to weed out seasonality is to look at the yearly chnage in the unemployment rate, and when I do that, I get the following graph:

Looked in this way, you can see that both the headline figure and non-farm unemployment are down for almost a year.

A slighly more detailed analysis (still requiring nothing more than basic algebra) reveals that out of the almost 1.2 million joining the army of the unemployed, more than two thirds is due to increased labor force participation. While it would be natural to expect the wife and the kids to look for jobs if the breadwinner of the family is out of work or risks losing his job, these dyanmics also reflect the country's demographics. With a young population, Turkey would need a growth on the order of 5% at the very least to stabilize unemployment.

I think this is a challenge that is being ignored by many, for two erroneous reasons. First, it is assumed that rising unemployment is cyclical, meaning that as the country is getting out of recession, the unemployment rate will come down.

To start with, such an argument ignores the main reason why unemployment is a lagging indicator in the first place: There are inherent asymetries in the hiring decisions of companies. Firms will be reluctant to hire unless they know they have strong tailwinds behinds, opting to increase hours worked of existing workers in the meantime. The ongoing lackluster shift from inventory rebuilding to consumption, investment and exports, to which I have been referring to in columns, will slow down this process further. Moreover, when it does finally come down, unemployment could stabilize at permanently higher rates.

Notwithstanding the social unrest associated with a permanently higher plateau, such a shift in unemployment could, in turn, transform it into a leading indicator as consumption is further undermined by more uncertain unemployment prospects. The government will be forced to intervene, especially with general elections looming. And to make matters worse, fiscal policy is likely to be less potent than anticipated in that situation, throwing the government into a deeper maelstrom. And with the state of public finances, this will all start looking rather ugly, as unemployment and growing public debt usually do not go well together.

I am getting ahead of myself (and the data). After all, today's numbers are marginally better than previous couple of months. But as the elders say, it usually pays to be overly cautious now rather than sorry later.


Mary Stokes said...

Thanks for this post!

I completely agree with you that the role of demographics is largely being ignored in looking at unemployment. As I see it, Turkey's young population is both a boon and a bane. The boon is that in the long-term, Turkey will not be facing the difficulties of an aging population at the same time as Europe, which could give the economy a leg up in a number of ways...less fiscal burden, greater competitiveness, etc.

In the short-to-medium term, however, Turkey's large young population means a high level of unemployment, regardless of the economic cycle, as you pointed out. Turkey has the highest unemployment rate of 30 OECD countries, behind only Spain. And I share your concern that this high level of unemployment heightens the risk of social unrest and political risk, in general.

What form do you see any potential social unrest taking? How much do you think high levels of unemployment will affect election results?

I really enjoy reading your blog. Thanks!

Emre Deliveli said...

Hi Mary;

Sorry for the late reply; I had been housecleaning, as I noted in my latest post.

I totally agree with the two-edged sword you are describing of Turkey's young population. But to realize the potential of this population, we need a complete overhaul of the education system. When I studied the Turkish higher education system 3 years ago as part of World bank project, I was shocked at the dismal quality/ unresponsiveness to business needs at most universities in the hinterland. That'd need to change, but much easier said than done:(

Anyway, coming to your questions, I think they warrant a separate post, which I will be writing in the next couple of hours.

BTW, thanks for the comments, any suggestions/critique are never required, but always much appreciated (sort of like a tip):)