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How to Approach the Challenge of Reconciling Labour Flexibility with Job Security and Social Cohesion in Turkey1*

Hakan Ercan, Aysıt Tansel, Middle East Technical University, Department of Economics (Ankara, Turkey)

The objective of this paper is first to provide a compact institutional background on labour flexibility and job insecurity in Turkey. In light of the recent labour market reforms that have mostly been prompted by the EU accession process as it is perceived in Turkey, this analysis will then set the stage for long-term labour policy recommendations, which is the second objective.

The importance of the topic is self-evident in the sense that, labour flexibility is typically implicitly or explicitly associated with economic growth performance. This association has been enforced in the volatile global economic environment of the 1990s, the decade of the free flowing capital of both direct investment and portfolio investment varieties. With the newly established financial links, regional crises are now more contagious and spread across continents among the emerging market economies. The frequency of crises that have large or small global impact has apparently increased.

Under these economic conditions, what then is the optimal balance between the economic need of flexibility and the individual worker’s need for job security? The concept has been important for some years in Europe now that it is called flexicurity. It appears that North Americans do not debate the concept, which is not surprising. After all, U.S. productivity and unemployment performances are often used in the discussion. Not of a collective mind or historical path to condone the U.S. model of flexible labour market institutions and relatively weak employment protection, Europe has been developing the concept of flexicurity.

Recent Turkish economic experience that is rich in global and domestic crises, chronic high inflation, and IMF supported stabilization programs, the last of which seems to have finally succeeded at much social and political cost, provides ample motivation for this paper. Economic growth came after years of hardship and it came without jobs. Flexibility in terms of falling real wages and employment losses inclusive of informal labour market arrangements emerged as the clear winner, despite the protective laws that have not been or could not have been applied. Turkish college graduates in the financial sector in 2001 became unemployed en mass. This was a first for the highly educated segment of the work force in Turkey.

The impact of the severe crisis on the social psyche and on recent college graduates is still felt. Starting and re-entry wages have fallen. Many pursue graduate degrees and remove themselves from the labour force. Despite these developments, employment level hardly moved up. (Anecdotal evidence suggests that conditions may be improving now.) Popular media question the government on the economic ‘miracle’: Growth and inflation performances are to be commended, but where are the jobs and better wages? Lately, an undesirable trend is in fashion. Official statistics are questioned.

This, therefore, is a good time to be discussing flexicurity in the Turkish context. The term has not caught up in the daily economic debate yet, but it soon will. One must then take stock now, using a few somewhat related previous studies, current debate issues between social partners, and selected labour market statistics.

The authors expect to contribute in the Turkish debate, by first systematically introducing the flexicurity angle in the issue of informal economy, and second by thinking out loud on ‘adequate’, ‘feasible’ and ‘useful’ flexicurity instruments for Turkey. Being labour economists, the authors are essentially confined to labour flexibility and labour policy recommendations. Although part of this may be passed as ‘social policy’, the authors will have nothing to say on family policies, leaving that to true experts.

The rest of the paper is organized as follows. Section one talks about recent labour market developments in the context of recent crises and stabilization programs. This section provides the necessary background as to why and how the new labour act turned out the way it did. Section 2 discusses labour flexibility and job security in light of these recent labour market reforms. Section 3 is on informal employment, which provides justification to the argument of legally rigid labour market regulations that do not necessarily imply compliance. Section 4 discusses path-dependent institutional-structural obstacles in reconciling flexibility with social rights. Section 5 concludes with recommendations.

1. Recent Labour Market Developments

1.1. Recent Economic Developments

Turkey’s growth performance was very well for 2004, 9.9%. The year 2003 was also a high-growth one. Year-end inflation target of 12% for 2004 has been reached. The inflation target of 8% for 2005 is considered feasible, even if there should be further oil price hikes.

Figure 1 below summarizes recent macroeconomic history. It shows the 1988, 1994, 1999, and 2001 crises and the recent recovery since 2002 with accelerating growth since the second quarter of 2003.

Figure 1. Quarterly year-on-year growth rates of GDP and industrial output.

Source: Computed from State Institute of Statistics (SIS) data

Private consumption is the major contributor to this recent surge in growth. Pent-up consumer demand of 2001-2002 did not let go in 2003 but started to in 2004. The boom was fuelled by falling interest rates on consumer loans. The government instituted credit controls to slow consumption demand.

In line with the recent years’ macroeconomic transformation measures, the government committed itself to carry on with its (and IMF’s) tight fiscal policy. Primary budget surplus of 6.5% will be maintained in the Turkish economy in the coming years as well. Reducing high levels of public debt is arguably the structural measure in the coming decade. Dictated by the necessity of debt reduction, the non-interest budget surplus may be expected to have a negative effect on growth (and employment). Reality may be different, however. It is a signal of responsible public policies, therefore a confidence measure, therefore a positive signal for private investment. When public sector borrowing requirement decreases, interest rates keeps falling. This benefits private investment and employment.

Productivity has been improving in private Turkish manufacturing sector while real wages have been going down. Almost two years into the macroeconomic recovery, employers were just hiring again after having invested in equipment and machinery in recent quarters. This observation has also been borne by increasing capital goods imports, which is an indicator of future production and productivity increases.

Recent rise in labour productivity levels (7.5% in the first half of 2004 from a 2001-2003 average of 6.3% per annum) must be what is keeping inflationary pressures at bay. Average annual private sector trend labour productivity growth during the 1990s was 2.3% (Ercan, 1999). These numbers may be pointing at a new productivity trend value. If so, Turkish long-term potential growth rate may have risen as well.

1.2. Labour Markets

Just when Turkey was finally seeing the first signs of an upturn in employment, the turnaround may stop in its tracks if the world growth slows down because of high oil prices. This would be a pity, because as it is, historical Turkish employment growth rates have already been below the growth rate of working age population. Add to this the labour productivity increases in the past four years (which kept employment from recovering like GDP growth did) the employment picture may be frustrating for some more time to come.

One should keep in mind with the Turkish data that the labour market exhibits a dichotomous structure. Formal, large private sector and public employment constitute the primary segment. Social security coverage is lacking for 54% of the employed persons. In urban areas, 37% of those who work have no social security coverage. This is the secondary segment of the labour market. It is usually thought that labour market adjustments during the frequent crises were done in this flexible informal segment of the labour force that lack job security. State Institute of Statistics (SIS) Household Labour Force Survey (LFS) reports that 40% of the non-agricultural employers and self-employed are in the informal sector.

The important message that came out of the 2004 LFS data is that, there is finally a long awaited improvement in the labour market. Unemployment rate has finally come down from 12% at the end of 2003, to 9.3%. The fast recovery was well received by the government officials. Never mind that non-agricultural unemployment rate stayed at 13.6%. Agriculture’s share in total employment is high (35%) in Turkey. Because of unpaid family workers, participation and employment levels are high in agriculture, which affects the overall figures favourably. Meaningful comparisons with the EU should thus be made over urban non-agricultural labour market statistics.

Employment did not register the surge that GDP growth did. This frustrates politicians. Moreover, the new low unemployment rate may be signifying a break in the data series. SIS has recently revised its data collection methodology so that it will conform to EUROSTAT norms and standards. Its survey now comprises 37,000 households, up from 23,000 previously. It also doubled the number of its questions from 47 to 98, fine-tuning its classification of employment and unemployment. The most significant departure from previous practice is about unpaid family workers. This blanket category covered all agricultural-rural household members. They were considered in employment by default. Casual (daily wage) workers and unpaid family workers now must have worked at least one hour in the reference week in order to be considered employed. Note that this is an ILO norm and EUROSTAT norm is closer to the previous SIS practice.

It remains to be seen whether the SIS will adjust its existing series backward using the new weights, to the extent that it is possible. SIS has totally revised all its former LFS results for 1991-2002 period using the 2000 census population weights. (It does not therefore make much sense for researchers to establish their own labour market database in Turkey.) As a result, the authors are still cautious about whether the jobless growth period has ended or not. Public sector employment, which constitutes 13.1% of total employment, keeps bleeding as well: -9.5% in 2004 over 2003.

In 2004, total employment was 22.2 million; the number of unemployed was 2.27 million. Total labour force participation rate (LFPR) was 49.2%. A snapshot of employment is given in Table 1 below.

Table 1. Employment by economic activity, gender, and job status in 2004.














Job Status














Casual wage





















Unpaid family














Economic activity



































Source: SIS Labour Force Survey results.

Table 1 reveals the general structure of employment. Women entrepreneurs are rare and male self-employment rate is 2.5 times that of women. Half of all women are unpaid family workers and 59% of women work in agriculture. Agriculture’s share in total employment is large at 35%. Industrial employment has stabilized around 18% for some time. Construction is still at its minimum at 6.5%. In its good days, it climbs up to 12%. This is also an indication that building component of investment activity or house construction is still missing.

2. Legal Labour Flexibility, Job Security, and Labour Market and Welfare State Reforms

The process of EU accession has provided strong incentives for various institutional changes. Labour market regulations and employment policies have been one of the most important areas for Turkey in the adoption of the EU acquis. These recent changes will alter the functioning of the labour market significantly with critical outcomes for workers, firms, and long-term economic performance. Further, labour market is a social organization; therefore, its operation will directly induce changes in the lives of the members of the entire society.

This section of the paper concentrates upon regulations in relation to labour market flexibility and job security. Section 2.1 will give an overview of recent developments in the Turkish Labour Law. Legal framework for labour market flexibility will be covered in Section 2.2 and the legal framework for the job security will be covered Section 2.3.

2.1. New Labour Act

In June 2001, the Ministry of labour and social security organized a commission of nine university professors and charged them with the preparation of the new Labour Act. Three of the professors were appointed by the government, three by the Turkish Confederation of Employer’s Association (TISK) and one by each of the labour confederations TURK-IS, HAK-IS and DISK. The aim was to implement a new labour law complying with the EU regulations, and at the same time address employer and labour concerns. The new Labour Act prepared was ascribed with flexibility and atypical forms of employment in accordance with the community acquis. Sucb forms were not recognized in the previous labour law and these changes met with union opposition.

Recent crisis and ensuing unemployment problem led policy makers to consider in depth new possibilities in working time and modalities of employment. Prior to the new Labour Act Turkey had rigid employment protection schemes and no legally regulated flexible work arrangements. Employers demanded flexible employment regulations. Labour unions were hostile to the proposition as they claimed that it would deteriorate working conditions and reduce unionization rates. Therefore, a balance had to be struck between the aims of making enterprises more competitive and productive through flexible forms of employment and satisfying workers’ demands for job security. That is, the very same European dilemma was the agenda.

There were intense lobbying by both the labour unions and the employer’s associations. Labour union’s lobbying had a satisfactory outcome in the sense that some atypical types of employment were revised in their favour. Employers’ lobbying had a satisfactory result in the sense that, increased job security was limited to establishments employing thirty or more workers. Note that, over 90% of manufacturing sector establishments, not to mention enterprises in the trade and services sector, operate below this level. Flexibility argument has won over job security, it may be argued (further discussion and justification will follow in the next section on informal employment).

The new Labour Act no. 4857 was put into effect on June 10, 2003. It replaced Law no. 1475 that had prevailed for decades. Job Security Act was act no. 4773 and it was passed before the general elections in November 2002 to become effective on March 13, 2003. Later it was absorbed into the New Labour Act. Job security act was of course part of the new labour law, but it was deemed expedient at the time by the government to be separated and passed as a law unto itself just before the elections (the government coalition parties disappeared in the election nevertheless). ILO convention on the termination of employment was the model for the Job Security Act. It increased protection against dismissal by improving the now abolished Labour Act and still existing Unions Act. This act was severely criticized by the employers’ association for having gone too far in guarding the workers against dismissal and placing the burden of proof on the employers.

2.2. Labour Market Flexibility in the New Turkish Law

This section discusses the flexitime and flexible work arrangements under the new Labour Act no. 4857.

2.2.1. Flexitime

Employer associations demanded greater flexibility in working time, which would enable them to abolish overtime and thus reduce labour costs. Labour unions oppose the implementation of flexitime practices. Article 63 of the law stipulates that normal weekly working time cannot exceed 45 hours. The distribution of this total over the workdays cannot exceed 11 hours a day. The distribution has to be even over workdays unless agreed otherwise. Deviations from this are possible. Reference periods enable flexibility. Regular work can be increased or decreased as long as the average time worked over two or four months is as stipulated. These flexitime arrangements are not used much in practice. The reason for this is that the re-distribution of working time into workdays is left to the worker and the employer to agree. Flexitime arrangement cannot be used unless both parties are willing and workers are not willing. In the informal sector or smaller establishments (which are usually synonymous) flexitime is the norm anyway.

Annual leave with pay

Article 53 stipulates that workers be entitled to annual leave with pay after at least one year of employment. The duration of annual leave with pay depends on the years of employment. For 1-5 years of employment, the duration of annual leave with pay is 14 days; For 5-15 years of employment, it is 20 days and for more than 15 years of employment, it is 26 days.

Compensatory work and short-time working

Compensatory work may be undertaken by workers within a two-month period to compensate work stoppage for compelling reasons, extension of national or public holidays and leave conferred on a worker upon his request. Compensatory work cannot be considered overtime work and cannot be performed during rest days (all workers are entitled to at least an uninterrupted 24 hours in a given week for resting).

In the short time working arrangement, there is a temporary decrease in work-time in order to prevent imminent lay-off. Article 65 stipulates that the establishments may be in distress due to general economic crisis or for other compelling reasons rather than the difficulties arising from the establishment itself or a sectoral crisis. Employer on short-time working arrangement has to declare the situation with its reasons thereof to the Employment Office and to the labour union. Workers on short time are considered employed, however, and they receive short-time work benefits from the unemployment insurance fund if they qualify. Short-time work period cannot exceed three months.

2.2.2. Flexible Modalities of Employment

Flexible modalities of employment, which are also referred to as atypical work, or non-standard work include part-time employment, fixed term contracts, and temporary employment. Employers favour flexible work arrangements. Labour unions, on the other hand, are set against issues of deregulation and flexibility. Flexible work modalities make it easier for establishments to hire workers, particularly women, first-time job seekers, retirees, and the disabled. It is known that part-time work may allow combining work with family responsibilities thereby increase labour force participation of married women.

Fixed-term contracts

A fixed-term contract is an employment contract whose end is determined by objective provisions such as reaching a specific date or completing a specific task. Articles 5 and 12 stipulate that fixed-term workers will not be discriminated against because they have fixed-term contracts and they will be treated similarly as the comparable permanent workers unless differential treatment is vindicated by objective reasons. Fixed-term contracts cannot be renewed unless there is strong cause requiring their renewal. This is expected to prevent their misuse in the form of successive fixed-term contracts.

Part-time work and on call work

A part-time worker’s normal hours of work are substantially less than the normal hours of work of a comparable full-time worker. Articles 5b and 13/2 stipulate that part-time workers will not be discriminated against because they work part-time and they will be treated similarly as the comparable full-time workers unless differential treatment is vindicated by objective reasons. Article 13/4 stipulates that employers should regard demands by workers to transfer from full-time to part-time work and vice-versa if there is such possibility in the firm.

Article 14 regulates on call work. On call work is part time employment whereby a call to work is made upon existence of a work to be performed by the worker. The duration of work will be 20 hours a week unless otherwise is specified by the parties. The call to work has to be made at least four days prior to the workday. The duration of work has to be at least four consecutive hours in a day unless otherwise specified by the parties.

Temporary Employment

In a temporary employment relationship, user firm, interim work agency and the temporary worker are involved. The agency acts as a mediator. The worker has a contract with the agency rather than with the user firm. Agency sends him to work for a user firm in need of additional workers. During the negotiations phase, proposal for this form of employment received considerable opposition from the labour unions and the opposition party. In the end, its scope changed. Article 7 stipulates that an employer may hire out his workers to another workplace for at most six months to be utilized in a similar job. This is renewable only twice. This is referred to as temporary work.

There are no regulations in the new Labour Act covering home workers, domestic workers, and unpaid family workers.

2.3. Job Security Regulations

2.3.1. Employment Termination2

Termination by employer through a term of notice has two set of rules: One for workers who are provided with increased job security and another for workers who are not provided with increased job security. Increased job security is provided for workers employed under an open-ended labour contract. They must have been working for a period of at least six months in the establishment where at least 30 workers are employed. The employer’s notice of dismissal has to be in writing. Article 17 stipulates observance of a notice period when the labour contract is terminated. The length of the term of notice depends on tenure with the firm. If the length of employment is less than six months the corresponding notice period is two weeks; if the length of employment is between six months to one-and-a-half years, and so on up to eight weeks. These are suggested minimum notice periods. They can be increased by individual or collective labour agreements. If the employer does not act in accordance with the notice periods, he has to pay notice compensation.

As opposed to an open-ended contract, a fixed-term labour contract is a labour contract where the end is determined by reaching a specific date, completing a specific task, or the occurrence of a specific event. Fixed-term labour contracts cannot be renewed. In case of renewal, it will be reclassified as an open-ended labour contract. Expiration of the fixed-term contract is the second mode of contract termination.

The stipulations for workers without increased job security are provided in order not to impede growth of and job creation in small and medium-sized enterprises. According to Article 17, a worker who is not covered by increased job security provisions may be dismissed for any reason or for no reason. The employer is not legally obligated to state the reason of dismissal. However, the employer may not dismiss abusively. On the other hand, the burden of proof of abusive dismissal will be on the worker. The worker will be entitled to severance compensation if he has had at least one year of service with the employer.

Increased job security provisions provide that an employer cannot terminate the employment of a worker unless there is a valid reason related to capacity or conduct of worker, or based on the operational needs of the workplace or work. The employer has to specify the reason for termination clearly in writing. The worker must be provided an opportunity to defend himself against the assertions made. The worker may apply to the labour court within a month of the receipt of the written notice. He may assert that no reason for termination has been given or the reason specified is not valid. The burden of proof is on the employer. However, the burden of proof will be on the worker if he asserts that termination is based on another reason. Article 21 stipulates that the court or the arbitrator may declare the termination invalid and order reinstatement of the worker. If the employer does not reinstate, he/she will be ordered to pay adequate compensation amounting to four to eight months’ wages.

Article 25 regulates the dismissals with just cause. These could be applied to both open-ended and fixed-term labour contracts. In this case, there is instant termination and no notice periods are observed. Just causes could be related to health reasons, serious misconduct and immoral behaviour by the worker (under these conditions the worker may not demand severance compensation), compelling reasons, and absenteeism due to being detained or arrested.

2.3.2. Severance Compensation

Severance compensation was very important in the Turkish labour relations system because there was no unemployment insurance system before 1999. There were debates as to whether severance compensation should continue to be provided as it has been in the past, now that unemployment insurance scheme has been established. However, there were no amendments to the existing system in the new Labour Act. Article 14 of the previous Labour Act on severance compensation continues to be in effect. The provisional Article 6 stipulates establishment of a severance compensation fund. Until severance compensation fund is established, Article 14 of the old Labour Act regulates the worker’s right to severance compensation.

Severance compensation is the lump-sum payment made to a worker if he/she worked for at least one year and if his/her labour contract is ended according to the specifications. These specifications are as follows: Death of worker; worker’s compulsory military service; old age pension, retirement, disability benefits; female worker’s giving up her position due to her getting married; the worker’s termination of employment for a just cause under Article 24; employer’s termination of employment except for reasons of serious misconduct and immoral behaviour; worker’s termination of employment upon completing the required social insurance period for old age pension but has not reached the prescribed age.

Severance compensation is thirty days’ pay for each year of service at that work place. The thirty-day specification can be changed by individual or collective agreements. The basis for the severance compensation is the worker’s last daily gross wage. Wage supplements of a continuous nature will be added to this amount. There is a ceiling on severance compensation. The annual amount of the severance compensation cannot exceed the amount of the retirement bonus of the highest ranking civil servant who is the undersecretary to the prime minister.

2.3.3. Unemployment insurance scheme

The Act no. 4447 governing unemployment benefits is dated August 25, 1999. Payments began in March 2002. Insured workers who lose their jobs benefit from the unemployment insurance system but not the civil servants or the self-employed. Their loss of income is compensated in proportion to the premiums paid. Article 50 stipulates that the amount of compensation will be the 50 percent of the net daily income of the worker. It cannot exceed the net minimum wage for workers above 16 years of age. In order to be eligible for unemployment benefits worker must have been working as an insured worker for at least 600 days during the three-year period before the contract end and must have been working continuously by paying premiums for at least 120 days prior to contract termination. The worker must register with the Turkish Employment Office in person expressing his/her readiness to undertake a new job.

The contract termination should be one of the following categories. Dismissal by the employer on notice or for a just cause except for serious misconduct and immoral behaviour by the worker. Resignation for a just cause or expiration of a fixed-term contract; becoming unemployed because of privatization. Payment duration depends on the length of employment and premiums accumulated. Those who have paid premiums for 600 days in the last three years are eligible for benefits for 6 months; paying premiums for 900 days in the last three years increases eligibility for benefits to 8 months and those who have paid premiums for 1080 days in the last three years receive benefits for 10 months.

In addition to these payments, the unemployed may also receive health and maternity insurance coverage, vocational training, vocational development and retraining services and help in searching a job. These activities are carried out by the Employment Office. Social Insurance Institution (SSK) is the responsible body for collecting unemployment insurance premiums. A committee consisting of employer, employee and Treasury representatives and headed by the director general of the Employment Office manages the unemployment insurance fund.

It soon became obvious that far too few workers could meet these stringent eligibility requirements. The fund grew at a rate much faster than the benefit payments. Currently, an amendment is at a parliamentary committee to relax eligibility criteria and increase benefits.

2.3.4. Loss of job compensation in privatized establishments

Privatization Act no. 4046 is dated November 24, 1994. It regulates lost job compensation for workers in the privatised State Owned Enterprises. Article 21 stipulates that loss of job compensation is an additional payment and does not replace any one of the other forms of compensation schemes. It is paid out of privatization fund. The worker must register with the Turkish Employment Office in person and should not be receiving social security benefits. This registration also serves as an application for unemployment benefits. Loss of job compensation equals the daily net wage. It will be paid for 90 days for the uninterrupted employment period of at least 550 days at the time of termination; 120 days for the similarly employment period of at least 1100 days; 180 days for the similarly employment period of at least 1650 days and 240 days for the similarly employment period of at least 2200 days. The displaced worker also receives help with finding a new job and training to acquire new skills and occupational development, one of the few active labour market policy schemes in existence in Turkey.

Note that, all of these schemes are of defined contribution – defined benefit variety, designed for the labour force. There are no means tested social transfer programs for the needy in Turkey. The poverty survey of the State Institute of Statistics (SIS) in 2002 identified the (socially excluded) poor as non-participating (rural) women; uneducated (unskilled) component of the labour force across all age groups and both genders; and casual daily wage workers who are not covered under any social security organisation. Turkey has a long way to go in the welfare state direction.

3. Informal sector: Natural mechanism of labour market adjustment3

The previous section described the labour market institutions as they pertain to formal, large firm, first segment of the economy. Manufacturing firms in this segment account for much of Turkey’s exports. In this section, another segment is described. Note that, informal (unregistered) economy does not necessarily mean small and clandestine. In many otherwise formal establishments, it is common practice to register workers at the minimum wage and provide additional compensation in so-called ‘envelope wages’. Turkey’s burden on wages is high. Net pay is about half of gross wage and only 40% of net take home pay in large formal private manufacturing is related to actual hours worked. The rest is fixed overhead. This structure, previous discussion in section one, and the following discussion on informal economy reveal the handicaps for social inclusion.

The European Union (EU) concept of ‘undeclared work’4 is very close to the Turkish concept of ‘kaçak isçilik’ (literally, clandestine/illicit workmanship) or ‘kaçak çalisma’ (clandestine/illicit labour/work). The extensive national debate on this topic distinguishes between undeclared work and ‘informal (unregistered) employment’. The latter term is used to describe those workers who are not known to the authorities. All informal employment is therefore undeclared work, but the full scope of undeclared work is wider than just unregistered employment. Criminal activities are excluded from the concept of undeclared work.

Because of frequent economic crises in recent years that were discussed in section one and the resultant austerity measures sanctioned by the International Monetary Fund (IMF), the employment performance of the Turkish economy has not been satisfactory. The recent macro-economic recovery has not brought about an increase in jobs. The phasing out of agricultural subsidies and large regional disparities in income are likely to bring about another wave of rural-to-urban migration.

Given the lack of marketable skills (in particular low levels of education) of most Turkish workers, the work environment is conducive to unregistered work. Non-compliance with the rules allows for flexibility (minimal hiring and firing costs) for unskilled workers in low added-value, low-productivity activities such as working from home in the garment industry, and clothing industry production of brand names in small firms. The smaller the firm, the more likely there is to be non-compliance with labour and tax regulations. Larger firms may register themselves but not all of their workers. Many registered employees receive ‘envelope wages’ in cash over and above the legally registered minimum wage. This arrangement is also commonly found in Central and Eastern European (CEE) states. This type of fully or partially undeclared work probably comprises the bulk of the phenomenon in Turkey. Enforcement against undeclared work is weak.

Close reading of existing studies and their methodologies indicates a conservative estimate of 20% as a realistic minimum for the unregistered economy, which puts Turkey in the same league as Greece and Italy. The real figures are more likely to be over 30%, which moves Turkey closer to Bulgarian and Romanian figures. The ‘true’ figure may be even higher; employers and trade unions often quote the size of the unregistered economy as being half or two-thirds of the registered one. However, their methodologies are not well documented.

Note that, on paper, Turkey has rigid employment protection regulations, almost as tight as Portugal’s. By now, it must be clear that the picture in the field is different. Such segmented labour markets provide for an undesirable form of flexibility, that is, an employment relationship that has no job security and lack social security coverage. Social ramifications are as expected and severe. Some symptoms are weak labour force attachment, low human capital levels that will perpetuate in the second generation, undesirable working conditions, workplaces that do not provide for benefits such as day-care (therefore limiting the already low labour force participation rates of low-skilled married urban women). On the sociological side, one may mention low self-esteem and low income segregated neighbourhoods, overall, a sense of not belonging. This is a dangerous urban mix in migrant receiving cities like Istanbul, Ankara, Izmir, and Mersin. Burglary and purse snatching are on the rise.

3.1. Sectoral distribution and scope

The sectoral distribution of informal employment in Turkey reflects the usual sectors in a developing economy, such as textile production in households and small and medium-sized enterprises, and personal services. However, undeclared work occurs across the board because of the Turkish legal code, which exempts small-scale farmers, small-scale vendors and artisans from taxes; all street vendors are also exempt. Vendors and artisans in one or two-person operations are not covered by employment legislation. The same applies for agriculture. As a result, agriculture should not be included in meaningful labour market comparisons with the rest of the EU.

The output of one-third of the total labour force’s work – i.e. in agriculture – is typically non-observable. Almost all self-employment in Turkey is likely to be either unregistered or partially or fully undeclared. This probably also applies to the majority of professionals such as doctors and lawyers; these groups often only declare incomes at the minimum level. In addition, more than half of urban employment is in services. All told, the work environment in Turkey is highly conducive to undeclared work.

The importance of the retail and restaurant sectors in undeclared work is similar to CEE countries. Unlike CEE economies, the incidence of the informal economy is high in the manufacturing sector. This is because most manufacturing is on a small or micro scale in Turkey, and textiles are very important in industrial revenue and exports.

The SIS (2000) conducted an informal sector survey of small urban enterprises. It reported the following distribution of employment in the informal sector: 20.3% in industry, 58.4% in trade, and 21.3% in services.

The SIS currently reports (2004) employment in the informal sector as 1.34 million (12.5% of urban non-agricultural employment). This low figure is the result of the severely restricted definition applied to the concept of the informal sector by the SIS. The informal sector is defined as those non-agricultural economic entities that are unincorporated (personal ownership or simple partnership) and that either pay no taxes or pay a nominal tax by occupation, not by income. This definition categorically rejects the existence of informality or undeclared work in formal establishments and does not attempt to measure it. It also ignores social security status. SIS Labour Force Survey results for the first quarter of 2004 reveal that 4.5 million non-agricultural workers have no social security coverage whatsoever. This is 30% of the non-agricultural workforce of 15 million.

3.2. Structural Difficulties in Reconciling Flexibility with Social Rights

Officials from the Turkish Ministry of Finance and Ministry of Labour routinely speak out against the unregistered economy and undeclared work, the flexible component of the economy. Avoiding taxation and social security contributions creates unfair competition for law-abiding companies, from low-productivity firms to large, formal, unionised businesses in the highly competitive food and textiles and clothing sectors. Ministers therefore pay some heed to the problem in meetings with employers’ organisations.

However, real inroads into the problem of tax evasion and undeclared activities are hampered by the practice of offering tax or social security amnesties following a number of years of non-payment. Political parties generally offer such amnesties ahead of elections. This and other practices such as under-declaration of income have undermined public trust in the state authorities’ powers to address the problem of undeclared work.

As noted before, one-third of total employment in Turkey is in agriculture. Workers in this sector tend to be uneducated and unskilled. When they migrate to urban areas (as agricultural price supports have mostly been phased out), women are not likely to participate in the labour force at first. Younger women go to school or find employment in textiles until they get married; this is almost the norm in the sector. Young uneducated men work in construction if they can. This means that low-skilled agricultural employment and urbanisation will continue to provide fertile grounds for informal employment and undeclared work for at least another decade – and possibly longer – in Turkey. This may be an important reason for the authorities not to crack down on undeclared work. Formal employment-growth performance in Turkey has been very poor relative to the growth in unskilled working-age population. The strategy may be one of “look away and maybe the problem will go away”. Frankly, this may be an expedient strategy for the time being, until Turkey mandates more schooling (from eight to 12 years) and educates its younger population.5

The second important possible cause for the prevalence of informal employment is the dominance of small and micro enterprises in Turkey (State Planning Organisation, SPO, 2001). Low levels of human and physical capital imply low productivity. Exemptions in the tax code and employment legislation for self-employment and micro firms provide an environment for informality in the non-agricultural sector. Surveillance is in any case difficult in small-scale services and manufacturing. The exemptions can therefore be seen as an admission by the state authorities that resources are lacking for effective policing of the system.

The SPO (2001) report states that lenient official attitudes towards the unregistered economy go back several decades. In the process of capital accumulation and providing incentives for entrepreneurs, many tax exemptions were granted and the Turkish private sector mostly grew up automatically requesting such preferential treatment. These attitudes are now ingrained, reinforced by frequent amnesties on tax and social security payments. The tax collection system has become distorted and is continually revised and re-revised. The perception of fairness has become a casualty along the way as governments have routinely collected ‘supplementary’ taxes for one reason or another. Matters may only improve when trust is re-established between the citizen and the government. This will be a function of stable macro-economic conditions.

Finally, employers’ organisations complain about red tape and non-wage labour costs.6 These are both high in Turkey relative to OECD averages. The Turkish Employers’ Unions Confederation (TISK) makes a strong case for simplifying the rules and regulations to reduce the administrative burden on employers. TISK claims that these pecuniary and administrative costs encourage informal employment and discourage entrepreneurship. Law-abiding establishments suffer unfair competition as a result. Trade unions counter with the ‘level of wage’ argument Although, only about 40% of the formal sector Turkish wage cost is basic wage, that is, pay for actual hours worked (the rest are bonuses and social payments like social security contributions), hourly wage cost in Turkey is only a fraction of that in other industrialised countries. In 2003, in the formal large unionized private sector, gross hourly wage per hour per worker was 7.1 YTL (new Turkish lira) ($5.1 at 1.4 YTL/$ or €3.9 at 1.8 YTL/€) (TISK, 2004). Even though factually correct, this argument nevertheless does not take into account cross-country differences in productivity or the fact that, the employer still would have a significant wage-bill to pay even at times of non-production.

An important effect of the above picture relates to productivity. Informal employment and most undeclared work in Turkey are associated with low levels of human capital. Even if capital investment per capita goes up (and it has been rising since the end of 2003), workers on the shop floor or at the computer terminal will not be able to make the most use of such an increase because of their low skills base. Higher levels of education and training correlate positively with growth and further development of human resources. This would assist in combating undeclared work and the informal economy, which are concentrated in low-skilled sectors. In turn, this would lead to improvements in social security and increase tax revenues.

3.3. Measures taken to combat undeclared work

Political attitudes regarding undeclared work are lax as have been discussed above. The general attitude has historically been lenient, and this situation continues today. At the same time, finance and labour ministers are obliged to agree with employers and trade unions that the authorities should crack down on unregistered employment. Some important steps like unemployment insurance and training programs for job losers in privatised industries have been taken to tackle the informal economy and help establish social rights for workers. The list remains a short one at present.

Given time, measures that are not necessarily aimed at combating undeclared work will eventually contribute to its reduction. To quote from the EC report on undeclared work (2004): “Therefore, in the less advanced of the new Member States and candidate countries, efforts should be targeted at state formation, development of democratic institutions and stabilisation of the general socio-economic situation. Policy targeted towards undeclared work is of later concern.” If ‘state formation’ is replaced with ‘institution building’, and ‘development of democratic institutions’ with ‘strengthening democratic institutions’, the same conclusion would be reached for Turkey.

4. Conclusion

Socio-economic factors fuelling the existence of undeclared work and unregistered employment in Turkey may be reiterated as follows:7

· There has been macro-economic instability and volatile growth. A series of anti-inflationary, demand-contracting IMF programmes have finally reduced inflation and achieved growth, but the recovery has so far been unable to generate jobs.
· A related factor is that the economic environment is unsuitable for foreign direct investment, as foreign capital complies with the rules and avoids undeclared work (EC, 2004).
· Unemployment remains high that makes people more willing to accept informal work contracts.
· Agricultural subsidies have largely been phased out. Rural-to-urban migration of unskilled agricultural workers may accelerate.
· Privatisation has de-formalised some former public-sector employment.
· Turkey’s excessively lenient regulations on retirement age have recently been tightened up. However, there is still a young retiree population in their late forties and fifties. They are more likely to engage in undeclared work to supplement their pensions.
· Income distribution is highly skewed. The top 20% of households receive half the income. The bottom 20% receives 6%. Poverty is a powerful motivator behind undeclared work.

Institutional factors also contribute to the high level of undeclared work:

· There is a high tax burden on employment and high social security contributions. The state does not contribute for individuals, but ends up paying the deficit lump sum from the budget. The social security gap already comprises 4.5% of GNP, despite favourable demographics.
· Tax controls are inadequate. The government has traditionally been unwilling to crack down on small enterprises, which account for the bulk of employment.
· There is excessive red tape. The Turkish Employers’ Unions Confederation states that 172 signatures are needed to open up a business and the process takes 2.5 months. Nor does it end there. This level of bureaucracy tends impedes entrepreneurial activity.

Cultural factors must also be cited:

· People have come to mistrust tax collection authorities (and the government). ‘Supplementary’ taxes are the norm, and ‘temporary’ taxes have stayed in place.
· Transgressors have received too many amnesties on tax and social security payments. This has led to a deep-rooted feeling of unfairness in law-abiding citizens and enterprises. The state does not just let the market eliminate inefficient operations, and governments routinely cave in to popular demands. This is detrimental to the business environment in the longer term.
· Former agricultural workers are not accustomed to asking for their rights.

Note that, almost all of the above points also imply policy recommendations. Macroeconomic stability has improved which will gradually allow more structural measures to be taken. EU accession process is expected to increase foreign direct investment, which will impart more labour law compliance. The main obstacle in the way of social inclusion, however, is unemployment. This may only be expected to gradually climb up for demographic reasons including rural urban migration. There are no easy solutions. One would need a concerted effort for more basic and vocational education, more active labour market policies, less bureaucratic red tape in job creation, reasonable tax burdens on employment, and more social welfare measures for the inevitable needy. The expected casualty in this battle will likely be income equality, as more jobs now will usually mean low quality jobs (in the service sector) that do not pay much.

Unsurprisingly, Turkey has so far achieved few results in tackling undeclared work, revealing an implicit preference for labour market flexibility over social inclusion. Cultural attitudes towards social rights are not sufficiently discussed. Employers’ organisations emphasise the importance of tax cuts and reductions in social security contributions, while trade unions call for mandatory unionisation. All these are mostly labour economic perspectives and disadvantaged group advocates and sociologists should have louder voices in the debate.


Ercan, Hakan (1999). "The Structure of Turkish Labour Markets: 1988-2025." Background paper for Turkey: Economic Reforms, Living Standards, and Social Welfare Study, (Volume II: Technical Papers). Washington, D.C.: World Bank official report.

Ercan, Hakan (forthcoming). “Undeclared Work in Turkey.” European Employment Observatory Review, Spring 2005.

European Commission (2004) Undeclared Work in an Enlarged Union: Final Report Brussels: EC, Directorate General Employment and Social Affairs.

State Planning Organisation (SPO) (2001) Kayıtdisi Ekonomi Özel Ihtisas Komisyonu Raporu (Unregistered Economy Special Expertise Commission Report) (in Turkish) Ankara: SPO.

Sural, N. (2005). “Employment Termination and Job Security Under the New Turkish Labour

Act”, Middle Eastern Studies, 41(2): 249-268.

TISK (Turkish Confederation of Employer Unions) (2005). “4857 Sayılı İş Kanunu ve Gerekçesi.” (Labour Law 4857 and Its Justification.)

1 * Turkish expert group’s preparation for FORUM 2005 “Reconciling labour flexibility with social cohesion values.”, .

2 Further details of employment termination practices may be found in Sural (2005) and TISK (2005).

3 This section draws liberally from Ercan (forthcoming).

4 The concept is defined in the 1998 Commission Communication on undeclared work and is often quoted in later related EU documents. “The concept of ‘undeclared work’ is taken to mean any “paid activities that are lawful as regards their nature but not declared to the public authorities, bearing in mind that differences in the regulatory system of Member States must be taken into account. Applying this definition, criminal activities would be excluded, as would work which does not have to be declared.”

5 This is one of the authors’ practical personal opinion, which usually meets with resistance from other scholars. Opponents are correct in the sense that everyone deserves social rights like decent social security coverage and related benefits.

6 The website of the Turkish Employers’ Unions Confederation (TISK) ( has many bulletins and reports making this case. TISK declared the size of the unregistered economy to be 66% of the registered one in 2003, compared with 40% in 2001. The computational methodology and what accounts for the jump are not discussed in TISK sources.

7 Some points have not been discussed in the text for brevity. Follows the same structure in Ercan (forthcoming).