UNDECLARED WORK WILL GO AWAY ON ITS OWN IN TURKEY, SO SOME BELIEVE

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1 MUTUAL LEARNING PROGRAMME: PEER COUNTRY COMMENTS PAPER - TURKEY UNDECLARED WORK WILL GO AWAY ON ITS OWN IN TURKEY, SO SOME BELIEVE Peer Review on Tackling undeclared work: developing an effective system for inspection and prevention Prague (Czech Republic), 4-5 October 2012 A paper submitted by Hakan Ercan, Middle East Technical University in consortium with GHK Consulting Ltd and CERGE-EI Date: 10/09/12

2 This publication is supported for under the European Community Programme for Employment and Social Solidarity ( ). This programme is managed by the Directorate-General for Employment, Social Affairs and Inclusion of the European Commission. It was established to financially support the implementation of the objectives of the European Union in the employment and social affairs area, as set out in the Social Agenda, and thereby contribute to the achievement of the Lisbon Strategy goals in these fields. The seven-year Programme targets all stakeholders who can help shape the development of appropriate and effective employment and social legislation and policies, across the EU-27, EFTA- EEA and EU candidate and pre-candidate countries. PROGRESS mission is to strengthen the EU contribution in support of Member States' commitments and efforts to create more and better jobs and to build a more cohesive society. To that effect, PROGRESS will be instrumental in: providing analysis and policy advice on PROGRESS policy areas; monitoring and reporting on the implementation of EU legislation and policies in PROGRESS policy areas; promoting policy transfer, learning and support among Member States on EU objectives and priorities; and relaying the views of the stakeholders and society at large For more information see: The information contained in this publication does not necessarily reflect the position or opinion of the European Commission.

3 CONTENTS 1 LABOUR MARKET SITUATION IN THE PEER COUNTRY ASSESSMENT OF THE POLICY MEASURE ASSESSMENT OF THE SUCCESS FACTORS AND TRANSFERABILITY QUESTIONS... 8 ANNEX 1: SUMMARY TABLE... 9

4 1 LABOUR MARKET SITUATION IN THE PEER COUNTRY This paper has been prepared for a Peer Review within the framework of the Mutual Learning Programme. It provides information on Turkey s comments on the policy example of the Host Country for the Peer Review. For information on the policy example, please refer to the Host Country Discussion Paper. The Turkish labour market has three inter-connected, salient features: urbanisation is yet to be completed; the average education level is low; and, labour force participation rates are the lowest in the OECD region. The female labour force participation rate (LFPR) was 31% in June, which is an anomaly among the upper middle-income countries, as classified by the World Bank. Turkey has kept its population in rural areas by subsidising its agricultural sector (the 50% urbanisation rate was reached only in the mid-1980s). Through IMF-led stabilisation policies, governments have gradually removed these subsidies in the last decade. Agricultural employment was already slowly dissolving at the time. Male migrants from agricultural employment (who mostly dwell in rural areas) had at best five years of primary education, while females had even less than that (mandatory schooling went up to eight years only in ). Previously unpaid agricultural workers (unskilled women) do not participate in the urban labour market and the Turkish female participation rates keep falling as a result. Where uneducated young males could work in the seasonal agriculture, construction and tourism sectors, young unskilled urban women could work in informal clothing and textiles, or in urban personal services and retail trade. Informality in the labour market is very high. The following quote from the executive summary of World Bank (2010) highlights the trend: Although the headline measure of informality has been falling, this is almost entirely explained by migration out of agriculture into more formal sectors. The headline measure of informality fell from 53 % to 44 % between 2004 and 2008, according to the Turkish Statistical Institute (TUIK - the proportion of workers unregistered for social security). However, this aggregate decline hides important patterns. Most of the decline between 2001 and 2006 is explained by migration of the workforce out of agricultural employment (where nearly all workers are informal) to manufacturing and services, mainly in urban areas (where informality rates are below 20 % for wage earners). Moreover, during this period urban and non-agricultural informality increased (from 29 % to 34 % ). It is important to note that Turkey is still going through its final stage of demographic transition that will be ongoing well into the mid-21 st century (Hoşgör and Tansel, 2010, p. 14), as such, the above dynamics will only start to improve gradually. Thanks to increasing urbanization and slowly increasing education levels that also increase the age at first marriage, the average family size has decreased from 5.6 in 1955 to 4.5 in The Turkish population is now increasing as a result of population momentum (i.e., not because of a high number of children per family, but because of an increasing number of persons at child-bearing age). This momentum will come to a stop around 2050 when Turkey will have a stable population of 98 million persons. There is evidence to suggest that employment of the rural-urban transition is not complete. Turkish urban areas should expect another million or so migrants from its rural areas in the coming two decades (Ercan, 2007a, Ch.2). Rural young people migrate into urban areas in search of education and jobs. The rural population has thus stabilized at below 18 million, with a slightly declining trend (according to Turkstat s downward population correction of 3.5 million in rural areas, following its first de jure population census in 2007). Consequently, the proportion of the rural population will continue to diminish and the urban population will continue to rise. 4

5 Presently, agricultural employment (mostly rural) lacks social security coverage almost entirely. Rural-urban migrants are uneducated and form the casual wage and self-employed segment of the urban labour force: where the former is almost fully and the latter is twothirds informal (HLFS results, 2010). There is a strong negative correlation between education and informality in the labour market. The trend favours education and formal work, but this is a slow process. Left to its own dynamics, informal employment levels would only gradually come down, as average education level slowly rises. 2 ASSESSMENT OF THE POLICY MEASURE Informal employment in Turkey constitutes 40 % (June) of total employment. During the 2001 crisis, informal employment rose by 2.3 percentage points and remained high for another two years before settling into its downward trend in This is in line with the widespread assumption that formal workers who lose their jobs go to the informal economy. This would suggest that employment in the informal economy might expand during an economic crisis. The response in the recent crisis was not like the response in the 2001 crisis. Overall and male informal employment proportions remained level after an initial fall. However, the female proportion fell in 2008, remained level in 2009, and then rose in the recovery. This observation is not a fluke. There were more unregistered women, in 2010, compared to the 2009 average. These women occupy the bottom level of the Turkish labour market, after the unpaid family workers in agriculture. They have no social protection. The story that fits into these patterns is this. During the 2001 crisis, informality increased because of formal job losses, with some of the outflow ending in informal jobs; this is the usual expectation. During the recent crisis, job losses must have been disproportionately higher in the informal segments so that the proportion of informal employment fell overall and for males. The rise in the proportion of female informal employment suggests an added worker effect 1 in addition to the observed rise in agricultural employment (return migration). Self-employment is not a good alternative to salaried employment. Public authorities ignore unregistered work, including self-employment during crises, lest the unemployment rate rises. In Turkey, self-employment makes up two-thirds informal employment (not registered in current job), of which, agricultural self-employment constitutes three-fourths. With respect to women, self-employment makes up 90% of informal employment; for women in agriculture, almost all self-employment is informal employment. Note that self-employment in Turkey is close to the casual (daily) waged work, that is, another option after failing to obtain regular waged work. Labour law in Turkey regulates social security for the self-employed via a third institution (after government employees and private sector wage employment institutions). This institution traditionally has the lowest contribution and highest payment arrears rates. In Turkey, it is evident that the laissez-faire approach to unregistered work is politically expedient. What are the administrative institutions in place then? Labour inspectors are charged with ensuring compliance with labour laws and run audits in enterprises to that effect. They are organised under the Labour Inspection Administration (LIA) within the Ministry of Labour and Social Security (MoLSS). Their mission s international legal framework is the ILO s 1947 Workplace Audit Convention, which Turkey signed in Labour inspector is an internationally defined professional classification. 1 Added worker effect refers to the phenomenon when (for example) the main bread-winner of the family loses her/his job, and non-participants at the household, usually the wife or older children, start looking for employment. 5

6 LIA s mandate covers production methods, equipment and machinery, raw and processed materials. They also inspect life and health-related arrangements in the workplace. The inspections may be planned or impromptu. 2 Labour inspection personnel visit and use regional offices of the MoLSS in all 81 provinces for specified periods during audits (Turkey has 81 provinces and 26 NUTS-2 denominations). This number recently came up from 23 provinces with the re-organization that allowed LIA to utilise Public Employment Agency s (ISKUR) premises in the provinces. That is, in the highly centralised bureaucratic set-up of Turkey, inspectors were stationed in Ankara. 3 Unless there are highly publicised work-related aggravations that the media are on to, these audits are hardly effective in the big picture (in terms of compliance with safety regulations or UDW, for instance). Regional offices do NOT have the authority to assign labour inspectors themselves. There are 968 labour inspectors and 525 assistant labour inspectors in Turkey. The numbers swelled due to recent hires. As part of the Ministry of Finance ( the Turkish revenue administration (TRA) is responsible for tax collection. The TRA had two good reports on its website: one is its strategic plan for the coming years and the other one was the Action Plan of Strategy for Fight against the Informal Economy, (sic). 4 This was the official document, by Turkey, regarding UDW. The plan (published in February 2009), however, could not be implemented because of the crisis. It provided the results of an attitudes survey about UDW. The general public or employers seem to regard undeclared work as necessary or unavoidable in order to contain labour costs. This is in line with the Turkish industrial structure being mostly composed of small firms. In Turkey, 90 % of the manufacturing firms employ less than ten people. The Social Security Institution (SGK) has been the recent umbrella organisation of social security in Turkey that was finally operationally activated in 2007, after many years in the employment agenda. It united the tripartite pension system of Turkey: Bag-Kur that covers agriculture and the self-employed; Emekli Sandigi (ES, Pensioner s Chest) for government employees; and, SSK (Social Insurance Institution) for blue-collar workers. In its second year of operation, SGK prepared the first part of a new social security legislation, which was passed in Parliament in April The new legislation introduced fundamental changes in Turkish labour market institutions. The original working days requirement in the initial proposal for pension payments became days in the face of strong union opposition. Previously, Turkish women could be eligible for retirement as early as 38 years of age, men at 43 years of age, which was the result of many decades of populist policies. This problem of young retirees is always cited as one of the factors that fuel UDW in Turkey, as many of them would seek UDW since they are already covered for health care and pension. Turkey is a land of early retirees, thanks to the populist policies of the past. This is a drain on the social security system and an incentive for informal employment practices, as well as an obstacle to new labour market entrants. According to the new law passed in April 2008, except in agricultural occupations, if a retiree starts working, his or her pension payment will be suspended. He or she will also keep contributing to the social security system. It is important to note that, illegal migrants in Turkey fall under the jurisdiction of the police. DG-General Security (police), is not an organisation responsible for regularisation of migrants, only their deportation for overstaying their tourist visas if caught. No statistics whatsoever are available for illegal migrant workers. Turkish police and 2 This synopsis is condensed from the regulations section of the MoLSS web page, which provides links to the Employment Agency and social partners, as well as industrial relations related statistics. 3 Under a new organization scheme, there are now ten group presidencies for labour inspectors

7 societal attitudes are generally lax and lenient against illegal migrant workers. For example, Armenian citizens more or less engage freely in luggage trade in their own Istanbul shops. The only penalty for overstaying when getting out of the country is a hefty fee payable at the airport. Turkish consulates will not penalise such persons when they apply for visas again. A huge step in the right direction was one regarding the employment of elderly care and home workers (foreign workers) from transition countries like Georgia, Moldova, and Turkmenistan. These countries citizens could enter Turkey on tourist visas freely, and stay for three months, after which they have to leave the country and re-enter (Georgians do not need passports). This cycle could go on indefinitely and it was generally tolerated by Turkish authorities. Many of these workers are university graduates that are willing to provide home-based services for lower pay. 5 The ministry of labour has provided a practical way out. The police started to issue residency permits to any Turkish citizen who employs foreign home workers starting this year, no questions asked. With these permits, the Ministry of Labour started issuing work permits that are to be renewed every year, no questions asked (within reason, of course, one worker per household). Tens of thousands of these unregistered workers now stand to be legal employees in Turkey. In 2011, work permits were prepared by MoLSS. The current number of work permits is and is expected to reach by the end of Foreign workers have accepted a wage cut by sharing the tax burden with their employers, but in doing so, they have gained basic health coverage and legal status. It is yet to be seen whether future monthly household labour force surveys will now be able to cover foreign workers, now that they are legal. Moreover, the immigration statistics may well reflect a number that is much closer than the true situation in Turkey. 3 ASSESSMENT OF THE SUCCESS FACTORS AND TRANSFERABILITY Despite the many difficulties that the measure met in its short implementation period, the host country paper proposes two success factors. Enhancing cooperation between various related institutions of the state responsible for labour market regulation Assessment and transferability: Such cooperation is also a sore point in Turkey. There have been improvements in recent years, though. Some units of the Ministry of Labour and Turkish Employment Agency merged in provinces regarding the paperwork of unemployed individuals, for example. Turkish authorities can also be very practical, if need be, for example: because of a high demand for home-care and a lack of (desired quality) domestic labour supply for in-house home services, the Ministry of Labour swiftly devised a legalisation scheme for Georgian, Moldovan, and Turkish home-care providers and nannies (discussed above). The numbers are staggering: there may be two million such workers in Turkey, as indicated by entry and exit statistics. However, this was not implemented by devising a new scheme. The police were told to be lenient in issuing residency permits that required the employer to show up at the police department with the identification information of her/his already informally employed foreign employee. With this information, the Ministry of Labour can immediately grant a work permit, thus giving the employer (the elderly Turkish citizen) the responsibility for depositing her/his foreign employee s social security contributions. Following considerable success, many foreign workers are now working legally in Turkey. 5 They work weekends; they are on call 24-hours-a-day at homes; and, they are paid, on average, USD 650 or EUR 489 a month, which is still considerably higher than the expected salary of USD or EUR in their respective countries. 7

8 Consequently, the prevailing Turkish attitude on these matters had every right of becoming somewhat suspicious, i.e., what if the system is abused? Nevertheless, attitudes are changing and the carrot (easing the process) proved to be a better tool than the stick (non-existent spot checks) 6 ) to stop undeclared work where it has prevailed for years. The Czech Republic measure s transferability would have involved the cooperation of labour inspection directorate, labour offices, and the Social Security Administration, the police, and post offices. However, it is important to note that the political will for a concerted effort to tackle undeclared work is a pre-condition for this cooperation. This will is not here in Turkey. Things are changing surely, but gradually and Turkish politicians are content to keep it that way. Labour inspectors may presumably utilise local employment office s employer contacts, but this would be counter-intuitive. The PES is trying hard to make the employers use its services (they do not) and if the employers associate PES offices as snares for labour inspectors, these efforts would prove fruitless. As to the obvious SSA and PES database unification, the will has been there for the past five or six years, but for some reason there have been technical difficulties. Every six months or so, information is picked up that they are on the brink of merging their data sets. The police has already cooperated with the Ministry of Labour in Turkey. The post offices have turned into credit card and utility bill payment centres and parcel post deposit offices, so their role would have to be well defined in these cooperation efforts. Employing CzechPOINT contact points in cooperation with the Czech Post Assessment and transferability: The Czech authorities innovative spot checks for the unemployed are certainly commendable. Since 90 % of the unemployed do not qualify for unemployment insurance in Turkey (as revealed in the last crisis, see Ercan, 2010), they have no business with PES; as a result, there is no possibility for transfer here. 4 QUESTIONS I am under the impression that most of the unemployed are covered in the public employment service system. Is this true and how is this achieved, given the discussion in the host country paper about societal attitudes? Have foreign companies largely left the Czech Republic? Did they have an influence in introducing registered work practices as a norm? Where are the labour unions in this discussion? 6 It is believed that no labour inspector would violate the sanctity of an older lady s home to penalise her for employing an illegal worker, newspapers would cry murder the next day 8

9 ANNEX 1: SUMMARY TABLE Labour market situation in the Peer Country Rural-urban migration is yet to be completed. Average education level is low, six years. Labour force participation rates are the lowest in the OECD region for women. Informality is high (44%). Assessment of the policy measure Women occupy the bottom level of the Turkish labour market after the unpaid family workers in agriculture. They have no social protection. Self-employment is not a good alternative to salaried employment. It is mostly informal. Public authorities ignore unregistered work including self-employment during crises, lest unemployment rate rise. These observations point out to a very different informality and unemployment structure than the one in the Czech Republic. It is hard to compare the policy measure. Assessment of success factors and transferability Lack of cooperation is also a sore point in Turkey. However, Turkish authorities can be very practical if need be. In one clean swoop, they have legalized and registered over 1.5 million foreign home-care providers. No big, over-arching policy measures were needed. Note that the political will for a concerted effort to tackle undeclared work is a pre-condition for cooperation. This will is not strong in Turkey. There are usually technical difficulties. Since 90% of the unemployed do not qualify for unemployment insurance in Turkey (as revealed in the last crisis, see Ercan, 2010), they have no business with the PES, no transfer possibility of the second success measure here. Questions I am under the impression that most of the unemployed are covered in the public employment service system. Is this true and how is this achieved, given the discussion in the host country paper about societal attitudes? Have foreign companies largely left the Czech Republic? Did they have an influence in introducing registered work practices as a norm? Where are the labour unions in this discussion? 9

10 REFERENCES Dayıoğlu, Meltem, and Hakan Ercan (2009). Labour Market Policies and Institutions with a Focus on Inclusion, Equal Opportunities and the Informal Economy - Turkey. Geneva: ILO. Ercan, Hakan (2010). The Impact of the Global Financial Crisis on Employment in Turkey. In Crisis and Turkey: Impact Analysis of Crisis Response Measures. Ankara: ILO Office. Hoşgör, Şeref and Aysıt Tansel (2010) ye Doğru Nüfusbilim ve Yönetim: Eğitim, İşgücü, Sağlık ve Sosyal Güvenlik Sistemlerine Yansımalar (Demographics and Administration towards 2050: Education, Labour Force, Health and Social Security System Projections). Istanbul: TÜSİAD (Turkish Industrialists and Businessmen Association). Taymaz, Erol (2010). Automotive Industry: Crisis Impact and Policy Measures. In Crisis and Turkey: Impact Analysis of Crisis Response Measures. Ankara: ILO Office. World Bank (2010). Turkey Country Economic Memorandum - Informality: Causes, Consequences, Policies. Document of the World Bank. Report No TR (March). 10