Unemployment – Can we keep growing with it?

Unemployment – Can we keep growing with it?

Unemployment is one of the important problems of politicians, especially in election years. They want to distract voters’ attention from this problem if they are not dealing well with it. If unemployment rate of a nation is increasing, it could mean that there is not enough job for people who are actively searching for one. It is also a signal for government to take consumption level into consideration. For GDP calculations, household expenditure is very important and if the unemployment rate increases that could mean that people must be cautious and accommodate themselves to new circumstances in economy, where there is too much uncertainty and geopolitical tension.

Turkey is standing in the middle of Middle East hurdle and couldn’t get itself out of this swamp yet. Other problems like dependency to hot money, foreign investments, competitive disadvantages etc. intensify Turkey’s growing and job creation problems. Keeping these on mind, we can argue that Turkey is right behind PIGS countries (Portugal, Italy, Greece and Spain) in unemployment ranking among OECD countries in 2016 and with this pace it could take the fourth place from Portugal by the end of 2017.

The path of Turkey’s unemployment level can be seen clearly from the abovementioned graph. Turkey cannot decrease its unemployment rate under 8.4% according to OECD calculations. Addition to that Turkey’s unemployment rate trend from 2005 doesn’t look very promising too. In 1Q2009 it has its peak level nearing 15%. As I mentioned in my former articles, 2009 was the worst performance in GDP for Turkey since 2001 too. Therefore it is not awkward to see worst unemployment performance in 1Q2009. In the graph below seasonally and calendar adjusted unemployment data seems to be approving the march of events.

In order to understand the structure of unemployment we need to figure out the distribution of economic activities by years. The evolution of service sector is very fast and it almost cannibalizes all the loss in share of agriculture sector. Economic activity distribution share of industrial sector seems to be shifting to construction which is supported by government to hinder irregular urbanization and to be ready for the big earthquake anticipated in coming years.

Increase in economic activity in construction sector also affected the hourly wages. The rise in wages are always higher than inflation in construction sector, therefore their income is not vanished by inflation in real terms. Regardless of the fact construction workers are not beaten by inflation their base wages are not high and their level of education is also not high. That could mean the level of saving is not increasing because of the effort of labor force in construction sector is trying to reach higher living standards. Only then they could add more saving and limit their expenditure.

That takes us into this conclusion:

-         Turkey’s unemployment rate is not in a downward trend but needs to be taken under control if we want to at least stabilize household expenditure for GDP without raising tax rates.

-         The job opportunities in recent years are seen mostly in construction and service sector.

-         It is very sad that most of the unemployed are consisting of vocational high school, universities, etc.

-         Turkey needs to develop industry in order to create more value added jobs.

-         By increasing production level Turkey could decrease the trade deficit by channeling part of those productions into exportation.

Hormonal Growth - Growth but in which direction and with what pace…

Hormonal Growth - Growth but in which direction and with what pace…

It is very important to choose the right parameter if you want to compare yourself. Your performance must be realistic in the eyes of others, too. It is sometimes not reasonable to compare your past performance with the current one, especially with the worst one. There are ups and downs in someone’s life and they don’t show any sign of normality.

This situation is also valid for institutions. They must be consistent and transparent in their decisions. They shouldn’t have any hidden agenda. They must be predictable in order not to fool the people which do believe in their comments and statements.

For todays’ economies performance is everything. It is the key for developing countries like Turkey to attract investors and fuel the economy with long term investments of foreigners. The question which stands against those stories is the trustworthiness. If a teacher would change its grading methodology after the first exam there could be question marks in heads of the students about the reason. Does the teacher change the grading method in order to prevent giving higher scores or did it in favor of the children to increase their GPA’s? In a competitive world a school does this in order to uplift their students’ success rate and get more credit. With this reputation it could easily increase its tuition per student.

Like schools, governments use the same tricks to get ahead of other countries and to be able to reach hot money as quick as possible. In order to align the System of National Accounts (SNA-2008) and the European System of Accounts (ESA-2010) the Turkish Statistics Institute (TUIK) make some modifications to its GDP calculation method in 2016. This new methodology helped TUIK to extend its dataset. With the support of the national income administration and the Social Security Institution, TUIK could include small- and medium-sized enterprises’ to its calculations. Addition to that there are other modifications and adjustments in other components subjected to GDP calculations like savings, share of sectors like construction (increased its weight in economic activity calculation), etc.

With the expenditure approach GDP has over performed its previous Yoy performances from 3Q2011 till the last announcement.  With the new methodology, it seems that Turkey have beaten the odds. The 11.1% yoy increase in 3Q2017 is a sign of recovery for our nation. But again the question must be: “Is it realistic, because it seems too good to be true”. The 1998 data which is 97.4% correlated with the new base 2009 data, the GDP in 3Q2017 must be increased by 8.8%.

So we came to the conclusion with different angles:

-          TUIK has decided to change its methodology according to EU standards. The problem is that EU considers 2010 as its base year for the calculations, which is more reasonable considering financial crisis throughout the world in 2009 (mortgage & subprime).

-          From the graph below we can clearly find out about the plunge of Turkish economy in 2009, which must be an outlier for TUIK’s calculations, instead of base!

-        How much do we trust on household and non-profit institutions serving households (NPISH) if we add inflation to the equation? If the inflation will continue to raise with this pace, will it be possible for this group to spend more which do have more than 50% share on GDP expenditure components. Does the graph below shows the reality or is it also a painted beauty? The consumption pattern shows the same direction like each other year but it is more aggressive in 2017 compared to 2015 and 2016.

From Income Inequality to Inflation: A Different Angle Worth of Looking

It is very simple to say that we are facing tough times dealing with inflation as a whole country (I mean Turkey, of course). If you are thinking that this problem popped out suddenly, you’re mistaken. It was always there but diluted with other social problems. There is always a turning point for igniting the fire inside us to question the root of the matter. And I think that we are on the edge.

 

Are we living a better life now? Or, are we mixing the things that comes along with the technological revolution (increase in accessibility level of internet, development of electronic devices, etc.) with the things that must carry us towards being a better nation among the others?

What I understand from the tables I’ve got from Turkish Statistical Institute (TUIK), World Bank (WB), Organization for Economic Co-operation and Development (OECD) and International Monetary Fund (IMF) that our wealth distribution is not getting better compared to 2010. We are almost at the same place where we were in 2006. I based my argument on Gini coefficient which means quoting WB: “Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.” That inference takes me to the point where I need to look deeper according to the data published by TUIK and WB.

Gini index of WB and TUIK started to differ in 2010 and the gap continued to widen in 2014 as we can trace from the 2 tables below. Also the trend between the periods of 2010-2014 doesn’t look like the same. The directions are opposite. Are we deceived in one or another way from one of the 2 organizations or did one of them made a methodological change in their calculation?

 

From the data of distribution of annual household disposable income I have the chance to collect some evidence supporting my theory of not reaching to a better point as a nation. Below you will see two pie charts, one from 2006 and one from 2016. I want you to think about the consequences afterwards. Does it mean that we are in a good situation for a country according to Gini coefficient levels if we are not making any progress? The richest 20% is continue to sustain its share from the total annual disposable household income. In terms of growth each quintile has almost the same performance throughout the years. That preoccupies my thoughts about bowing to the inevitable: The concept of social state isn’t working.

 

 

After these income distribution information I need to explain the link between disposable income and inflation. The basket and the weights of items in it are very important for calculating the consumer price index (CPI) or as we all call it “inflation”. This basket must reflect the needs of an ordinary citizen because in a normally distributed household income diagram, ultra-rich and ultra-poor people will be outliers.

 

 

Before digging deep to this basket, we must also know our place among other countries in the world. According to OECD “Consumer prices - all items” data our annual percentage increase in CPI level is the highest among 35 OECD countries in 2016. This rank can be compared with IMF WEO data which states that Turkey is the 30^th highest country according to the average consumer price index percentage change. But you must also consider that IMF’s data covers 190 countries and the highest inflation (Rank #1 in 2016) level belongs to South Sudan in which civil war that began in December 2013, continued in 2016 despite a peace agreement signed in August 2015.

 

Marching with slower pace against the CPI data which is highly correlated to PPI (Producer Price Index) I need to inform you about what will happen sooner or later. In the line chart below we can clearly figure out that PPI fluctuation is much higher than CPI and they are almost always affected in the same direction. That means an increase in PPI level will eventually affect CPI levels because of the goods we consume. In my opinion what could be preventing that from happening can be 2 different strategies: 1) subventions like VAT (furniture, white goods, etc.), 2) reducing importation tax, allowing traders to import goods from abroad.

  

Aforementioned strategies will help to slow down CPI levels a little, but each of them alone are not sustainable in long term. Subventions are going to be a burden for a state and can change the consumer habits if they are applied for a long period. Subventions can prevent the state of getting higher tax income if they are not related directly to export production. Otherwise it could compensate the loss generated by subventions by bringing foreign exchange and balancing the balance of payments. Continuing or periodic subventions keep one's hand in taking advantage of this concept. It could also create expectation and hinder consumers to purchase something at regular times.

Reduction on importation tax can lead a country to lose its industrial power in long term. Without domestic production a country could lose its place in international trade of goods and services platform. Looking forward it could lead a nation to laziness and foolishness. And that will eventually decrease the need for qualified person, increase the rate of unemployment and trigger brain migration.

Now we can move on to inflation basket case. On the table below you can analyze main group list for CPI basket. There are adjustments in weight of each group made by TUIK at the beginning of every year. In my opinion it could mean two things:

1) If your country is exposed to currency risk and doesn’t have any energy reserve, meaning obliged to import it, what could be the best move to reduce the effect of sudden and unpredicted FX rate increase? What could be the solution for a country which tries to widen its tax revenue by implementing it to necessity goods? I will ease your time to think and answer by giving you a small tip. You can rearrange the weights of each item subjected to CPI basket. In that way, you won’t experience CPI level to raise like PPI and don’t need to make any dramatic interest rate hike.

Inflation and interest rates do have a spiral effect on each other and it could be prevented by maintaining price stability. Distorting or concealing data might seem easier to reach a quick result but a country, which chooses hard way to raise its level of wealth and prosperity to the level of developed countries, must stand tall and imply its strategy to carry itself to the future. With steady production, more technology based (more value added) products and higher export level, our country can reach desired welfare level in coming years.

2) If I am wrong and there is a good reason for Turkish public institutions to make adjustments for each data differentiating from worldwide organizations, they must also consult to worldwide accepted organizations to make those changes in order to align and not to spoil investors’ appetite for our country. We are not the only country trying to lure investors, and comparisons are made for each country before taking a huge step towards direct/indirect investment.