One of the “best” things about Turkish severance
pay is that it literally “binds” employers and employees, although not exactly
At the family
business from where I was reporting
on the latest tourism developments last week, we have an employee who really
hates his job. He won’t quit because he would lose his severance, and we won’t
fire him because the productivity gain we’ll get from his replacement is
unlikely to make up for the cost of cutting him loose. Employees who have worked
in a firm for at least a year are entitled to one month’s salary for each year
with the company, which makes the Turkish system one of the most generous in
No wonder Istanbul-think tank BETAM likened severance to
shackles in its report, “Severance Pay Reform: Problems and Solutions”, which
was published on Thursday. But the problems of the current system are much more
extensive than such “mismatches”. For one thing, any labor economist would tell
you that “firing costs are hiring costs”, as firms take into consideration
redundancy expenses when hiring. Therefore, the existing setup is actually increasing
unemployment by restricting employment.
Moreover, only a small part of the workforce is de
facto covered. Many firms choose not to register their workers to avoid severance
and other labor costs, and the ones that do often show low official salaries,
paying the difference in cash. There is anecdotal evidence that many firms
“ask” their workers to resign before they complete one year, resorting to
mobbing when employees don’t comply. They are then rehired in a month, without
To investigate this last point further, I borrowed
Turkish investigative journalist Emin Çölaşan’s
“tiny bird” again, which had sneaked
into the Central Bank for me a few months ago. After having a look at the
Social Security Institution’s classified data, the birdie told me that the
number of people who quit work in 2010 was almost as large as total non-farm,
non-public sector employment, which doesn't make sense unless people are
quitting and restarting.
Last but not the least,
stupid companies that
play by the rules are at a disadvantage against their smarter more deceitful
competitors. It is clear that the current system is a mess. An easy fix would
be to lower severance pay to levels comparable to Turkey’s peers. BETAM offers
a better solution: They propose a severance pay fund, whereby employers would
transfer a small premium over to employees’ accounts each month.
As they explain in detail in the report, this
system would increase coverage, providing unconditional access to all workers.
It would also encourage formal employment by lowering the cost of firing (and
hiring) workers. Finally, it would bring “real” mobility to the labor market
and decrease mismatches.
There would also a small but non-negligible impact
on the household savings rate, alleviating one
of the Turkish economy’s main problems. And if these personal accounts are
managed by the private sector, as BETAM is recommending, it would also increase
financial deepening and literacy.
BETAM makes a good case for reform, but that’s not even
necessary. After all, we have nothing to lose but our chains.