EMRE DELİVELİ > Chains binding capitalists and proletarians

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One of the “best” things about Turkish severance pay is that it literally “binds” employers and employees, although not exactly in solidarity. 

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 the world. 

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 any seniority. 

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.


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Blue Dotterel

8/18/2012 5:30:40 AM

KK, the private sector hires employees when it needs them, and passes the costs on to other stakeholders, like consumers. If the rules are the same for all, there is no issue. It has nothing to do with your view of basic economics. Companies will always cut labor costs to the bare minimum to maximize profits, and create unemployment. They will always hire people when they need them to produce a product or service effectively. If competitors are affected by the same rules, it is not a problem.

Köksüz Kosmopolit

8/16/2012 2:00:27 PM

@BD, it's just basic economics: if you make severance packages more generous, you increase the cost of hiring workers, which can mean fewer jobs all round. This doesn't mean there should not be generous severance packages -- that is a policy question, not a question of economic principle (and I personally favor more rather than less generous packages). But in deciding how to answer the policy question, this cost is one (among many) of the factors you need to consider.

Blue Dotterel

8/13/2012 4:11:01 PM

Emre, perhaps you could give a more direct link to the article. I checked the site quickly but didn't see it. I did see, however, that Betam's advisory board is overwhelmingly made up of academics from private foundation universities, many of which are closely tied to corporate interests, some, not just run by them, but named after them like Sabanci and Koc. The close connection to the business world suggests research will likely be biasd to business interests not workers interests.

Emre Deliveli

8/13/2012 3:48:48 PM

@BD: BETAM is an independent think-tank, which is part of Bahcesehir University. It is not conservative & it doesn't get any "big capital money". As for the Turkish severance pay system, there are numerous studies that have shown that it is harmful for both firms & workers alike. & I am telling you, not as an economist, but as a company owner, that companies in Turkey are hurt by the current system. I'd be more than happy to give you English references if you get in touch with me by email.

Blue Dotterel

8/13/2012 1:49:25 PM

Emre, What makes the BETEM report independent and objective? Conservative think tanks are typically shills for big capital from whom they usually get their funding. This is one of the ways big capital influences gov't to pass legislation to ultimately benefit them. Companies are not hurt by the severence pay, they take it into consideration when hiring as a part of workers pay. Only the workers suffer when let go, as they are paid little to begin with, and need to find another job with the pay.

Emre Deliveli

8/13/2012 10:45:35 AM

@DKI: This isn't me, this is BETAM saying these things. & BTW, the government largely agrees with them & is planning to reform. @BD: I knew I'd get this reaction because the current system seems to be protecting poor workers against greedy capitalists. It isn't! It is protecting jobs more than workers & the disadvantaged (young,women,etc) are suffering the most as a result. Please read the BETAM report if you speak Turkish- there is also info.on the history of current system there.

Blue Dotterel

8/13/2012 1:59:43 AM

There is nothing wrong with the severance pay setup. It prevents abuses by employers who might otherwise make people redundent at will for no good reason. The method in Turkey ought to be adopted globally. It is one of the better ideas coming out of Turkey (when was it implemented?). It might be added that the vast majority of emploees would prefer to keep it as a type of work protection. If an employee is really incompetent, the cost of firing them would not be much, compared to keeping them.

dogan kemal ileri

8/13/2012 1:03:18 AM

Lord is there any area in Turkiye that does not need reform,that does not need inspection and enforcement and does not need any further planning and infrastructure and does not need major re-organisation? Please tell me and cheer me up Emre!!!
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