One of the “best” things about Turkish severancepay is that it literally “binds” employers and employees, although not exactlyin solidarity.
At the familybusiness from where I was reportingon the latest tourism developments last week, we have an employee who reallyhates his job. He won’t quit because he would lose his severance, and we won’tfire him because the productivity gain we’ll get from his replacement isunlikely to make up for the cost of cutting him loose. Employees who have workedin a firm for at least a year are entitled to one month’s salary for each yearwith the company, which makes the Turkish system one of the most generous inthe world.
No wonder Istanbul-think tank BETAM likened severance toshackles in its report, “Severance Pay Reform: Problems and Solutions”, whichwas published on Thursday. But the problems of the current system are much moreextensive than such “mismatches”. For one thing, any labor economist would tellyou that “firing costs are hiring costs”, as firms take into considerationredundancy expenses when hiring. Therefore, the existing setup is actually increasingunemployment by restricting employment.
Moreover, only a small part of the workforce is defacto covered. Many firms choose not to register their workers to avoid severanceand 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 tomobbing when employees don’t comply. They are then rehired in a month, withoutany seniority.
To investigate this last point further, I borrowedTurkish investigative journalistEmin Çölaşan’s“tiny bird” again, which had sneakedinto the Central Bank for me a few months ago. After having a look at theSocial Security Institution’s classified data, the birdie told me that thenumber 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 arequitting and restarting.
Last but not the least,
stupid companies thatplay by the rules are at a disadvantage against their smarter more deceitfulcompetitors. It is clear that the current system is a mess. An easy fix wouldbe to lower severance pay to levels comparable to Turkey’s peers. BETAM offersa better solution: They propose a severance pay fund, whereby employers wouldtransfer a small premium over to employees’ accounts each month.
As they explain in detail in the report, thissystem would increase coverage, providing unconditional access to all workers.It would also encourage formal employment by lowering the cost of firing (andhiring) workers. Finally, it would bring “real” mobility to the labor marketand decrease mismatches.
There would also a small but non-negligible impacton the household savings rate, alleviating oneof the Turkish economy’s main problems. And if these personal accounts aremanaged by the private sector, as BETAM is recommending, it would also increasefinancial deepening and literacy.
BETAM makes a good case for reform, but that’s not evennecessary. After all, we have nothing to lose but our chains.