Chains binding capitalists and proletarians

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.