Informal employment in Turkey

Informal employment rates have always been high in our country. It is estimated that there are around 10 million people working informally in our country without being registered with any social security institution. These workers, whom we can describe as modern-day slaves, are left behind because they have no job security for their own future or that of their families.

Informal employment, which is one of the leading socioeconomic problems, still maintains its importance in our country, as it does in many others. When looking at the size of the informal economy, it is seen that informal employment is dominant in the informal economy.

The sector where informal employment is most common is the agricultural sector. According to TUIK, after agriculture, the sectors with the highest informal employment are construction and the hotel and restaurant sectors within the service industry. The industrial sector is the area where informality is relatively the lowest.

According to 2023 TUIK labor force statistics, the informal employment rate is 31%. With this rate, it is seen that informal employment, especially in the agricultural sector, is still high. The informal employment rate and the size of the informal economy run almost in parallel, and this rate is seen at around 35% in Turkey.

Informal employment is at the 35 percent level in 2023. Although Turkey has taken significant steps to reduce informal employment, it has not yet reached the level of the European Union and other developed countries in terms of reducing informal employment.

It is observed that informal employment is significantly lower in Istanbul and Bursa compared to other provinces. Factors such as the development levels of the provinces and the share of industry in employment are effective in the differentiation of the informal employment rate on a provincial basis.

The prevalence of informal and semi-formal activities in small firms in Turkey parallels the sharp differences in productivity between different firm sizes. The productivity gap between small and medium-sized firms in the Turkish manufacturing sectors is among the largest among peer countries.

There is significant potential for mergers that increase economies of scale and for cooperation opportunities between firms. Furthermore, the gap between small and medium-sized firms and their larger counterparts has increased over time.

Entrepreneurs known as "young entrepreneurs," who were established after the early 2000s and operate in medium-high and high-tech sectors, tend to have productivity levels similar to large firms, which suggests that Turkey has fertile ground for improving the overall technological intensity of its manufacturing sectors.

The low average productivity of businesses stems from a combination of factors.

The average level of productive capital per employee and the skill level, including owners and managers, lag behind other OECD countries despite strong investment growth and improvements in enrollment rates in secondary and higher education. On average, Turkish firms are less involved in export activities, and exporting firms mainly produce goods that are consumed as final goods elsewhere.

Very small informal businesses employ 60% of all informal workers in the Turkish economy. The share of informal workers is much lower in larger and more corporate firms. The agricultural sector accounts for 80% of small informal businesses. Only about 20% of employees in manufacturing and other sectors are considered informal.

In our country, large, fully registered firms account for approximately 25% of total employment and roughly 50% of the value added of the total business economy.

In our country, as a result of high employment costs, rigid employment costs, and rigid employment regulations, a large portion of workers are employed informally or semi-formally.

The reasons for this are high social security contribution payments and income taxes. The government should reduce the cost of employment, especially for young and low-skilled individuals, to support job creation in the formal sector. Furthermore, strengthening vocational training in cooperation with the business sector will increase the employment of youth groups in higher productivity activities and higher quality jobs.

A significant obstacle to formality in Turkey is the OECD's rigid employment rules for both permanent and temporary workers. Informal and semi-formal businesses do not comply with these regulations and, as a result, gain a comparative advantage over law-abiding competitors.

While informal and semi-formal firms can succeed in competing with more formal firms, especially in labor-intensive sectors, by taking advantage of flexible forms of employment, fully law-abiding and financially transparent firms have much less flexibility due to Turkey's relatively rigid employment regulations.

Employment protection rules for both permanent and temporary workers should be made more flexible, for example, by reforming the severance pay regime and making fixed-term contracts more common for all workers, but without compromising health insurance and retirement rights. However, this increased flexibility requires more effective social protection for the unemployed and more reliable public funding for retraining and job searching.