Targeted reduction of social security payments, Turkey

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The Turkish government introduced a general as well as targeted reduction of social security contributions and significant social security and corporate and VAT reductions for enterprises investing in less developed regions. The incentives were coupled with a deterrence approach targeted at employers using undeclared labour. The measure has led to an increase in formal (new) jobs.

 

Background

The project of targeted reductions in social security payments falls within the scope of measures to reduce non-wage labour costs. As well as reducing undeclared work, these have encouraged recruitment of workers and increased employment. In order to achieve this, the government introduced a general as well as targeted reduction of social security contributions and significant social security and corporate and VAT reductions for enterprises investing in less developed regions. The incentives were coupled with a deterrence approach, whereby those discovered to have employed workers not registered with social security are not entitled to the reductions in social security contributions.

Objectives

Although the primary objective is to increase employment of the targeted groups (youth, women and long-term unemployed), this has the indirect effect of increasing formalisation among those already employed but working on an undeclared basis.

Specific measures

The government decided to cover the costs of the employers’ share of social security contributions, for a five year period, for those recruited between May 2008 and May 2010. Using the Unemployment Insurance Fund for this measure, young people and women were targeted. The subsidy was set at 100% for the initial year but gradually decreases to 20% in the fifth year of employment. Employer social security contributions for disability, old age and death were reduced from 19.5% to 14.5% of gross wages. These cuts were offset by public transfers to social security institutions.

Lessons and conclusions

Achievement of objectives

The success of the implemented measures is reflected in the fact that 33,395 new jobs were created for women in 2010. Overall, more than 61,000 jobs were created in 2009 and more than 63,000 in 2010. The result of reducing non-wage labour costs has been that companies were encouraged to recruit workers rather than cut jobs, causing a drop in undeclared work (International Labour Organization, 2012).

Obstacles and problems

Measures like this lead to an increase of public debt and should therefore only be used to boost labour demand on a short-term basis. This is especially true if taxes are subsequently increased to cover the associated costs; otherwise the boost to employment might not last.

Transferability

The success of this approach seems to make it a good practice for other countries to follow. Certain amendments such as changing or adding to the targeted groups could be made depending on which groups have the highest unemployment/undeclared work rates in the country concerned. For example, it could target women, people over a certain age, or people with a disability.

Bibliography

Saget, C (2012), ‘ Weathering the crisis: A Turkish recipe, International Labour Organization (ILO), Available at http://www.ilo.org/global/about-the-ilo/newsroom/comment-analysis/WCMS_186211/lang--en/index.htm.

 

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