Modeling general equilibrium for socially responsible macroeconomics: Seeking for the alternatives to fight jobless growth in Turkey

Despite rapid growth and a significant surge in exports, Turkish economy could not generate jobs at the desired rate. In the post-2001 crisis period Turkish GDP expanded by a cumulative 25% in real terms, and yet the unemployment rate could not be brought below the 10% mark. By some, the meager job creation of the economy is due to the excessive regulatory framework and the tax burden; while others from the structuralist tradition see the joblessness problem as a global phenomenon due to the deflationary environment under the finance-led global economy. In this paper we utilize a computable general equilibrium model to study the jobless growth problem in the Turkish context and examine various policy alternatives to generate more conducive conditions for employment creation. The model is in the Walrasian tradition with nine production sectors, two labor categories and a government operating within an open macroeconomy environment. It accommodates flexible production functions, imperfect substitution in trade; segmented labor markets and open unemployment. The model spans the 2003-2010 period for Turkey with explicit recognition of the current IMF program targets. The model results suggest significant employment gains due to a policy of lower employment taxes. In returns for lowering effective employment tax rates by 5 percentage points, the unemployment rate is observed to fall by 2 percentage points over its base-path. However, as a result of lower tax revenues, the policy suffers from the insufficiency of fiscal funds for public investments and the consequent fall in the quality of public services. If the current IMF program is followed through 2010 without any adjustments on the primary budget targets, we observe that public investments need to be lowered to 2.7% of the GDP. As an alternative, we find that a heterodox program with expanded direct income taxes replacing lower employment taxes, and expanded public investments together with a lower primary surplus target for the public sector may produce socially superior macroeconomic outcomes.Scientific and Technological Research Council of Turkey (TÜBİTAK)Publisher's Versio