The Social Protection & Labor Sector (HDNSP) of the Human Development Network
sponsored this presentation by

Gordon Betcherman, Lead Economist, ECSHD and

Carmen Pagés, Principal Economist, Research Department, IADB

Chaired by Milan Vodopivec, Senior Labor Market Economist, HDNSP

High labor tax wedges and slow formal employment growth have combined to make labor tax reform an important policy issue in Turkey, as it is in many  client countries. However, solid evidence does not exist to confidently assess the likely employment gains and fiscal implications if the taxes on wages or social insurance contributions were reduced. This report presents the results of a series of empirical labor demand studies to assess the employment impact of a labor tax reform. Using data from firms, households, and social insurance files and various methodologies the research finds that reducing labor costs could significantly boost registered employment. However, the actual effect of lower taxes on employment would be diluted because a portion of the reduced tax is captured by workers through higher wages rather than by employers through lower labor costs. While this “pass-through” effect would substantially limit the job gains of a general reduction in labor taxes, it is much smaller at lower wage levels where most of the effect of a tax cut would be to lower total labor costs and, thus, increase labor demand. The analysis does indicate that tax cuts targeted towards low-wage labor (e.g., young people) would be more cost-effective than reductions across-the-board. This is confirmed by simulations of the implications of various tax reform options on the fiscal position of Turkey's social security and UI funds. However, under all scenarios, the registered employment gains of a cut in social insurance contribution rates do not broaden the tax base enough to compensate for the reduced contribution rates. To achieve overall fiscal neutrality, compensating additional revenues from other sources or reduced expenditures would need to accompany lower contribution rates.

Presentation (119kb pdf)

About the Authors

Gordon Betcherman is a Lead Economist in the Human Development Unit of the Europe and Central Asia Region (ECA). He joined the regional unit after seven years in the Social Protection anchor where he led the Labor Market Group.  In his current position, he is responsible for research, policy, and operational support activities in the ECA region in a variety of employment-related areas including labor market analysis, labor market policy, and social protection for workers.  Current research topics include informality, labor taxation, youth employment, the impact of active labor market programs, and the evolution of labor market policy in China.  He has just co-authored a new book, From Red to Gray, about aging populations in Eastern Europe and the former Soviet Union. He has published widely in the fields of labor economics and industrial relations and has been a frequent speaker and media commentator.  Prior to joining the World Bank in 1998, he held senior positions in research organizations in Canada.  He is a Visiting Fellow at the School of Policy Studies, Queen's University.  He obtained his Ph.D from the University of California at Los Angeles.

Carmen Pagés is a Principal Economist at the Research Department of the Inter-American Development (IADB).  Her topics of research are the design of labor market policy, the causes and consequences of informality, and the impact of labor market regulations and more broadly, of the investment climate, on economic outcomes.  Among other studies, she co-authored a book on labor market regulations with Nobel laureate professor J. Heckman and was the director of the 2004 IADB flagship report on Labor markets in Latin America.  Her work has been published in leading academic journals in Economics.  She has also advised governments in a number of countries on matters related to labor reforms.  In addition to her tenure at the IADB she spent two years at the Social Protection Unit of the World Bank, where she developed a number of analytical studies on the impact of labor market regulations and institutions in India, Turkey and Kenya among others, and a regional study on employment and growth in Latin America.  A native of Spain, she holds a MA degree in Economics from the Universidad Autonoma de Barcelona and a Ph.D in Economics from Boston University.