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12/28/10

On further decline in labor productivity in Turkey


Figure 1 is borrowed from our paper on productivity [1]. It presents the case of Turkey. This is a difficult example with the rate of productivity growth oscillating since 1980. Since the measured time series is smoothed with MA(3), actual oscillation is even more prominent. Such a behavior is a nightmare for the mainstream models based on capital, labor and multifactor productivity. As a rule, the multifactor productivity has to resemble observations and severe “shocks” to productivity are introduced.  This is a lucky hour for an economist – millions of factors to explain these shocks. In reality, the number of explanations is steadily approaching the number of economists involved. At the end of the day, all mainstream models are able to explain only “stylised facts”. This is a euphemism of “failure”.

Our model uses only one variable – real GDP per capita. The intuition behind the model is almost banal.
  1. A developed economy is characterized by a constant speed of real economics growth, which we call “economic inertia” in line with mechanical sense of inertia. In other words, the economy would be growing with constant increment per year, i.e. at constant speed, if no change in the population age structure is observed. 
  2. Any deviation from the inertial growth results in the change in labor force participation. Obviously, a higher speed of growth may attract more people into the labor.
  3. The number of people who are able to join the labor force in response to a given growth above the inertial one is proportional to the relevant deviation.
  4. The value added by any newcomer must depend on his/her overall professional capabilities. It is obvious that this characteristic (capability or productivity) is distributed (we claim that this distribution is exponential and personal income distribution is) over the working age population and people with efficiency between 50% and 51 % should bring more value added to the economy than those between 75% and 76%.  In other words, one per cent of “extra” (above the inertial level) economic growth may allow to join the labor, say, 1% of population, when this labor force grows from 50% to 51% , or 5% of population, when the labor grows from 70% to 75%.  These portion must give the same extra input into the real GDP.
  5. The extra growth in real GDP has to be reflected in productivity, which is defined as a ratio of real GDP and the level of labor force. As suggested in point 4, the extra labor force depends on the current participation rate. Therefore, the growth in productivity depends on the current rate of participation in labor force for a given increase in real GDP.  As an example, the rate of participation in Italy and Canada is quite different and 1% extra growth in real GDP per capita results in absolutely different change in labor productivity.
  6. Mathematical formulation of this simple consideration is given in [2].

Finally, Figure 1 (and the example of Canada ) demonstrate the predictive power of our simple and parsimonious model. 


Figure 1. Observed and predicted (from real GDP pee capita) change rate of productivity in Turkey.  The observed curve is represented by MA(3) of the original version. Model parameters are as follows: A2=$105, N(1959)=1450000, B=-6000000, C=0.24, T=2 year.

Figure 2 tests the model by adding two new data points to Figure1. These new measurements are borrowed from the Conference Board database [3]. One can conclude that the model gave an excellent prediction for 2008 and 2009. The period of the productivity decline will continue in Turkey for another couple years, and then it will start to grow again. This turn is a challenge for any productivity model or concept. We will revisit the case of Turkey for further validation of the model. Meanwhile, we would not expect good news about labor productivity from Turkey.



Figure 2. Same as in Figure 1 with two new points – 2008 and 2009.


References
1. Kitov, I., Kitov, O., (2009). Modelling and predicting labor force productivity, MPRA Paper 15152, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15152/01/MPRA_paper_15152.pdf
2. Kitov, I., Kitov, O., (2008). The driving force of labor productivity, MPRA Paper 9069, University Library of Munich, Germany, http://ideas.repec.org/p/pra/mprapa/9069.html
3. Conference Board. (2010). Total Economy Database, January 2010. http://www.conference-board.org/data/economydatabase/

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