Severance payment effect on the labour market

The interaction of unemployment and the labour costs are the main challenges in the labour markets of the developing country economies. Furthermore high manpower costs are the main reason which negatively affects the performance of creation abunden jobs. In Turkey labour costs are rather higher comparing to European Union (EU) countries and also labour laws are more rigid. An oppressive and heavy burden of severance payment stands out as a major factor increasing the labour costs in Turkish economy. In Turkey severance payment also operates as an unemployment insurance while it serves its own purpose. In some OECD countries severance payment also contains the unemployment insurance as it is in Turkey yet does not heavily burden the firms as it is in the range of the plausible acceptible figures. While this contribution investigates the severance payment and the effects of increment of the severance payment in Turkish economy it also discusses the comparison of the actual fiscal burden of severance payment to the employees in EU countries and Turkey to figure out the size of volume which is burdened to Turkish employers. The amount of the severance payment and its relation to unemployment figures in Turkish labour market is analyzed using data from 1980 and 2010 years in the last division of this study. Unit Root Test and Johansen?s Cointegration Analysis are introduced so as to discuss the interaction of unemployment and the severance payment thoroughly using the data between 1980 and 2010 years in this study. Increasing labour costs attenuates the cost advantage and following specifically lowers the international competitiveness of the Turkish export companies. The countries having low competitive power like Turkey should improve their competitiveness altering the actual local implementations primarily setting new standards on the labour costs to make up the differences with developed economies.