The effects of labour market regulations on labour demand and supply: an analysis on Turkey

This study examines the labour regulations in Turkey during the post 1980 period and the effects of these regulations on labour supply and demand. Market failures and unique characteristics of the labour markets are the main drivers for the labour market regulations. Turkey?s labour market has been subjected to extensive regulations since the early years of the foundation of the Republic. Economic and political changes have potential effects on these regulations as well as their outcomes. The global regulation process that was seen prior to the 80?s has been replaced by a deregulation period after 1980. Unlike the global trend, the labour market regulations in Turkey do not follow a distinctive path.In this study, the effects of the labour market regulations in Turkey during the post 1980 period are evaluated theoretically. Besides the theoretical descriptive analysis, the effects of labor market regulations on labor supply and demand in 18 European OECD countries and Turkey during the 1998 ? 2008 period were then estimated by panel data analysis. The analysis revealed that more strict employment protection legislation leads to a reduction in labor demand and an increase in labor supply. Additionally, strict employment protection legislation tends to reduce the labour cost elasticity of labour demand both in the short and long run. In this respect, deregulation of employment protection causes an increase in labour demand and labour cost elasticity as well as improving the adjustment speed of labor demand.Based on to the descriptive and empirical analyses performed, it can be concluded that a combination of regulations that drive a reduction in labour costs excluding the wages, and regulations enabling the employer to gain access to effective employees would increase demand in labor and hence reduce the unemployment in Turkey.