Intertemporal CGE Analysis of Income Distribution in Turkey

By Aykut Mert Yakut and Ebru Voyvoda

The effects of welfare payments on the labor market outcomes of recipients and the size distribution of income are subject of academics for decades. In the related literature, various country cases show that welfare payments render labor force participation and / or lower hours of work of the recipients. For the Turkish case, there are few studies on the issue although there are controversies on the welfare regime. In the last fifteen years, although number and variety of the programs have been increased and the total budget of such programs has been expanded, the main controversy about such programs have been emphasized the escalation of transfer payments in line with the election calendar and clientelistic and rich households-biased coverage. On the other hand, several studies for Turkey claim that these payments have played a corrective role in terms of income distribution and poverty alleviation, in spite of their small shares in total household income.

This study focuses on the effects of such programs on the size distribution of income in Turkey. To this end, an intertemporal dynamic equilibrium model with heterogeneous agents in a small open economy framework is constructed. One of the notable characteristics of the model is the inclusion of internal migration from rural to urban in the presence of endogenous labor supply decision of individuals. Moreover, this study is the very first attempt for the Turkish case since it extensively utilizes various micro-level data sets in the calibration process of households’ parameters.

The recent policy framework of welfare payments in Turkey is based on unilateral unconditional cash and in-kind payments which are paid as long as individual/household can prove her/its necessity. However, the government has been criticized due to budget allocations on social policies. Among the OECD member countries, Turkey, still has the lowest total social transfers to GDP ratio. The first policy experiment constructed in this study analyzes the effects of an increase in the share of government transfers in GDP by 20%. The expected but undesired outcome of such a policy change is its disincentive effects on the labor supply behaviors of informal workers and unskilled formal wage earners. The results of such an experiment are in line with the previous findings of the literature and indicate that the recent policy package is not sufficient to alleviate income inequality. Moreover, worsening position of households who hold the majority of capital implies a political-economy aspect of such a change in the composition of government expenditures.

As a second experiment, a modified version of the employment subsidy program designed and implemented in the aftermath of the global financial crisis of 2008-9 is simulated. This study, rather than treating all sectors homogeneously and reducing sectoral social security contribution rates uniformly as proposed by the program, assumes that the subsidy rates are endogenous and are functions of sectoral shares in total unskilled formal employment. The results reveal that migration inflows from the rural to the urban expand and the labor supplies of all households increase. The effect is the highest for the informal workers. On the other hand, the size distribution of income improves in favor of relatively poor households.


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