Income inequality in Turkey and its causes and effects on the Turkish population

Maastricht University | | | | School of Business & Economics | | | | Place & date: | Maastricht,08 December 2014 | Name, initials: | Canli, T | ID number: | 6091093 | Study: | International Business | Course code: | ebc1009 | Group number: | 1 | Tutor name: | Pierfrancesco, Guarino | Writing tutor name: | Campbell, Gabriel | Writing assignment: | Main Paper (Task 10) | | |
t.canli@maastrichtuniversity.nl

Table of Contents 1. Introduction 2 2. Income Inequality and its components 2 3. Gini coefficient and inequality 3 4. Turkey´s economic structure 3 5. Wage distribution in Turkey 4 6. Main causes of inequality 5 6.1 Return on capital and increase of economic input 5 6.2 Relationships between people and social mobility 5 7. Effects on Turkish population 6 7.1 Education, child labor and social mobility 6 8. Possible solutions 7 9. Conclusion 8 10. Works Cited 9 11. Figures 10 12. Tables 10

1. Introduction
In the past decades the topic “Economic Inequality” has risen in popularity. The reason for this trend is mostly because economic inequality has risen drastically around the world. There are many forms of economic inequality, e.g. gender inequality, regional disparities, and wage inequality, only to name a few. Thus many politicians are discussing about economic inequality, particularly in Turkey. The largest driving force behind these discussions in Turkey was the coal mining accident in Soma, which took place on May 13th (The Econmist, 2014). This accident awakened major part of the Turkish population to the issue of the economic inequality. This is because miners were risking their lives and working very hard in order to make a living. However, they were barely able to earn sufficient income and were often treated inhumanely (Altayli, 2014). Thus, it is evident that the Turkish population has significant problems with economic inequality. Furthermore, the most glaring inequality is the disparity in the distribution of wages. This unequal distribution has many negative effects onto the Turkish society. However these effects might be decreased through certain external actions.

In order to investigate the effects of economic inequality, this paper first defines income inequality and its components. Second, this paper introduces the Gini coefficient, which is a method to measure economic disparity. Third, this paper analyses the Turkish economic structure and the wage distribution in Turkey. Moreover the main causes of economic inequality, and the effects on the Turkish population are examined. Finally, it is attempted to find possible solutions to diminish the effects and causes of economic inequality.

2. Income Inequality and its components
Piketty (2014) states that income inequality is created by two main components. The first component is the inequality of income from capital. This component includes income derived from ownership of capital independent from labour. Examples for income from capital are interests, rents, dividends, and so on. The second component is inequality of income of labour. This component describes the unequal distribution of wages and therefore is also often called wage inequality. However, this paper mainly focuses on the latter, as generally speaking, the higher the wage inequality is, the higher the inequality from capital will be. Furthermore, Aghion, Caroli and Garcia-Penalosa (1999) argue that disparities might result in inefficiently low levels of physical and human capital investment and lower combined productivity and growth.

3. Gini coefficient and inequality
The Italian statistician Corrado Gini developed the Gini coefficient. It “is one of the more commonly used synthetic indices of inequality, frequently found in official reports and public debate”. (Piketty, 2014) Hypothetically, this coefficient can range from 0 to 1. The higher the Gini coefficient, the higher the inequality and vice versa. A Gini coefficient of 0 represents a total equal distribution, while in contrast a coefficient of 1 portrays a total unequal distribution. However, Piketty (2014) claims that in practice the Gini coefficient for total income inequality ranges between 0.3 and 0.5.

4. Turkey´s economic structure
Turkey is a unique country in many aspects. Not only is its geographical position unique, as it is located on both the Asian and European continent, but also its history and economic structure. The Turkish economy can be described by a dual structure (Elveren & Galbraith, 2009). The reason behind it is that the Turkish economy can be subdivided into two different economies. On the one hand, there is the industrialized West, which has a high income per capita. However, on the other hand, there is the poorer East, which is more engaged in agricultural activity. Moreover, the East has many problems, mainly due to cultural, historical, political and religious issues between different ethnic minorities and general economic issues (Elveren & Galbraith, 2009). Consequently, this means that many people are not content with their current situation in the East and thus migrate into more civilized areas. Further, as a consequence of this, the inequality in the urban areas rises. The reason behind this, is that the migrants often do not have a high human capital, which leads them to still live in a miserable situation.
Table 1: Distribution of annual total household income: income shares of quintiles and Gini coefficient, 1963-2003 (Duygan & Güner, 2006)

5. Wage distribution in Turkey
As it can be derived from table one (Duygan et al., 2006), there is a high inequality in the income from labor. The Gini coefficient is considerably high, ranging from 0.56 to 0.42 between the years of 1968 and 2003. However, there is also a sign of change, as the coefficient is declining almost steadily. Nonetheless, this sign should also be regarded with a certain degree of doubt, as the values are not given annually. Therefore, there might be major fluctuations in between the years, which are not listed. This would diminish the sign of change. However, there are also authors, such as Yıldırım and Öcal (2006), who argue that this change is indeed happening. Their main argument contains the fact, that there is simply not enough data to judge whether inequality is rising or whether it is not. However, Yıldırım and Öcal (2006) also claim that it is very hard to attain such data for a developing country, such as Turkey.

Furthermore, Elveren et al. (2009) suggest that “that the income inequality is significantly higher in urban areas”. The reason behind this suggestion is the addressed migration of less skilled people into the urban areas with high hopes. Therefore, in the urban areas the economic inequality is created between certain groups. However, the individuals in the rural areas also contribute to the total economic inequality. Nonetheless, their contribution is different, as many individuals have a similar total income. Silber and Özmucur (2000), claim that the main difference in rural areas is due to income of primary jobs, for example agriculture. Therefore, individuals living in rural areas mainly contribute to the total economic inequality by disparities within groups.

6. Main causes of inequality

6.1 Return on capital and increase of economic input
One general cause of economic inequality is about the equation r>g, which is suggested by Piketty (2014) to be the main cause of economic inequality. In this instance, Piketty (2014) defines r as the average annual rate of return on capital and g as the annual increase of economic output. As a consequence, inherited wealth creates a higher growth than output and income. Moreover, because this holds true, inherited wealth will always exceed the wage income. Therefore, as long as no third party intervenes this process through measurements, economic inequality will only grow and grow.

6.2 Relationships between people and social mobility
Another important main cause, which can also be examined in Turkey, is the relationship between males and females. As Duygan et al. (2006) demonstrate, people with a higher education are more likely to get into a relationship with people with a higher education and vice versa. This phenomenon is called “assortative mating”. Assortative mating only enhances the disparity between families in terms of education and consequently in term of wage inequality and total income inequality. The reason for this, is that individuals who are from more educated families, regularly also have a higher human capital and thus have a higher income of labor. In contrast to this, individuals from less educated families normally have a lower human capital and thus have a lower income. As a consequence, the social mobility, meaning the ability to change an individual´s social status, is very limited. This causes the economic inequality to further expand. This expansion has multiple effects onto the Turkish society.

7. Effects on Turkish population

Figure 1: School enrollment, secondary (% gross) (World bank, 2014)

7.1 Education, child labor and social mobility
One of the largest impacts of economic inequality on the Turkish population is the access to education. The Turkish education system requires parents to hire private tutors or send their children to private tutor centers in addition to the regular school. These are very costly. Consequently, not many families can afford to send their children to these private tutoring sessions (Aysit, 2006). Therefore, families with a higher total income are able to afford better and more tutoring than the others. This results, in most cases, in better access to higher level education. As a consequence, children coming from the top quartile, have greater prospects of landing a job with a higher salary.

Another consequence of economic inequality is the low secondary school enrollment in Turkey. This is illustrated in figure one (World bank, 2014). Turkey has a low gross secondary school enrollment in comparison to the Netherlands and other developing countries, located in Europe and Central Asia. In many cases the children, who are not enrolled in secondary school, often have to work to support the family. In urban areas, they do so by working, for example as street vendors, apprentices (Dayioğlu, 2006). Furthermore, the State Institute of Statistics (2001), demonstrates that around 10.2 per cent among the 6 to 17 year old children were involved in child labor in 2001. Consequently, these children, normally, are unable to pursue a good academic career. Therefore, they often end up continuing their job, which they are working in during their childhood. This also hurts the country itself, as highly skilled and gifted children might end up with less demanding jobs than they could handle. This effect, as long as any external party does not regulate it, causes the economic inequality to grow. Therefore, it is a vicious cycle, which only enhances the disparity. However, there might be certain possible solutions to these negative effects of economic inequality.

8. Possible solutions
The first solution addresses the main cause of economic inequality, the inequality equation r>g. In order to solve this problem, a third party has to take action as stated beforehand. One of the most optimal measurements against it would be a high taxation on return on capital. This way the annual rate of return on capital could be decreased to levels, where either the equation r=g or the equation r<g holds true. Consequently, the main cause of economic inequality would either stagnate or even decrease.

Another possible solution to the problems faced in the inequality in education might be subsidies by the government for private tutoring and private universities. Although there are some programs, which are intended to support students coming from eastern Anatolia, and who study at private universities. However, these programs often lack in truly supporting the student financially. Therefore, subsidies or further subsidies would probably result in a more equal opportunity for everyone. Consequently, this would enhance social mobility. As a result of this, economic inequality might be lowered or at least remain static. A different approach to provide a different education system, where students learn more in the schools than in private tutoring centers. Thus, they would not have to go private tutoring sessions to have better academic outlook.

9. Conclusion
Clearly, a total income inequality exists in Turkey. It can particularly be described as inequality in-between groups for urban areas and inequality in groups for rural areas. Furthermore, this inequality has major effects on the Turkish society, such as inequality concerning education, social immobility and child labor. All these effects harm the society. However, there might also be some possible actions against inequality. These actions require the Turkish government to act and implement measurements, such as taxation of the upper quintiles and subsidies to support the education. Therefore, these external actions might diminish inequality and its negative effects.

10. Works Cited

Aghion, P., Caroli, E., & Garcia-Penalosa, C. (1999). Inequality and Economic Growth: The Perspective of the New Growth Theories. Journal of Economic Literature , 37, 1615-1660.
Altayli, F. (2014, May 14). Facia: Soma'da maden kazası. Retrieved November 28, 2014, from Habertürk: http://www.haberturk.com/gundem/haber/948040-facia-somada-maden-kazasi
Aysit, T. (2006). Demand for education in Turkey: A tobit analysis of private tutoring expenditures. Economics of education review , 25 (3), 303-313.
Dayioğlu, M. (2006). The impact of household income on child labour in urban Turkey. The Journal of Development Studies , 42 (6).
Duygan, B., & Güner, N. (2006). Income and consumption inequality in Turkey: what role does education play? In A. F. Sumru G. Altug, The Turkish Economy (pp. 63-92). Abingdon: Routledge.
The Economist. (2014, May 14). Turkey's mining disaster - The Economist. Retrieved November 28, 2014, from The Economist: http://www.economist.com/blogs/charlemagne/2014/05/turkeys-mining-disaster
Elveren, A., & Galbraith, J. (2009). Pay Inequality in Turkey in the Neo-Liberal Era, 1980-2001. The European Journal of Comparative Economics , 6 (2), 177-206.
Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press.
Silber, J., & Özmucur, S. (2000). Decomposition of Income Inequality: Evidence from Turkey. Topics in Middle Eastern and North African Economics, Electronic Journal , 2.
State Institute of Statistics (SIS). (2001). Türkiye’de Çalışan Çocuklar (Child labour in Turkey). Ankara.
Yıldırım, J., & Öcal, N. (2006). Income Inequality and Economic Convergence in Turkey. Transition Studies Review , 559-568.

11. Figures

Figure 1. School enrollment, secondary (% gross). (2014) From: World Bank (2014), http://data.worldbank.org/indicator/SE.SEC.ENRR/countries/TR-7E-NL?display=graph

12. Tables

Table 1. Distribution of annual total household income: income shares of quintiles and Gini coefficient, 1963-2003. (2006) From: The Turkish Economy (p. 65), by Duygan et al., 2006, Abingdon: Routledge.

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[ 1 ]. Note: can exceed 100% due to the inclusion of over-aged and under-aged students because of early or late school entrance and grade repetition