Unemployment & Public Finance

Assoc.Dr. Yesim HELHEL

 Unemployment definition
• Unemployment, according to the OECD
 (Organisation for Economic Co-operation and
Development), is persons above a specified age
(usually 15) not being in paid employment or 
self-employment but currently available for work
during the reference period.
• Unemployed persons have the working power
and want to work, but cannot find a job under
valid wages and working conditions.
• The international standard definition of
unemployment is based on three criteria:
• - Not having a job,
• - Ready to go to work
• - Job seeking
• To be considered unemployed, a person must meet
all three of these criteria simultaneously.
• Unemployment is measured by the unemployment
rate, which is the number of people who are
unemployed as a percentage of the labour force
 (the total number of people employed added to
those unemployed).[4]
• According to the definition made by ISKUR; Among
those waiting for a job (registered workforce) in
the institution records, those who want to work
only in a certain workplace and declare that they
will not accept the job opportunities that can be
provided in other workplaces, those who want to
switch to more suitable jobs while there is a job,
and retirees are eliminated at the end of the
month and the rest are considered unemployed.
• Let’s calculate unemployment rate with an example; Turkey's
population is 83 mio in 2019, the number aged 15 plus above 15
is 60.6 mio. The total workforce is 32.372 thousand people, which
is 28.105 thousand people working in a job, that is, the number
of unemployed people who have tried to find a job in the last 4
weeks and are in a position to start work within 15 days is 4.267
thousand.
• Unemployment Rate Equation = # of unemployed seeking to find
a job in the last 4 weeks and able to start work within 15 days /
total workforce
• Unemployment Rate 2019 = 4.267 / 32.372 = 13,2%
• Accordingly, the unemployment rate is 13,2% in Turkey at the end
of 2019
• The most important deficiency of this system is that a person
who has applied within the last four weeks is only accepted as
unemployed.
• Although people in developed countries constantly
renew their applications, this renewal is not done
frequently in developing countries. For this reason,
it is widely believed that the number of unemployed
seems to be low in developing countries.
• If the number of unemployed in non-agricultural
areas is proportioned to non-agricultural labor force,
then non-agricultural unemployment rate is
calculated. Non-agricultural unemployment rate is
important in terms of showing how much
employment and unemployment the economy
created in the industrialization process ( 15.8% in
2019)
• The purpose of the seasonally adjusted
unemployment indicator is to examine the
developments by adjusting the effects of seasonal
employment. Sept 2020 unemployment
(seasonally adjusted 12,7%)
• Unemployment—both voluntary and involuntary—can
be broken down many types.
1. Voluntary unemployment
2. Involuntary unemloyment
3. Frictional unemployment
4. Structural unemployment
5. Hidden unemployment
6. Cyclical unemployment
• Voluntary unemployment is attributed to the
individual's decisions, but involuntary
unemployment exists because of the socio-
economic environment (including the market
structure, government intervention, and the level
of aggregate demand) in which individuals
operate.
• Voluntary unemployment includes workers who
reject low-wage jobs, but involuntary
unemployment includes workers fired because of
an economic crisis, industrial decline, company
bankruptcy, or organizational restructuring.
• Frictional unemployment is partially voluntary
and partially involuntary. It is for temporary
reasons such as work and location changes and
does not affect the entire economy. The labor
market is not well organized, the lack of
knowledge in the labor market, the lack of
mobility of the labor force, the inability to provide
production inputs on time, new participation in
the working population, and those who quit their
jobs in the hope of finding a job under better
conditions. It is a type of unemployment that can
occur even in economies with the highest rate of
employment.
• Frictional unemployment is the time period between
jobs in which a worker searches for or transitions from
one job to another. It is sometimes called search
unemployment New entrants (such as graduating
students) can also suffer a spell of frictional
unemployment.
• Structural unemployment is a form of 
involuntary unemployment caused by a mismatch
between the skills that workers in the economy can
offer, and the skills demanded of workers by
employers (also known as the skills gap). Structural
unemployment is often brought about by 
technological changes that make the job skills of many
workers obsolete.
• Structural unemployment is hard to separate
empirically from frictional unemployment except that it
lasts longer. As with frictional unemployment, simple
demand-side stimulus will not work to abolish this type
of unemployment easily.
• If there is no change in the total amount of production
with the withdrawal of a portion of labor from
economic activity, there is hidden unemployment here.
If the amount of production does not decrease even
though we lay off some of the employees in an
enterprise, it means that there is not unemployment,
on the contrary, there is an over employment. This type
of unemployment is most common in the agricultural
sector.
• Cyclical unemployment occurs when there is not enough 
aggregate demand in the economy to provide jobs for
everyone who wants to work. Demand for most goods
and services falls, less production is needed and
consequently, fewer workers are needed, and
unemployment results. Its name is derived from the
frequent ups and downs in the business cycle, but
unemployment can also be persistent
• With cyclical unemployment, the number of unemployed
workers exceeds the number of job vacancies and so
even if all open jobs were filled, some workers still
remain unemployed. For example, a surprise decrease in
the money supply may suddenly decreases aggregate
demand and thus inhibit labor demand.
 Public Finance
• Maliye is a word that comes from Arabic. Finans is a
French vocabulary. So, we use “public finance”
instad of “maliye”.
• Public finance refers to the rules and policies that
regulate the incomes, expenditures and public
borrowing required for the conduct of business in
the public sector.
• Private finance; It is meant the efforts that include
all the applications to be made in terms of
individuals, companies and families taking into
account the risk of cash flows (savings or deficit)
arising between the income and expenses
• Public and private sectors operate differently from
each other. The main difference is income. The
public sector collects taxes from the society for
public services finance each year. These are
collected without recompense. On the other hand,
the private sector has no such an income without
recompense. The public sector makes infrastructure
investments such as roads, dams, tunnels, airports,
ports, railways, bridges, etc. and offers them to the
benefit of the society. The private sector does not
have such an obligation. The private sector grows
and increases its profitability by using the
investments made by the public sector.
• There is no profit purpose except for the
economic enterprises of the public sector. For
example, education in state universities is not
operated for profit. As a result; While the social
purpose of the public sector is the dominant, the
increasing profitability is the dominant goal in
private sector. The most important table of the
public sector is the BUDGET, the most important
financial statements of the private sector are the
BALANCE SHEET and INCOME STATEMENTS.
 Balance of Budget & Primary Surplus
• A budget is an estimation chart showing the
revenues to be obtained for a certain period and
the expenses planned to be made. The difference
of the public budget from the budgets made by
private sector is tax. Tax is a compulsory
contribution imposed by the public authority
irrespective of the exact amount of service to the
tax payer in return and not imposed as a penalty
for any legal offence. Another difference of the
public sector budget from private budgets is that it
is a law. Budget law is a one-year and empowers
government to operate.
• budget equation can be written as follows:
• Budget Balance = Budget Revenues (tax revenues
+ other income) - Budget expenses (non-interest
expenses + interest expenses)
• Non-interest expenses can also be listed as
personnel expenses, investment expenses, other
current expenses.
• There are three situations about balance of budget:
• It is called ‘balanced budget’ if budget income is equal to
budget expense
• It is called ‘budget surplus’ if budget income is greater than
budget expense
• It is called ‘budget deficit’ if budget income is less than
budget expense
• Borrowing amount is not written as income or expense in
the budget, they are recorded in a separate debt account.
On the other hand, since interest expenses paid for debts
are paid from the budget income, it is written in the budget.
The primary  balance is the government
fiscal balance excluding interest payments.It is formulated
as follows:
• Primary balance = Budget revenues - non-interest expenses
• One of three situations arises in the primary
balance:
• If budget revenues = non-interest expenses, there
is a primary balance.
• If budget revenues> non-interest expenses, there
is a primary surplus.
• If budget revenues <non-interest expenditures,
there is a primary deficit.
• In case of primary surplus, public revenues cover
public expenditures excluded interest expense
and a certain amount of surplus is available. In
other words, state has surplus.
• As it can be understood, the primary balance is
not related to interest by its essential nature, on
the contrary, it refers to the discipline to be
applied in budget income and expenditure items
other than interest expense.
• Primary surplus policies that reduce growth
should not be chosen. Chronic budget deficits
bring along an increase in debt and interest
burden. Primary balance is also an important
instruments in managing the debt sustainability.
 Public Debt
• There are three ways to close the budget deficit in
the public sector:
• 1. to increase revenues
• 2. to reduce expenses
• 3.Barrowing
• Public debt means that the total amount of
domestic and foreign debts except for publicly
owned corporations in a country. The public debt
burden means the ratio of the total public debt to
the GDP in the term.
• In general, only the principal amount of debts are
included in the debt burden. In other words,
interests are not included in the debt burden. The
main reason of this is that borrowing expense is
recorded as interests expense in the budget.
 Government Domestic Debt Securities (DIBS)

• Government Domestic Debt Securities (DIBS) refer to

debt securities issued by Treasury in the domestic
market. The debtor state pays the interest amount
owed to GDBS holders on the coupon payment dates
and principal+interest amount at the maturity. DIBS
can be bought and sold by individuals and institutions
in secondary markets throughout their term.
• GDDSs can be classified according to their maturity,
issuing methods, the currency in which they are
issued, the types of interest payment, whether they
carry coupons or not.
• The most widely used classification is made
according to maturity.
• Government Bonds longer than maturity of 1 year
• Treasury Bills maturity of less than 1 year
• Public debt is divided into two according to its
sources:
• Domestic Debt: The public borrowing from the
domestic market is called domestic debt. Since this
borrowing is mainly made by the Treasury,
sometimes the term Treasury domestic borrowing is
used synonymously.
• Domestic debt in TL or foreign currency
indexed or in foreign currency does not
change the nature of the borrowing and all of
them is considered as domestic debt. Here, it
does not matter who holds security. So if a
foreign investor brings his currency, and
converts into TL, then purchases Treasury Bills
issued in Turkey, it is qualified as a public
domestic debt. The distinguishing factor in
whether the debt is domestic or external is
the market in which the borrowing authority
issued securities.
• It is important which currency is used in borrowing. If
the borrowing is made in foreign currency , This debt
will either be paid in foreign currency or paid in TL by
converting on the date of payment. In both cases, the
risk of depreciation of the TL (loss on exchange) is taken.
• External(foreign) Debt:
• The public borrowing from external markets is called
external debt.Treasury has a significant weight in this
borrowing.
• This borrowing can be done in four ways: (1) Through
credit usage(loan), (2) By issuing bonds, (3) Borrowing
from governments, (4) Borrowing from international
institutions.
• 1) Through credit usage(loan): The public
institution receives a loan with a certain maturity
to finance a project or an investment by applying
to foreign banks in return for interest. This loan
can be given by a bank or with the participation of
several banks depending on the size of the
amount. If more than one bank participates, it is
called “syndication” and this joint loan is called
“syndication loan”. Turkish Treasury used to take
such loans in the past.
• 2) By issuing bonds: Treasury issues bills/bonds
to foreign markets and borrows in return. These
bonds can be in foreign currency or in TL. The
distinguishing feature of foreign debt is not the
currency written on it or who bought it, the
market in which it was issued is the distinguishing
factor.
• 3)Borrowing from other governments: External
debt is provided by the Treasury on behalf of the
Republic of Turkey. Here, Republic of Turkey can
get a loan for a project or any program from the
other countries.
• This method, which is not used much nowadays,
was used widely in the past. There was a
consortium established in the OECD, which lent for
Turkey and Turkey's stability program.
• 4) Borrowing from international institutions: It
refers to the borrowings made from multinational
institutions such as IMF, World Bank, investment &
development banks. These are loans taken either
to support a program or to realize certain public
projects.
• Borrowing from the IMF is the most difficult to
evaluate as a debt. Because the aim here is not to
borrow money, but to get financial support to provide
a certain state of stability. In this context, the
resources provided by the IMF are given names such
as support, facility and convenience rather than credit
or debt, while the price accrued for these uses is
called charge instead of interest.
• The World Bank can give loans to governments for a
specific transformation program, as well as give loans
to public institutions and organizations for projects
they will implement. Investment and development
banks are also mostly lending institutions for projects.
 Public Debt Burden

• The ratio of public sector debt stock (internal

debt + external debt) to GDP shows us the public
debt burden. Today, the ratio of the government
nominal debt stock to GDP defined by EU is used
for this purpose.
 2013 2014 2015 2016 2017 2018 2019

Growth 8,5 5,2 6,1 3,2 7,4 2,6 0,9

USD/TL 1,90 2,19 2,74 3,02 3,66 4,76 5,68

Inflation rate 7,4 8,2 8,8 8,5 11,9 20,4 11,84

Unemployment rate 9 9,9 10,3 10,9 10,9 13,5 13,7

Balance of budget/GDP % -1 -1,1 -1 -1,1 -1,5 -2 -2,2

Public debt burden/GDP % 31,4 28,8 27,6 28,3 28,3 32,2 34

 Domestic Debt Roll-over Ratios
• The domestic debt rollover ratio is the ratio of the
domestic debt paid by the treasury and the
domestic debt acquired during the relevant
period. A ratio greater than 100 percent indicates
that the treasury borrowed more than it paid.
• If the domestic debt rollover ratio is higher than
100, it means that the treasury has a budget
deficit and has been barrowing more than the
principal + interest amount to be paid at that
time.
• In the case of the domestic debt rollover ratio below
100, the interest rates decline and private sector has
more opportunity to benefit from the borrowing
market.
• If we look at the table, we can see that the domestic
debt rollover ratio remained below 100 until 2017, that
is, the Treasury borrowed less than the debt it paid to
the market, and thus left money to the market. In this
case, interest rates decline and the opportunity of
private sector to benefit from the borrowing market
increases. This situation is called crowding in effect
which means that the increase in the opportunity of
the private sector to benefit from the borrowing
market. Since 2017, the situation has reversed.
• The Treasury increased its domestic debt roll-over
ratio to over 100, meaning it borrowed more from
the market than it paid to the market. As a result
of the increase in the domestic debt rollover ratio,
the private sector was forced to borrow less and
invest less. Because the public sector has
demanded most of the loanable funds and caused
the interest to rise. The emergence of this
situation is called the crowding out effect.
Year Domestic Debt Service Principal Interest D. Debt D.Debt roll-over ratio

2010 178,1 136,2 41,9 159,0 89,3

2011 132,2 97,1 35,1 84,5 63,9

2012 124,7 84,0 40,7 81,4 65,3

2013 167,2 128,1 39,1 84,5 50,5

2014 157,1 117,8 39,3 81,5 51,9

2015 107,2 67,4 39,8 84,4 78,7

2016 100,6 63,2 37,4 90,6 90

2017 99,7 60,4 39,3 126,8 127,1

2018 122,8 73,6 49,2 134,3 109,4

2019 151,8 83,8 67,9 180,5 118,9

 MONETARY POLICIES

• Monetary policy refers to decisions taken to

influence the availability and cost of money in
order to achieve targets such as economic
growth, employment growth and price
stability.
• Monetary policy includes the tools
undertaken by a nation's central bank to
control money supply and achieve sustainable
economic growth.
• If there were only a limited amount of coins
put on the market by treasures (or mints), and
banknotes issued by central banks, the
amount of money they put into the market
would constitute the basis of monetary policy.
• Firstly, check currency (kaydi para) was created by
banks with the increase in loan demand, and then
credit cards were introduced. Both are currencies
that were not under the direct control of the
Central Bank.
• In this case, the money supply amount controlled
by central banks began to be insufficient in terms
of the effectiveness of the monetary policy.
Central Banks, unavoidably, had to use new tools
to control the credit volume of the commercial
banks.
• When it was not common for banks to create
check money, MV = PQ equation which is Fisher's
famous quantity equation was sufficient to explain
monetary relationships. In this equation, M =
money supply, i.e. the amount of money in the
market, V = circulation of money, i.e. how many
times a currency changes in hands in one year, P =
the general level of prices, Q = the physical
quantity of goods and services produced in the
economy in a year. In this equation, since PQ is
equal to GDP, we can write MV = GDP.
• Accordingly, in a place where there is only money,
the Central Bank can implement monetary policy
by controlling M, that is, the money supply in the
market. If inflationary trends are in question, it
pulls out the excess money in the market, that is,
it lowers M, so as long as Q does not change on
the second side of the equation, P, that is, prices
fall. If deflationary trends are in question, it
increases the money supply, namely M, and in
this case, since Q will not change immediately, P,
that is, prices begin to rise.
 Monetary Policy Tools
• Direct Monetary Policy Tools
• Credit Ceiling
• Interest rate regulation
• Other Direct Monetary Policy Tools
• Indirect Monetary Policy Tools
• Discount rate
• Open Market Operations
• Reserve requirement
• Interest Rate Policy
• Exchange Rate Policy
• Open Speech Policy
• Quantitative Easing
 Direct Monetary Policy Tools
• Credit(loan) Ceiling: The amount of loan that banks can
lend may be limited by central banks by means of credit
ceiling For example, if the Central Bank instructs banks
that they can extend a loan up to 80 percent of the
deposits they collect or all their resources (deposit +
equity + other resources), 80 percent here constitutes the
loan ceiling. Let's say if a bank's total deposit is 100 TL,
the ceiling of the loan it can lend is 80 TL. Instead of
putting such a rate, the amount can also be put directly.
For example, Central Banks may order banks not to
extend loans more than X billion TL each year. The credit
ceiling can also be applied to the bank. The Central Bank
may impose a loan ceiling on some banks, according to
reports from the Banking supervisory authority.
• The credit ceiling combined with reserve requirement
can be a highly restrictive measure. Let's assume that
reserve requirement ratio is determined as 10 %, and
the loan ceiling is 80 % of the deposit. In this case, it
means that the bank will be able to lend 80 % of the
remaining 90 TL, that is, 72 TL, as a loan after
depositing 10 TL as reserve in the Central Bank.
• Two-step effects can be created by the application of
this policy tool: (1)The excess demand created by
credit expansion is diminished to some extent and the
resulting inflationary pressure can be eliminated.
• (2) As the credit borrowing becomes narrower, interest
rates rise and the loan demand decreases further.
• Interest rate regulation: The Central Bank may impose
restrictions on the interest rates applied by banks for
deposits and loans. The free interest system applied today
was under control in many ways in the past. The Central
Bank may set a limit on the interest rate and impose
different interest rates for different terms. The same
supervision is applied today, especially in state banks.
• For example, Ziraat Bank lends low-interest loans to
agriculture sector. Halkbank also lends loans to traders
and SME in Turkey. The losses due to low interest rate
credit was being billed to the Treasury in the past. In 2019
and 2020, a similar application was carried out for
mortgage loans, especially to save construction
companies.
• Other direct monetary policy instruments: The
Central Bank may apply some tools to monitor
the money supply in various matters such as
increasing the minimum amount payable to
banks for credit cards, limitations to consumer
loans can be used.