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Informal-Formal Worker Wage Gap in Turkey: Evidence From A Semi-Parametric Approach

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  • Yusuf Soner Baskaya

    ()

  • Timur Hulagu

Abstract

Using individual level data from Turkstat Household Labor Force Survey for 2005-2009 period and a variety of parametric and semi-parametric techniques, we test two hypothesis regarding formal and informal labor markets: whether there is a wage gap between formal and informal workers and whether this gap is sensitive to variations in unemployment rates across regions and over time, where the formality of employment is defined with respect to registry status of the individuals to compulsory Social Security System. In line with most studies, the formal workers earn more than informal workers, as suggested by standard wage regressions, conditional on workers' observed individual characteristics. On the other hand, considering the limitations of parametric methods and possibility of misleading results due to the different distributional characteristics of formal and informal workers, we alternatively implement propensity score matching. In contrast with the recent studies for other developing countries showing that the wage gap estimates with propensity score matching is insignificant, we do find large and sizable wage gaps between formal and informal workers in Turkey. While parametric methods give similar estimates for formal-informal wage gap within gender groups, the semi-parametric estimates suggest that the observed formal-informal wage gap is larger among females compared to males. Finally, we show that although the parametric methods, such as wage curve regressions, suggest that wages of informal workers decreases and wages of formal workers do not change with higher unemployment rates, the semi-parametric methods show that these gaps are insensitive to unemployment rate variations across regions or over time. Keywords: Formal/Informal Employment, Wage Gap, Propensity Score Matching, Regional Labor Markets. JEL classification: C14; J30; J42; J60; O17

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa11p409.

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Date of creation: Sep 2011
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Handle: RePEc:wiw:wiwrsa:ersa11p409

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  1. Badi H. Baltagi & Yusuf Soner Baskaya & Timur Hulagu, 2011. "The Turkish Wage Curve : Evidence from the Household Labor Force Survey (Türkiye’de Ücret Egrisi: Hanehalki Isgücü Anketi’nden Bulgular)," Working Papers 1106, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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  5. Caliendo, Marco & Kopeinig, Sabine, 2005. "Some Practical Guidance for the Implementation of Propensity Score Matching," IZA Discussion Papers 1588, Institute for the Study of Labor (IZA).
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  10. Aysit Tansel, 1999. "Formal Versus Informal Sector Choice of Wage Earners and their Wages in Turkey," Working Papers 9927, Economic Research Forum, revised Sep 1999.
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Cited by:
  1. Baltagi, Badi H. & Baskaya, Yusuf Soner & Hulagu, Timur, 2012. "How Different Are the Wage Curves for Formal and Informal Workers? Evidence from Turkey," IZA Discussion Papers 6836, Institute for the Study of Labor (IZA).
  2. Tansel, Aysit & Kan, Elif Oznur, 2012. "The formal/informal employment earnings gap: evidence from Turkey," MPRA Paper 38498, University Library of Munich, Germany.

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