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The Formal/Informal Employment Earnings Gap: Evidence from Turkey

In: Inequality after the 20th Century: Papers from the Sixth ECINEQ Meeting

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  • Aysit Tansel
  • Elif Oznur Acar

Abstract

Abstract This study investigates the formal/informal employment earnings gap in Turkey. We focus on the earnings differentials that can be explained by observable characteristics and unobservable time-invariant individual heterogeneity. We first, estimate the standard Mincer earnings equations using ordinary least squares (OLS), controlling for individual, household, and job characteristics. Next we use, panel data and the quantile regression (QR) techniques in order to account for unobserved factors which might affect the earnings and the intrinsic heterogeneity within formal and informal sectors. OLS results confirm the existence of an informal sector penalty almost half of which is explained by observable variables. We find that formal-salaried workers are paid significantly higher than their informal counterparts and of the self-employed confirming the heterogeneity within the informal employment. QR results show that pay differentials are not uniform along the earnings distribution. In contrast to the mainstream literature which views informal self-employment as the upper-tier and wage-employment as the lower-tier, we find that self-employment corresponds to the lower-tier in the Turkish labor market. Finally, fixed effects estimation indicates that unobserved individual characteristics combined with controls for observable characteristics explain the pay differentials between formal and informal employment entirely in the total and the female sample. However, informal sector penalty persists in the male sample.

Suggested Citation

  • Aysit Tansel & Elif Oznur Acar, 2016. "The Formal/Informal Employment Earnings Gap: Evidence from Turkey," Research on Economic Inequality,in: Inequality after the 20th Century: Papers from the Sixth ECINEQ Meeting, volume 24, pages 121-154 Emerald Publishing Ltd.
  • Handle: RePEc:eme:reinzz:s1049-258520160000024006
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    Citations

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    Cited by:

    1. Petr Huber & Ulugbek Rahimov, 2014. "Formal and Informal Sector Wage Differences in Transition Economies: Evidence from Tajikistan," MENDELU Working Papers in Business and Economics 2014-48, Mendel University in Brno, Faculty of Business and Economics.
    2. Antonio Di Paolo & Aysit Tansel, 2015. "Returns to Foreign Language Skills in a Developing Country: The Case of Turkey," Journal of Development Studies, Taylor & Francis Journals, vol. 51(4), pages 407-421, April.
    3. Huu Chi Nguyen & Christophe J. Nordman & François Roubaud, 2013. "Who Suffers the Penalty?: A Panel Data Analysis of Earnings Gaps in Vietnam," Journal of Development Studies, Taylor & Francis Journals, vol. 49(12), pages 1694-1710, December.
    4. Aysit Tansel & Halil Ibrahim Keskin & Zeynel Abidin Ozdemir, 2015. "Is There An Infırmal Employment Wage Penalty in Egypt?," ERC Working Papers 1508, ERC - Economic Research Center, Middle East Technical University, revised Sep 2015.
    5. repec:voj:journl:v:63:y:2016:i:3:p:293-312 is not listed on IDEAS
    6. Gizem Akar & Binnur Balkan & Semih Tümen, 2013. "Overview of Firm-Size and Gender Pay Gaps in Turkey: The Role of Informal Employment," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(3), pages 1-21, September.
    7. repec:ecr:col070:43454 is not listed on IDEAS
    8. repec:bla:econpa:v:36:y:2017:i:1:p:86-101 is not listed on IDEAS
    9. Tansel, Aysit & Ozdemir, Zeynel / A., 2014. "Determinants of Transitions across Formal/Informal sectors in Egypt," MPRA Paper 61183, University Library of Munich, Germany.
    10. Ceyhun Elgin & Burak Sezgin, 2017. "Sectoral Estimates of Informality: A New Method and An Application to Turkish Economy," Working Papers 2017/02, Bogazici University, Department of Economics.
    11. Tansel, Aysit & Ozdemir, Zeynel / A., 2014. "Determinants of Transitions across Formal/Informal sectors in Egypt," MPRA Paper 61183, University Library of Munich, Germany.

    More about this item

    Keywords

    Earnings gap; formal/informal employment; labor market dynamics; panel data; Turkey; J21; J31; J40; O17;

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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