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Estimating The Size of Turkey’s Informal Sector: An Expenditure Based Approach

  • Nurhan Davutyan


    (Dept. of Economics & Dept. of Industrial Engineering, Marmara University)

How extensive is the Turkish unofficial economy? An accurate answer to this question has considerable practical significance for various aspects of economic policy – particularly employment, fiscal and migration policies. Estimates based on macroeconomic data tend to be too imprecise. We utilize the most up to date household income and expenditure surveys to examine the extent of income underreporting among members of Turkey’s unofficial economy. The Pissarides-Weber (1989) approach that we use, hypothesizes that survey data would reflect income underreporting in the informal sector as “excess food consumption.” Since it relies on “marginal propensity to consume food”, this method allows comparisons across time and space, via Engel’s Law. Our results suggest that informal sector members spend more than their formal sector counterparts with the same level of reported income. Based on this information, we estimate the average size of the true informal sector income to be about 1.25 times the reported one. This implies the Turkish disposable income is (25%)*(83%) or about 21% larger than the official estimate based on reported magnitudes.

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Paper provided by Economic Research Forum in its series Working Papers with number 403.

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Length: 19 pages
Date of creation: May 2008
Date of revision: May 2008
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:403
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