Formal Versus Informal Sector Choice of Wage Earners and their Wages in Turkey

This study considers those wage earners who are covered by a social security program as part of the formal sector and those wage earners who are not covered by any social security program as part of the informal sector. Using 1994 Household Expenditure Survey I first examine how individuals are selected into nonparticipation and employment in the covered, uncovered and other sectors. Then, I estimate the selectivity corrected wage equations to examine wage determination in these sectors. These analyses are carried out for men and women separately. The results indicate that wage earners with more education are more likely to have social security coverage while those with less education are more likely to be uncovered. Further, when controlled for the observed characteristics and sample selection, for men, covered sector wages are at least twice as higher than uncovered sector wages at all levels of experience and education. This is true with some caveat for women also. This large differential in wages can be taken as an indication of labor market segmentation between the covered and uncovered wage earners.