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The Formal/Informal Employment Earnings Gap: Evidence from Turkey

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  • Aysit Tansel

    () (Middle East Technical University)

  • Elif Oznur Kan

    () (Cankaya Universityy)

Abstract

In this study, we examine the formal/informal sector earnings differentials in the Turkish labor market using detailed econometric ethodologies and a novel panel data set drawn from the 2006-2009 Income and Living Conditions Survey (SILC). In particular, we test if there is evidence of traditional segmented labor markets theory which postulates that informal workers are typically subject to lower remuneration than similar workers in the formal sector. Estimation of standard Mincer earnings equations at the mean using OLS on a pooled sample of workers confirms the existence of an informal penalty, but also shows that almost half of this penalty can be explained by observable variables. Along wage/self-employment divide, our results are in line with the traditional theory that formal-salaried workers are paid significantly higher than their informal counterparts. Confirming the heterogeneity within informal employment, we find that self-employed are often subject to lower remuneration compared to those who are salaried. Moreover, using quantile regression estimations, we show that pay differentials are not uniform along the earnings distribution. More specifically, we find that informal penalty decreases with the earnings level, implying a heterogeneous informal sector with upper-tier jobs carrying a significant premium and lower-tier jobs being largely penalized. Finally, fixed effects estimation of the earnings gap depict that unobserved individual fixed effects when combined with controls for observable individual and employment characteristics explain the pay differentials between formal and informal employment entirely, thereby implying that formal/informal segmentation may not be a stylized fact of the Turkish labor market as previously thought.

Suggested Citation

  • Aysit Tansel & Elif Oznur Kan, 2012. "The Formal/Informal Employment Earnings Gap: Evidence from Turkey," Koç University-TUSIAD Economic Research Forum Working Papers 1210, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1210
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    Cited by:

    1. 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.
    2. 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.
    3. Huu Chi Nguyen & Christophe J. Nordman & Fran�ois 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. Tansel, Aysit & Keskin, Halil Ibrahim & Ozdemir, Zeynel Abidin, 2008. "Public versus Private Sector Wage Gap in Egypt: Evidence from Quantile Regression on Panel Data," MPRA Paper 89540, University Library of Munich, Germany.
    5. Aysit Tansel & Halil Ibrahim Keskin & Zeynel Abidin Ozdemir, 2015. "Is There an Informal Employment Wage Penalty in Egypt?," Working Papers 976, Economic Research Forum, revised Dec 2015.
    6. Adem Y. Elveren Author-Email: aelveren@fitchburgstate.edu, 2016. "The Effect of Informal Economy on Income Inequality: Evidence from Turkey," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(3), pages 293-312, June.
    7. Altay Mussurov & Dena Sholk & G. Reza Arabsheibani, 2019. "Informal employment in Kazakhstan: a blessing in disguise?," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 9(2), pages 267-284, June.
    8. Saraçoğlu, Dürdane Şirin, 2020. "Do labour market policies reduce the informal economy more effectively than enforcement and deterrence?," Journal of Policy Modeling, Elsevier, vol. 42(3), pages 679-698.
    9. Harry Anthony Patrinos & George Psacharopoulos & Aysit Tansel, 2019. "Returns to Investment in Education: The Case of Turkey," Koç University-TUSIAD Economic Research Forum Working Papers 1906, Koc University-TUSIAD Economic Research Forum.
    10. Subhasankar Chattopadhyay & Rima Mondal, 2017. "Characterisation of Economic Growth in Developing Economies with Informal Sector," Economic Papers, The Economic Society of Australia, vol. 36(1), pages 86-101, March.
    11. Oksana Nezhyvenko, 2018. "Informal Employment in Ukraine and European Union Transition Countries," Erudite Ph.D Dissertations, Erudite, number ph18-03 edited by Philippe Adair, November.
    12. Tansel, Aysit & Ozdemir, Zeynel / A., 2014. "Determinants of Transitions across Formal/Informal sectors in Egypt," MPRA Paper 61183, University Library of Munich, Germany.
    13. 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.
    14. 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.
    15. Harry Anthony Patrinos & George Psacharopoulos & Aysit Tansel, 2019. "GLOBALISATION AND GOVERNANCE: Returns to Investment in Education: The Case of Turkey," ERC Working Papers 1903, ERC - Economic Research Center, Middle East Technical University, revised Mar 2019.
    16. Duman, Anil, 2020. "Pay Gaps and Mobility for Lower and Upper Tier Informal Sector Employees: an investigation of the Turkish labor market," GLO Discussion Paper Series 655, Global Labor Organization (GLO).
    17. Ceyhun Elgin & Muhammed Burak Sezgin, 2017. "Sectoral Estimates of Informality: A New Method and Application for the Turkish Economy," The Developing Economies, Institute of Developing Economies, vol. 55(4), pages 261-289, December.
    18. Vega Núñez, Adriana Patricia, 2017. "Analysis of formal-informal transitions in the Ecuadorian labour market," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    19. Tansel, Aysit & Keskin, Halil Ibrahim & Ozdemir, Zeynel Abidin, 2008. "Public versus Private Sector Wage Gap in Egypt: Evidence from Quantile Regression on Panel Data," MPRA Paper 89540, University Library of Munich, Germany.
    20. 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.

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    More about this item

    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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