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

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  • Yusuf Soner Baskaya

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  • 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

Suggested Citation

  • Yusuf Soner Baskaya & Timur Hulagu, 2011. "Informal-Formal Worker Wage Gap in Turkey: Evidence From A Semi-Parametric Approach," ERSA conference papers ersa11p409, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa11p409
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    Cited by:

    1. 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.
    2. Badi H. Baltagi & Yusuf Soner Baskaya & Timur Hulagu, 2013. "How different are the wage curves for formal and informal workers? Evidence from Turkey," Papers in Regional Science, Wiley Blackwell, pages 271-283.
    3. Dasgupta, Sukti. & Bhula-or, Ruttiya. & Fakthong, Tiraphap., 2015. "Earnings differentials between formal and informal employment in Thailand," ILO Working Papers 994896403402676, International Labour Organization.
    4. Hanan Nazier & Racha Ramadan, 2015. "Informality and Poverty: A Causality Dilemma with Application to Egypt," Advances in Management and Applied Economics, SCIENPRESS Ltd, pages 1-4.
    5. Nancy Daza & Luis Fernando Gamboa, 2013. "Informal-formal wage gaps in Colombia," Working Papers 301, ECINEQ, Society for the Study of Economic Inequality.
    6. repec:tcb:cebare:v:17:y:2017:i:1:p:11-17 is not listed on IDEAS
    7. Orhan Erem Atesagaoglu & Ceyhun Elgin & Oguz Oztunali, 2017. "TFP growth in Turkey revisited: The effect of informal sector," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 17(1), pages 11-17.

    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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