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.
This paper is based on Elif Oznur Acar’s PhD thesis prepared under the supervision of Aysit Tansel at the Department of Economics, Middle East Technical University. Ms. Acar would like to thank Hakan Ercan and Ozan Acar for helpful comments on her PhD thesis. Thanks are also due to Murat Karakas, Responsible of Labour Force and Living Conditions Group at the Turkish Statistical Institute for his kind help in implementing this study. This paper was presented at the 11th EUDN PhD Workshop on Development Economics organized jointly by European Development Research Network and Toulouse School of Economics in Toulouse, on October 2012. We thank the participants of this workshop for their comments. Any errors are our own.
Tansel, A. and Acar, E. (2016), "The Formal/Informal Employment Earnings Gap: Evidence from Turkey", Inequality after the 20th Century: Papers from the Sixth ECINEQ Meeting (Research on Economic Inequality, Vol. 24), Emerald Group Publishing Limited, pp. 121-154. https://doi.org/10.1108/S1049-258520160000024006Download as .RIS
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