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This paper, the first one to use individual-level Turkish panel data, examines the labor market transitions in Turkey along the formal/informal employment divide. The purpose of this paper is to contribute to the limited body of empirical evidence available on mobility and informality in the Turkish labor market.

Toward this end, the authors use Turkish income and Living Conditions Survey panel data for 2006, 2007, 2008 and 2009 to compute the Markov transition probabilities of individuals moving across six different labor market states: formal-salaried (FS), informal-salaried, formal self-employed, informal self-employed, unemployed and inactive. In order to examine the nature of mobility patterns in more detail, the authors then estimate six multinomial logit models individually for each transition adopting a number of individual and employment characteristics as explanatory variables.

The authors find evidence that mobility patterns are fairly similar across different time spans, the probability of remaining in initial state is higher than the probability of transition into another state for all the labor market states, except for unemployment, there is only very limited mobility into the FS state. Gender, education and sector of economic activity are observed to display significant effects on mobility patterns. The results reveal several relationships between the covariates and likelihood of variant transitions.

This study provides a comprehensive and detailed diagnosis of the Turkish labor market. The market is observed to display a rather static structure throughout the period considered. The results indicate that a well recognition of underlying dynamics may help policy makers to produce various effective tools for addressing informality.

First study to analyze labor market mobility across formal/informal sectors using newly available panel data.

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.