The Formal/Informal Employment Earnings Gap: Evidence from Turkey

Abstract

In this study, we examine the formal/informal sector earnings differentials in the Turkish labor market using detailed econometric methodologies 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.

Sectoral Estimates of Informality: A New Method and Application for the Turkish Economy

“…Tansel (, ), Savasan and Schneider (), Taymaz (), Tansel and Kan (, ), Acar and Tansel (), and Balkan and Tümen () are among the examples.…”

Determinants of Transitions Across Formal/Informal Sectors in Egypt

“…The results indicate the static nature of the labor market in Turkey except for the transitions from unemployment. Tansel and Kan (2012b) addressed the formal/informal wage gap in the Turkish labor market. Finally, Kan and Tansel (2012c) studied the definition and the measurement of the informal sector in Turkey and found that lack of social security coverage is the most appropriate way to define informality.…”

Les écarts salariaux dans une profession à prédominance féminine: le travail domestique informel et flexible au Portugal

“…Rares sont pourtant les études qui ont exploré les dimensions multiples des divers arrangements contractuels observés dans les faits. Tansel et Kan (2012) ont étudié les écarts salariaux selon que l'emploi est formel ou informel et salarié ou indépendant, tandis que Mocan et Tekin (2003) se sont concentrés sur les différences entre plein temps et temps partiel et entre secteur à but lucratif et secteur à but non lucratif. Ces approches n'ont pas encore été appliquées aux écarts salariaux dans le travail domestique, qui se caractérise par une forte fréquence des emplois informels et flexibles.…”