Tansel, Aysit and Kan, Elif Oznur (2012): The formal/informal employment earnings gap: evidence from Turkey.
Download (4MB) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||The formal/informal employment earnings gap: evidence from Turkey|
|English Title:||The Formal/Informal Employment Earnings Gap: Evidence from Turkey|
|Keywords:||Earnings gap; formal/informal employment; labor market dynamics; panel data; Turkey|
|Subjects:||J - Labor and Demographic Economics > J4 - Particular Labor Markets > J40 - General
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials
O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements
J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J21 - Labor Force and Employment, Size, and Structure
|Depositing User:||Elif Oznur Kan Acar|
|Date Deposited:||01. May 2012 18:50|
|Last Modified:||27. Sep 2015 22:25|
Abowd, J.M., F. Kramarz and D.N. Margolis (1999). “High wage workers and high wage firms”, Econometrica, 67(2), 251-333.
Amuedo-Dorantes, C. (2004). “Determinants and Poverty Implications of Informal Sector Work in Chile”, Economic Development and Cultural Change, 52(2), 347–68.
Arias, O. and M. Khamis (2008). “Comparative Advantage, Segmentation and Informal Earnings: A Marginal Treatment Effects Approach”, IZA Discussion Papers No.391.
Alzúa, M. L. (2008). “Are informal workers secondary workers? Evidence for Argentina”, CEDLAS Working Papers No.73.
Arellano, M. and S. Bond (1991). “Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations”, Review of Economic Studies, 58, 277-297
Badaoui, E., E. Strobl and F. Walsh (2008). “Is there an Informal Employment Wage Penalty? Evidence from South Africa”, Economic Development and Cultural Change, 56, 683–710.
Bargain, O. and P. Kwenda (2009). “The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data”, IZA Discussion Papers No.4286.
Bargain, O. and P. Kwenda (2010). “Is Informality Bad? Evidence from Brazil, Mexico and South Africa”, IZA Discussion Papers No.4711.
Basch, M. and R. D. Paredes-Molina (1996). “Are there dual labor markets in Chile?: empirical evidence”, Journal of Development Economics, 50, 297-312.
Baskaya, Y. S. and T. Hulagu (2011). “Informal-Formal Worker Wage Gap in Turkey : Evidence From A Semi-Parametric Approach”, Central Bank of the Republic of Turkey Working Papers No.1115.
Becker, G. S. (1964). Human capital: A theoretical and empirical analysis, with special reference to education, Columbia University Press, New York.
Bernabe, S. (2002). “Informal Employment in Countries in Transition: A conceptual framework”, CASE Papers No. 56, Centre for Analysis of Social Exclusion, LSE.
Blunch, N. H., S. Canagarajah and D. Raju (2001). “The Informal Sector Revisited: A Synthesis across Space and Time”, Social Protection Discussion Paper Series No. 0119, The World Bank.
Blundell, R. and S. Bond (1998). “Initial conditions and moment restrictions in dynamic panel data models”, Journal of Econometrics, 87, 115-143.
Carneiro, F.G. and A. Henley (2001). “Modelling formal vs. informal employment and earnings: micro-econometric evidence for Brazil”, University of Wales Aberystwyth School of Management and Business Research Paper No. 2001-16.
Canay, I. A. (2011). “A simple approach to quantile regression for panel data”, Econometrics Journal, 14(3), 368-386.
Chen, M. (2007). “Rethinking the Informal Economy: Linkages with the Formal Economy and the Formal Regulatory Environment”, Department of Economics and Social Affairs (DESA) Working Papers No. 46.
Cohen, B. and W.J. House (1996). “Labor market choices, earnings and informal networks in Khartoum, Sudan”, Economic Development and Cultural Change, 44(3), 589-618.
Cunningham, W. and W. F. Maloney (2001). “Heterogeneity among Mexico’s Microenterprises: An Application of Factor and Cluster Analysis”, Economic Development and Cultural Change, 50, 131–156.
Falco, P., A. Kerr, N. Rankin and J. Sandefur and F. Teal (2011). “The returns to formality and informality in urban Africa”, Labour Economics, 18(1), S23-S31.
Fields, G. S. (1975). “Rural-Urban Migration, Urban Unemployment and Underemployment, and Job-Search Activity in LDC’s”, Journal of Development Economics, 2, 165–187.
Fields, G. S. (1990). “Labour market modelling and the urban informal sector: theory and evidence” in D. Thurnham, B. Salomé and A. Schwarz (Eds), The Informal Sector Revisited, OECD, Paris.
Fields, G. S. (2005). “A guide to multisector labor market models”, Social Protection Discussion Paper Series No. 0505, The World Bank.
Gindling, T. (1991). “Labor market segmentation and the determination of wages in the public, private-formal and informal sectors in San-Jose, Costa-Rica”, Economic Development and Cultural Change, 39(3), 585–603.
Gong, X. and A. van Soest (2002). “Wage differentials and mobility in the urban labour market: a panel data analysis for Mexico”, Labour Economics, 9(4), 513-529.
Günther, I. and A. Launov (2006). “Competitive and Segmented Informal Labor Markets”, IZA Discussion Papers No. 2349.
Günther, I. and A. Launov (2012). “Informal employment in developing countries: opportunity or last resort?”, Journal of Development Economics, 97, 88–98.
Heckman, J. J. (1981). “Statistical models for discrete panel data”, in C. Manski and D. McFadden (Eds.), Structural Analysis of Discrete Data with Econometric Applications, 114-178, MIT Press, Cambridge.
Heckman, J. J. and V. J. Hotz (1986). “An Investigation of the Labor Market Earnings of Panamanian Males: Evaluating the Sources of Inequality”, Journal of Human Resources, 21, 507–542.
Heckman, J. J., S. Urzua and E. J. Vytlacil (2006). “Understanding instrumental variables in models with essential heterogeneity”, Review of Economics and Statistics, 88, 389-432.
Henley, A., G.R. Arabsheibani and F.G. Carneiro (2009). “On defining and measuring the informal sector: Evidence from Brazil”, World Development, 37(5), 992-1003.
Hussmanns, R. (2005), “Measuring the Informal Economy: From Employment in the Informal Sector to Informal Employment”, Policy Integration Department Working Paper No. 53, ILO.
Koenker, R. (2004). “Quantile Regression for Longitudinal Data”, Journal of Multivariate Analysis, 91, 74-89.
Koenker, R. and G. Bassett (1978). “Regression Quantiles”, Econometrica, 46(1), 33–50.
Lee, L. F. (1978). “Unionism and wage rates: a simultaneous equation model with qualitative and limited dependent variables”, International Economic Review, 19, 415-433.
Magnac, T. (1991). “Segmented or Competitive Labor Markets”, Econometrica, 59, 165-187.
Maloney, W. (1999). “Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico”, World Bank Economic Review, 13, 275–302.
Marcouiller, D., V. R. de Castilla and C. Woodruff (1997). “Formal Measures of the Informal-Sector Wage Gap in Mexico, El Salvador and Peru”, Economic Development and Cultural Change, 45, 367–392.
Mazumdar, D. (1976). “The urban informal sector”, World Development, 4, 655-679.
Mazumdar, D. (1981). The urban labor market income distribution: A study of Malaysia, Oxford University Press, Oxford.
Mincer, J. (1958), “Investment in Human Capital and Personal Income Distribution,” Journal of Political Economy, 66, 197-201.
Mincer, J. (1962), “On-the-Job Training: Costs, Returns, and Some Implications,” Journal of Political Economy, 70, 50-79.
Mincer, J. (1974). Schooling, Experience and Earnings, Columbia University Press, New York.
Nguyen, H. C., C. J. Nordman and F. Roubaud (2011), “Who Suffers the Penalty? A Panel Data Analysis of Earnings Gaps in Vietnam”, Mimeo, DIAL, Paris.
Perry, G., W. Maloney, O. Arias, P. Fajnzylber, A. Mason and J. Saavedra-Chanduvi (2007). Informality: Exit and Exclusion, The World Bank.
Pradhan, M. and A. van Soest (1995). “Formal and Informal Sector Employment in Urban Areas of Bolivia”, Labour Economics, 2, 275–297.
Pratap, S. and E. Quintin (2006). “Are Labor Markets Segmented in Argentina? A Semiparametric Approach”, European Economic Review, 50, 1817–1841.
Roberts, B. R. (1989). “Employment structure life cycle and life chances: Formal and informal sectors in Guadalajara”, in A. Portes, M. Castells, L. A. Benton (Eds.), The Informal Economy: Studies in Advanced and Less Developed Countries, Johns Hopkins University Press, Baltimore.
Saavedra, J. and A. Chong (1999). “Structural Reform, Institutions and Earnings: Evidence from the Formal and Informal Sectors in Urban Peru”, Journal of Development Studies, 35, 95-116.
Schultz, T. W. (1960). “Capital Formation by Education”, Journal of Political Economy, 68, 571-583.
Schultz, T. W. (1961), “Investment in Human Capital”, American Economic Review, 51, 1-17.
Tannuri-Pianto, M. and D. Pianto (2002). “Informal Employment in Brazil - A Choice at the Top and Segmentation at the Bottom: A Quantile Regression Approach”, Department of Economics Working Paper No. 236, University of Brasilia.
Tansel, A. (1999). “Formal versus Informal Sector Choice of Wage Earners and Their Wages in Turkey”, Economic Research Forum Working Paper No. 9927.
Tansel, A. (2000). “Wage Earners, Self Employed and Gender in the Informal Sector in Turkey”, Policy Research Report on Gender and Development No.24, The World Bank.
Tansel, A. and E. Ö. Kan (2012). “Labor Mobility across the Formal/Informal Divide in Turkey: Evidence from Individual Level Data”, IZA Discussion Papers No. 6271.
Turkish Statistical Institute (TURKSTAT) (2011), Income and Living Conditions Survey Data 2006-2009, Ankara.
Turkish Statistical Institute (TURKSTAT) (2012), Press Release on the Household Labor Force Survey for January 2012, Ankara.