Formal and informal sectors: is there any wage differential?

ABSTRACT

The main objective of this paper is to investigate if a wage difference exists between formal and informal sectors in the case of the Turkish labour market using a sample of wageworkers. To this end, we use data for 2004 and 2009 and a novel definition of the informal sector. On the methodological front, we adopt three alternative decomposition techniques, namely, the Oaxaca-Ransom [(1994). On discrimination and the decomposition of wage differentials. Journal of Econometrics, 61, 5–21] decomposition in the context of mean regression, the Machado and Mata [(2005). Counterfactual decomposition of changes in wage distributions using quantile regression. Journal of Applied Econometrics, 20(4), 445–465] decomposition in the quantile regression framework and the non-parametric decomposition method proposed by Nopo [(2008). Matching as a tool to decompose wage gap. The Review of Economics and Statistics, 90(2), 290–299]. The results reveal the existence of a wage gap between the two sectors. We found education and experience to be key determinants of earnings. The findings of this paper have implications for policies, which might be directed towards developing approaches with a focus on education and experience.

KEYWORDS:

• Informal economies
• labour market
• wage
• Turkey

Notes

1. Tansel and Kan (2012) use OLS and quantile regression analyses (including the informal sector dummy) and estimate the fixed effect OLS and fixed effect quantile regression.

2. Appendix Table A1 provides a summary studies for the formal–informal wage gap reviewed in Turkey.

3. Turkish law establishes the minimum working age as 15 years whilst the retirement age is 65.

4. The school start age in Turkey is six years.

5. Primary school covers education between ages 6–11 and last 5 years. Secondary education includes all general, vocational and technical education after primary school and last three years. In 1997, 5-year compulsory education was expanded to 8-year, which consist of 5-year primary schools and 3-year secondary schools, which is so-called primary education.

6. Grouping of occupations is made according to ISCO 1988 (International Standard Classification of occupation). Occupational groups 1, 2 and 3, professionals, associate professionals and legislators, respectively are excluded.

7. According to World Bank (2010), informality tends to be widespread among small firms, i.e. employing less than 10 workers in Turkey.

8. .

9. For further discussion, see Huber and Melly (2011).

10. See Nopo (2008) for detail description of the method.

11. We are grateful to an anonymous referee for pointing this out.