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.