Minimum Wage Effects on Labor Market Outcomes in Turkey

Minimum Wage Effects on Labor Market Outcomes in Turkey

16/14

June 2016

This paper estimates the impact of minimum wages on the labor market outcomes in Turkey using the sizable minimum wage increase in 2004. Utilizing a quasi-experimental approach we provide new evidence from a developing country where the minimum wage is binding to a great extent. The increase took place in a period of strong economic growth and cost to the employer was partially subsidized by the government. Our results suggest that minimum wage increase of 2004 compressed the wage distribution from below. Using degree of impact measures we estimate that a 1 percent surge in the minimum wage increased wages by an extra 0.22-0.35 percent. Wage response was lower for informally working, low educated and young employees. Higher minimum wage was accompanied by an increase in the likelihood of informal employment. The minimum wage increase did raise working hours, suggesting that firms may have tried to offset part of the increase in the labor cost by increasing employment at the intensive margin. Estimations do not point out to an adverse impact for the overall employment. But due to data limitations results on employment are less robust. Furthermore, looking at the impact of minimum wages on the formal and informal divide, our results do not support the predictions of the dual market hypothesis on wages. We observe wage increase not only for the formal but also for the informal employees pointing out to the presence of a "lighthouse" effect previously documented for some other developing countries.

Minimum wage, Turkey, Difference in differences, Informality

J31; J42; R23