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Minimum wage affects formal employment negatively

Seyfettin Gürsel, Ozan Bakış and Yazgı Genç 

Executive Summary

In the research note “Minimum wage increase is adversely affecting informal employment” (Betam Research Note 16/196) which we published earlier, we examined the effects of the minimum wage increase in 2016 on informal employment and found strong evidence for a positive effect.  In the same research which used data up to first quarter of 2016, we suggested one should be cautious about these first findings and emphasized that we will return to this topic again once more data is available. Unfortunately, we cannot publish this update on a single research note.  Thus, we decided to report the effects of minimum wage increase on informality with three research notes.

This first note will analyse general trends and year-on-year changes by employment status.  The second note is closer to the approach used in the research note published the last year. In this approach, the ratio of low-wage employees in each sector is considered as a proxy for the effect of minimum wage hike on informality for the sector. If this claim is true, the minimum wage increase will affect more heavily low-wage sectors and the increase in informality will be higher in these sectors compared to other sectors.  The third and final note will test the above claim using econometric methods and Household Labor Force Survey micro data.  The common finding of these three notes confirms the first findings of the research note we published earlier (Betam Research Note 16/196). Accordingly, minimum wage increase influences informal employment.

In this research note, we use all data of 2016 to examine informal employment for salaried and non-salaried workers based on employment status. Initial findings show that minimum wage increase in 2016 is stronger especially for employers and own account workers.  The effect of the minimum wage increase on informal employment evolves over time and is present in 2017 as well.

doc. ResearchBrief220

pdf. ResearchBrief220