1 Informality in Turkey: Size, Trends, Determinants and Consequences Background Paper by José Guilherme Reis Diego Angel-Urdinola and Cristian Quijada Torres for Country Economic Memorandum (CEM) – Informality: Causes, Consequences, Policies June 2009
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1
Informality in Turkey: Size, Trends, Determinants and
Consequences
Background Paper by
José Guilherme Reis
Diego Angel-Urdinola and
Cristian Quijada Torres
for
Country Economic Memorandum (CEM) – Informality: Causes,
Consequences, Policies
June 2009
2
INFORMALITY IN TURKEY: SIZE, TRENDS, DETERMINANTS AND CONSEQUENCES1
1.1 Informality is a matter of concern among policymakers and the business
community throughout the world. Impacts on productivity and growth, reduction in the
tax base and as a consequence in the amount of resources available to invest in the
provision of public goods and equity issues related to the existence of unprotected
workers are, not necessarily in this order, the main concerns associated with having a
significant part of the production and labor force in informality. Businesses tend to be
particularly concerned with the unfair competition associated with informality: recent
World Bank surveys of firms around the world show that firms tend to rank competition
from informal firms as one of their top three obstacles to do business. This can be seen in
14 Latin American countries, where 38.7 percent of the manufacturing firms ranked
informality ahead of issues such as tax rates and access to finance (Gonzalez and
Lamanna, 2007), as well as in countries as diverse as Vietnam and Mozambique, where
this same obstacle was ranked the top constraint for business growth. In the most recent
enterprise survey in Turkey, this topic was ranked the 4th
major constraint for business
growth.2
1.2 Whereas informality has been defined in a number of different ways in the
economic literature, it has been mostly associated with negative economic outcomes,
such as unprotected work, low firm productivity and tax evasion. This traditional view on
the consequences of informality is also usually associated with a particular view of what
drives informality. This view argues that, in general, workers and firms in the informal
sector would prefer to be formal (registering with the state, paying taxes, affiliating with
social security, etc.), but for reasons related to the state of the economy, the functioning
of the labor market, or the regulatory environment, they are prevented from doing so. As
argued by Perry et al. (2007), however, there is considerable evidence suggesting that the
informal sector is fairly heterogeneous, with workers and firms that have been excluded
from the formal economy coexisting with others that have opted out on the basis of
implicit cost benefit analysis. This latter concept of ―exit‖ posits that at least some of
those in the informal sector are there as a matter of choice. Specifically, some workers
and firms, upon making some implicit or explicit assessment of the benefits and costs of
formality, choose to opt out of the formal sector. Given existing opportunities and
constraints, they actually prefer informality. Since there is a wide range of degrees to
which exit or exclusion holds in any economy, these two perspectives are complementary
characterizations rather than competing hypotheses.
1.3 Understanding this heterogeneity in the informal sector, as well as the various
factors that influence individuals and firms’ decisions to ―take their business‖ to the
informal economy, is critical for the design of public policies. Indeed, even in those cases
where informality is driven by exit and not by exclusion, there are good reasons for policy
makers to want to move away from a social equilibrium in which a large number of
1 Paper prepared by José Guilherme Reis (LCSPF, World Bank), Diego Angel-Urdinola (ECSHD, World
Bank), and Cristian Quijada Torres (LCSPF, World Bank). Sunita Varada (consultant), provided excellent
research support. 2 The top 3 constraints were access to finance, tax rates and political instability. The survey was carried out
in 2008 and a report is expected to be published in 2009.
3
workers lack protection from negative shocks, where the informal status of many firms
limits their productivity and growth potential and where a large informal sector reduces
fiscal revenues.
1.4 With this motivation, the present chapter has 3 objectives: the first one is to
review evidence from various data sources, both macro and micro, on the incidence of
informality in Turkey, providing an overview of informal activities in the country; the
second objective is to analyze the role played in the specific case of Turkey of various
potential determinants of informality among firms and workers, again using different
sources of data, including the recent surveys undertaken for this report; third, it aims at
illustrating some of the consequences that informality appears to have on firm
performance.
Defining Informality
1.5 Informality is a heterogeneous concept, encompassing different situations such as
the unregistered small firm, the street vendor and the large, registered, ―formal‖ firm that
employs a share of its workers without offering them written contracts with access to
benefits and unemployment protection. It is thus difficult to measure and evaluate, and
actually impossible to characterize on a one-size-fits-all basis. Participants in the informal
sector, whether firms or workers, may have chosen to be there or may have been
excluded from the formal sector; some of the formal firms ―hide‖ sales (and thus taxes)
and employees (and thus contributions), while informal participants may pay some or no
taxes, suggesting that informality can hardly be described as a dichotomous condition.
Adding a time dimension does not help much in disentangling the observed behaviors:
available evidence suggests that informal participants may stay in the sector for a short or
extended period of time. Moreover, the short run relationship between the informal sector
and growth varies across countries—there is evidence of pro-cyclicality as well as of
counter-cyclicality, depending on specific countries and periods. In the long run, the
informal sector may vary in nature according to the phase of the development cycle—as
economic opportunities grow, incentives to ―start-up‖ a small business may expand,
while the attractiveness of informal wage labor may decline.
1.6 In general terms, the informal sector is broadly defined as the collection of firms,
workers, and activities that operate outside the legal and regulatory frameworks. The
reality is that different types of informality co-exist and that no one definition is likely to
be a self-contained characterization of the sector. There are informal activities that aim,
first, at the survival of the individual or household through direct subsistence production
or through simple sale of goods and services in the market, while there are others more
oriented toward increasing managerial flexibility and decreasing labor costs of formal
sector firms through off-the-books hiring and sub-contracting of informal entrepreneurs
(Portes and Haller, 2005).
1.7 Informal activities of survival are more associated to developing countries (Portes
and Haller, 2005; Gerxhani, 2004). Gerxhani (2004) argues, for instance, that informal
activities geared towards survival can broadly be described as both labor-intensive and
low-technology. They also bring in modest capital accumulation, if any at all. However
4
many of the indicators commonly used to measure informality, such as status of labor,
unreported income and tax evasion, and GNP accounts, imply that the informal activities
being measured are directed towards activities that go beyond just ―survival‖. Hence
informality is more than the sum of the self-employed, and the crude differentiation
between the registered and the un-registered firms would not suffice to characterize
informality in its multi-faceted totality. By focusing on activities of the registered firms,
for instance, the Enterprise Surveys of the World Bank clearly acknowledges informality
as in continuum rather than as bipolar opposite of the formal. Therefore any research on
informality conducted in a country of substantial industrial activity such as Turkey should
account for informal activities of the registered firms as well as the unregistered activities
of the survival type.
Measuring Informality3
1.8 If defining informality is a complex task, its measurement is an even more
daunting one. Given that it is identified with working outside the legal and regulatory
frameworks, informality is best described as a hidden, unobserved variable. That is, a
variable for which an accurate and complete measurement is not feasible but for which an
approximation is possible through indicators reflecting its various aspects. To provide an
estimate of the magnitude of informality in a country, it is better to use different
indicators which, when taken together, can provide a more robust approximation to
informality. Because of the ―hidden‖ nature of the sector and its heterogeneity, this
report relies on a combination of indicators to arrive at a sense of the scale of informal
activity. These same indicators are used later in the chapter to test different hypotheses
regarding the motivations behind decisions to become informal.
1.9 There are essentially two methods to measure informality: the first type is a direct
(micro) measurement based on individual surveys, such as the World Bank’s Enterprise
Surveys, which explicitly ask the firm’s owner or manager the year when the firm started
its operations and the year the firm was legally registered. A discrepancy between the two
is typically considered as the time when the firm operated informally. In some household
surveys or labor forces surveys, interviewees are asked whether in their current
employment they have signed a formal contract, or whether they are affiliated to the
social security administration (meaning that they, or their employer are contributing to a
pension plan or other protection program). The problem with this measure is that the
interviewee’s answer depends heavily on the phrasing of the question, and (in the case of
firms for instance) many interviewees will be reluctant to reveal their behavior, so that
one has to formulate indirect questions instead, which are likely to be much less accurate.
In addition, looking at workers covered by a pension plan, for instance, might be
misleading as some countries have recently shifted their participation schemes to include
self-employed workers, hence blurring the distinction between pension-plan holders as
formal and non-holders as informal.
1.10 The tax-audits method basically takes data from tax audits to determine the
percentage of the firms audited that evaded taxes and quantifies the amount of tax
3 This section is largely based on Perry and all (2007) and on Oviedo (2008).
5
underreporting as informal activity (one can also determine the legal status of the firm
with tax audits). The shortcoming of this information is that typically tax audits are not
conducted randomly and hence the information is not representative of the population of
firms.
1.11 Several indirect techniques use aggregate data instead. The first measure
estimates the size of the informal economy as the difference between aggregate income
and aggregate expenditure from the National Accounts, however, it has been used in a
few developed countries only, as it requires independent calculations of aggregate income
and expenditure. From the employment perspective, measures include taking the
difference between total labor force and total employment, and an index of pension
coverage of the population. The latter has the caveat that in recent years, coverage has
been expanded in several countries to the overall population regardless of their
employment status.
1.12 Other indirect techniques include the physical input approach, which measures
the growth of the informal economy as the difference between the growth rate of GDP
and the growth rate of electricity consumption. A related measure takes the difference
between the fitted values of an estimated money demand equation and the actual amount
of cash that circulates in the economy. These measures have several disadvantages. First,
they both assume that in the base year of the estimation (chosen arbitrarily according to
sample availability) the size of the informal sector is close to zero. Second, they both
make unrealistic assumptions about the use of electricity (constant coefficient per unit of
GDP, which ignores technological progress) and of money demand (common velocity of
circulation in formal and informal sector, and exclusive use of cash in the informal
sector). In practice, both measures are highly sensitive to variation in these assumptions:
in particular, changing the base year for the estimation of either model produces very
different estimates of the size of the informal sector.
1.13 Yet another method that has been used in recent years is the Multiple Indicator-
Multiple Cause (MIMIC) model, popularized by Schneider (2004) who applied it for 145
countries. This model assumes that while informal activity is not observable, its
magnitude can be represented by a latent variable (in index form), and both its causes and
effects can be observed and measured. This latent variable is then used in a set of two
equations: in the first, the latent variable is the dependent variable and its causes are the
explanatory variables; in the second, the effects of informality are modeled as a function
of the latent variable. The set is then simultaneously estimated and the fitted values of the
latent variable are used to compute an estimate of the size of the informal sector as a
share of GDP. This technique has been criticized because of the lack of theoretical
support for the equations supposed to capture the causes and effects of informal activity,
and it has also been argued that the estimation results are sensitive to transformations of
the data, to measurement units, and to the sample used. Its use, nevertheless, remains
widespread, probably as a consequence of the aforementioned difficulties to obtain broad
estimates of informality.
1.14 In addition to estimating the size or stock of informal activities, it is also
important to measure flows, incorporating the movements into and out of informality that
6
indeed take place for many individuals and firms throughout their lifetime. A few studies
have quantified these movements; among them we can cite Flores et al. (2004) and
Maloney (2004) for Mexico, and Perry et al. (2007) for other Latin American countries.
Table 1
Measuring the size of the informal sector
Direct methods
(micro)
Voluntary surveys
Tax audits
Indirect methods
(macro)
Discrepancy between aggregate
income and expenditure
Discrepancy between total labor
force and formal employment
Monetary methods
- Velocity of circulation
approach
- Currency demand approach
Physical input
(electricity consumption)
Kaufmann-Kaliberda method
Lacko’s method
Model approach MIMIC and DYMIMIC (macro)
Source: Perry et al. (2007)
1.15 Pragmatism and taking into account the different dimensions of informality does
not diminish the importance of being precise as to what kind of informality one refers to:
unregistered firms, unprotected workers or the self-employed. The appropriate policies
are likely to differ depending on the type of informality under consideration. Policy
analysis and recommendations therefore have to be based on a rigorous and
disaggregated investigation of the Turkish informal economy, and how it has evolved
over time.
How large is the Turkish informal sector?
1.16 After presenting the different definitions and methodologies for measuring
informality in this last section, we now move to provide basic estimations of the size of
the informal economy in Turkey. We concentrate on a few measures that can be
informative both about the breath of informal activity (whether it involves mainly firms
or workers) and its actual weight in terms of aggregate production and income. One
advantage of the measures presented here is that they are available for a large number of
countries, enabling basic comparisons with similar economies4. The methodologies used
to estimate informality in Turkey include two measures that take the employment view of
informality and two that look at informality from the production side.
Informal employment
4 For the analysis presented in this paper, we chose as comparators: the BRIC countries (Brazil, Russia,
India and China), countries with similar income levels (Chile, Hungary, Malaysia and Thailand), and
OECD countries for a comparison with a developed economy (Spain for most comparisons and USA for
the cross-country determinants of informality analysis). All of them subject to data availability for specific
indicators.
7
1.17 The first measure of informality computes the share of self-employed individuals
as a percentage of the total labor force, using data from labor force surveys compiled by
the International Labor Organization (ILO). In most developing countries, there is a
strong association between self-employment and informal activity. The figure below
presents self-employment results for the latest available years5. By this measure of
informality, Turkey presents levels of self-employment that are higher than most other
comparator countries6.
Figure 1
Source: ILO, various years
1.18 Next, we look at informal employment as characterized by workers that are not
registered in any pension scheme (social security). This data is drawn from Labor Force
Surveys conducted by the Turkish Statistical Institute (TurkStat) and from the World
Bank’s World Development Indicators. By this measure of informality, roughly a third
of non-agricultural employment has no affiliation to social security institutions in Turkey.
This figure has come down slightly in recent years, but overall it has not changed
significantly in the past seven years (Figure 2). As Figure 3 shows, this percentage varies
considerably by economic activity: agriculture and the construction sector, not
surprisingly, are characterized by high levels of informality. Looking across countries
and using long term averages7, Turkey’s average for the percentage of the labor force not
covered by pension schemes is again above the averages for Brazil and Malaysia and
significantly higher than Spain’s (Figure 4)
5 Self-employment refers to ILO status of employment definition #2 ―Own-account workers‖. Data for all
countries refers to 2007 figures, with the exception of Brazil, where figures are for 2004. 6 Self-employment figures for Hungary and Russia need to be taken with caution since, as highlighted by
Loayza and Rigolini (2006), self-employment in these countries appear to still be in transition to market-
economy levels, and remains substantially lower than in non Eastern European countries. 7 This number for labor force not contributing to a pension scheme is an average of the figure for the years
1993 to 2005. Data from Loayza (2009).
Self Employment as % of Total Employment
32.0%
23.2% 22.3%20.0%
17.4%16.3%
6.3% 5.7%
Thailand Chile Turkey Brazil Malaysia Spain Hungary Russia
8
Figure 2 Non-Agriculture Informal Employment (no pension coverage)
as % of Total Non-Agriculture Employment
Source: TurkStat
Figure 3 Informal Employment (no pension coverage)as % of Total Employment,
by Sector
Source: Turkstat (2006)
0%
5%
10%
15%
20%
25%
30%
35%
40%
2000 2001 2002 2003 2004 2005 2006 2007
Total Men Women
87.4%
62.2%
48.5%
43.1%
39.9%
32.0%
19.6%
18.0%
15.6%
3.2%
Agriculture, forestry, hunting & fishery
Construction & Public Works
Overall
Wholesale & retail, restaurants & hotels
Transport, communications & storage
Manufacturing
Financial institutions, insurance and real estate
Community services, social & personal services
Mining
Electricity, w ater & gas
9
Figure 4 Cross Country comparison
Source: Loayza (2009), based on WDI data.
Informal economic activity
1.19 Schneider’s methodology provides an estimation of the size of the informal
economy as a percentage of GDP. This methodology combines a latent estimation model
approach (DYMIMIC) with a currency demand approach and carries with it several
caveats mentioned earlier in this chapter. Results for Turkey show that the informal
sector still represents a considerable percentage of economic activity, albeit not as large
as in countries such as Thailand, Russia and Brazil8.
Figure 5
Source: Schneider (2007)
8 It is worth keeping in mind that estimations of the informal economy can vary greatly. As shown in a
recent report on the informal economy prepared by the Government of Turkey, estimates for the size of the
informal sector in the country range from 2 to 70% of GDP.
Labor force not contributing to a pension scheme
(1993-2005 averages, % of total labor force)
91%
82% 81%
59% 56%51%
39%
23%
11%
India Thailand China Turkey Brazil Malaysia Chile Hungary Spain
Informal Sector as % of GDP
2004/2005
54%
47%
42%
33%31%
25% 24%21% 19%
17%
Thailand Russia Brazil Turkey Malaysia India Hungary Spain Chile China
10
1.20 Next, we look at an additional indicator that can provide a qualitative view of
informality. This indicator comes from the Enterprise Surveys conducted by the World
Bank for several countries and provides us with the perceptions of formally registered
firms regarding tax compliance. The cross country comparison shows that almost two-
thirds of firms in Turkey believe that some degree of tax evasion is typical of a firm in
Turkey. While not as high as Brazil’s 83 percent number, this figure is nonetheless
considerably higher than most other comparator countries and shows that perceived tax
evasion is high in Turkey, a point that is reinforced by the qualitative survey conducted in
the country for this study.
Figure 6
Source: Enterprise Surveys
1.21 The several measures provided here reinforce the view that informality is
significant in Turkey. This observation remains valid even when controlling for levels of
income. The charts below show that, while the share of the informal economy as % of
GDP is at pace with Turkey’s level of development, informality as proxied by the share
of self-employed workers is high for its level of development.
% of Firms expressing that a Typical Firm Reports less than
100% of Sales for Tax Purposes
63%59%
49%
40% 40%
28%
18%
83%
Brazil
(2003)
Turkey
(2005)
India
(2006)
China
(2003)
Russia
(2005)
Hungary
(2005)
Chile
(2006)
Spain
(2005)
11
Chart 1
Chart 2
1.22 Finally, a simple exercise can be done to provide an idea of the extent that the
significant informality (as defined by self-employment figures) observed in Turkey is
associated with the sectoral composition of the Turkish economy, where agriculture still
accounts for a large share of employment. We create average employment figures (total
and informal) for a group of European countries9 to characterize a more mature economic
structure. The exercise then consists of estimating what the level of informality in
Turkey would be if it had the economic structure of this group of European countries.
Table 2 below provides the basic numbers used in the calculations. Using the European
average employment per economic sector and Turkish informality rates per economic
9 Countries selected based on availability of comparable data: Austria, Czech Republic, Estonia, France,
Hungary, Norway, Poland, Slovakia, Spain and U.K.
ALB
ARM
AZE
BGR
BIHBGR
HRV
CZE
HUN
KAZKGZ LVA
LTU
MDA
POL
ROM
RUS
YUG
SVK
SVN
TUR
UKR
UZB
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
0 5,000 10,000 15,000 20,000 25,000 30,000
GDP per-capita 2007 [PPP]
Info
rma
l E
co
no
my
as
% o
f G
DP
ARG
BOL
BIH
BRA
CHLCRI
DOM
ECU
SLV
GHA
GTM
HTI
JAM
KGZ
MEX
NIC
PAN
PRYPER
TZA
TUR
URY
VEN
VNMZMB
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 4,000 8,000 12,000 16,000
GDP per-capita PPP (2007)
% In
form
al (P
rod
uc
tiv
e D
efi
nit
ion
)
12
sector and assuming no interaction effects, the results show that the Turkish overall
informality rate would be 19.7% if its economic structure resembled this European
average, about 6 percentage points lower than its current levels (25.9%). Therefore
economic structure (level of employment by economic activity) accounts for about 60%
of the difference in informality rates between Turkey and this group of European
countries. As agriculture gradually reduces its importance in the Turkish economy, we
can expect a gradual reduction in informality in Turkey. This simple exercise shows,
however, that unless further reductions in informality are obtained in urban sectors,
namely in industry and especially in services, the overall level of informality in the
country is likely to remain high, at least twice the level observed in Europe.
Table 2
Total Employment by
Economic Activity10
Informal Employment11
by
Economic Activity
Turkey Europe Turkey Europe
Agriculture 31.8% 6.9% 44.9% 45.4%
Industry 23.7% 26.0% 6.4% 3.6%
Construction 6.9% 12.7% 10.9% 11.4%
Services 37.6% 54.5% 24.8% 8.9%
Total 100.0% 100.0% 25.9% 10.4%
Informality in Turkey
using the employment
structure of Europe 19.7% Source: ILO statistics for 2007
Trends in Turkish Informality
1.23 Equally as challenging as measuring the size of the informal sector is assessing
its trends. Besides its shadowy nature making it difficult to quantify, its various
definitions make comparisons and identifying patterns tricky. The descriptions below
consider a range of measures of informality – including tax compliance and those
obtained from labor force surveys – and cover mostly recent years (starting in 2000,
when data is available).
1.24 Measures of overall informality show an increase in levels between the beginning
of the decade and 2005.The Schneider DYMIMIC and currency demand method yields a
slight increase in the size of the informal economy between 1999/2000 and 2004/05, with
the peak level occurring in 2002/03. Comparator countries - Russia, Brazil, Hungary and
Malaysia - showed similar trends.
10
The following ILO categories for employment were not included in these calculations: Public
Administration and Defence; Compulsory Social Security, Education, Health and Social Work, Other
Community,Social and Personal Service Activities, Private Households with Employed Persons, Extra-
Territorial Organizations and Bodies, Not classifiable by economic activity. 11
Informal employment defined as self-employment, using ILO Own-account workers (ICSE-1993)
categorization.
13
Figure 7 Informality as % of GDP
Source: Schneider (2007)
1.25 The most commonly used and perhaps less controversial measure of informality
in Turkey and elsewhere is that of informal employment, which the Turkish Statistical
Institute (TurkStat) monitors. TurkStat identifies informal workers as those individuals
that are employed but not registered with the social security system. As evidenced by the
qualitative survey carried out for this report, many firms in Turkey choose not to report
all of their workers mostly to avoid perceived burdensome taxes, and to a lesser extent, to
avoid regulations. Figure 8 shows that the percentage of workers without social security
coverage has been consistently high, peaking in 2004 at 53 percent. Since then, number
has decreased, reaching 45.9 percent in September 2008. This same overall pattern,
although with much less variation, is observed when an alternative measure of informal
employment is used: the proportion of workers that identify themselves as ―self-
employed.‖ Figure 9 depicts the trend for this measurement, using data from the
International Labor Organization’s Labor Force Surveys.
0%
10%
20%
30%
40%
50%
60%
1999/2000 2001/2002 2002/2003 2003/2004 2004/2005
Turkey Brazil Russia
Spain Hungary Malaysia
14
Figure 8
Source: TUIK, Labor Force Survey.
Figure 9
Source: International Labor Organization Statistics
Disaggregating Labor Informality Trends12
1.26 We next disaggregate the trends for labor informality by employment sector,
education level, profession, employment status and firm size. The goal is to determine
the main forces behind the decreasing trend in informality observed in the period 2001 to
200613
. We look first at the employment sector breakdown.
12
The definition for informality used in this section of the report is that of workers without pension
coverage (i.e. not registered with any social security institution), unless noted otherwise. 13
More recently, a drop in non-agricultural informality has been observed. This fall has been concentrated
in regular and casual employees, especially women and took place despite a slight increase in informal self-
Percentage of Informality in Total Employment
50.6%
52.9%
52.1%51.7%
53.0%
50.1%
48.5%
46.9%
45.9%
42%
44%
46%
48%
50%
52%
54%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Percentage of Informality in Total Employment - ILO
23.5%
22.3%
24.7%24.9%
23.8%24.8% 24.7% 24.7%
16%
18%
20%
22%
24%
26%
28%
30%
2000 2001 2002 2003 2004 2005 2006 2007
15
Employment Sector
1.27 The main forces behind the decrease in informality between 2001 and 2006 were
urbanization, the decrease in agricultural employment and a reduction in informality rates
in rural areas and in the agriculture sector. The left panel of Figure 10 indicates that
between 2001 and 2006 employment in agriculture decreased from 36 to 26 percent of
overall employment (an important decrease). More broadly, the share of rural
employment decreased from 47 to 40 percent, due to rapid migration to urban areas
during the period. This shift in employment composition likely drove the overall decrease
in informality, since agricultural and rural employment present significantly higher
(albeit falling) rates of informality than other sectors. As labor shifted to urban areas,
urban informality actually increased during this period, as well as informality in non-
agriculture activities. Informality rates in the manufacturing, transport, and
communications sectors increased by approximately 20 percent between 2001 and 2006.
Services, the sector with the highest share of formal employment, displayed the largest
deterioration in informality: a 50 percent increase, going from 12% in 2001 to18% in
2006. However these increases were not large enough to compensate for the decreases in
informal employment related to labor moving out of agriculture and rural areas.
1.28 The decrease in rural informality was partly due to the fact that rural households
shifted from agricultural employment to non-agricultural employment (mainly into the
service sector). According to Dayioglu and Kirdar (2009) the share of household heads
engaged in agricultural self-employment decreased from 41.3 percent in 2001 to 30.5
percent in 2006. This was accompanied by an important reduction in unpaid family work
and an increase in wage employment. Informality rates among those working in
agriculture remained very high but decreased slightly from 91 percent in 2001 to 86
percent in 2006. This may have occurred due to the fact that those who stayed in
agriculture, at the margin, displayed higher productivity. According to Dayioglu and
Kirdar (2009), the majority of individuals who migrated from rural to urban areas in the
period of study (90 percent) had at most attained incomplete secondary education and
most of them were engaged in low-productivity self-employment in agriculture (generally
working as unpaid family members). On the other hand, Taimaz (2009) highlights
important improvements in rural productivity in Turkey during the period of study. As
such, less productive (i.e. more rudimentary) agricultural workers may have been more
likely to migrate than those with higher productivity (and thus more likely to be formal).
employed workers. It is still early to assess to what extent this may be reflecting the impact of recent
reforms in the pension system.
16
Figure 10 Informality Rates and Employment Composition by Employment Sector
in Turkey [2001 – 2006]
Source: World Bank using 2001-2006 LFS data.
36
47
33
45
26
40
0
10
20
30
40
50
60
70
80
90
100
Agriculture Rural
% o
f T
ota
l E
mp
loy
me
nt
2001 2003 2006
29
75
31
52
35
91
34
66
48
86
0
10
20
30
40
50
60
70
80
90
100
Agriculture Non
Agriculture
Rural Urban Total
% In
form
al
2001 2003 2006
17
Figure 11 Dynamics of Informality and Employment by Employment Sector in Turkey
[2001 – 2006]
Source: World Bank using 2001-2006 LFS data. Bubble graph: The X Axis illustrates the percentage
change in employment composition; the Y Axis, the percentage change in informality rates. The size of the
Bubble illustrated the informality rate in 2006
Education Level
1.29 Improvements in informality mainly benefited unskilled labor, which still
accounts for the majority of the employed population. The left panel of Figure 12
indicates the composition of employment in Turkey by educational attainment. Not
surprisingly, informality rates are higher among individuals with lower education
attainment and decrease as workers become more educated. Estimates for 2006 indicate
that the majority of all individuals employed in Turkey (52 percent) have attained at most
primary education. However, since Turkey is becoming a more educated country, the
Share of Employment by Industry in Turkey, 2006
Agriculture
27%
Manufacturing
19%Costruction
6%
Trans./commun.
5%
Fin./real estate
svs.
5%
Services
17%
Wholesale
21%
Agriculture
[86% informal]
Manuf.
[32% Informal]
Costruction
[58% Informal]
Wholesale
[43% Informal]
Trans./commun.
[40% informal]Fin./real estate svs.
[19% informal]
Services
[18% Informal]
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
-50.0% -25.0% 0.0% 25.0% 50.0%
Size of the Buble:
Informality rate in 2006
% Change in Informality
[2001-2006]
% Change in
Pop Share
[2001-2006]
Share of TTL employment
is growing
Informality
is growing
18
share of overall employment with at most primary education decreased from 63 percent
in 2001 to 52 percent in 2006. This coincided with an increase in the share of overall
employment that attained secondary and tertiary education. Informality decreased among
individuals with at most primary education, going from 67 percent in 2001 to 64 percent
in 2007. This group (largely defined as unskilled workers) was the only group that
benefited from improvements in informality during the period of study. This is consistent
with the fact that informality only decreased in agriculture and in rural areas where the
population is generally less educated than average. On the contrary, informality among
semi-skilled workers (those who have attained middle and high school) increased during
the period of study as well as informality among high-skilled workers (those who have
attained tertiary education).
Figure 12 Informality Rates and Employment Composition by Education in Turkey
[2001 – 2006]
Source: World Bank using 2001-2006 LFS data.
Profession
1.30 The increase in informality trend among high-skilled workers can be better
understood when broken down by profession. As described in Table 3, informality rates
among officials, clerks, technicians, and professionals increased significantly between
2001 and 2006. All of these groups also experienced growth in their share of the total
population. Within professions associated with lower skills (such as elementary
occupations and operators) informality also increased but to a lesser extent. The only
occupation that displayed a decrease in informality was agriculture/fishery workers,
which confirms what other data demonstrated above.
Table 3 Dynamics of Informality and Employment by Profession in Turkey [2001 – 2006]
2001 2006 Pop.
Share
%
Informal
Pop.
Share
%
Informal
% Change in
Composition
% Change in
Inf. Rates
Officials/managers 8.2 15.9 9.1 26.9 11.0 69.2
Professionals 5.9 5.1 6.7 6.6 13.6 29.4
Technicians 5.1 11.8 6.1 15.9 19.6 34.7
Clerks 4.6 9.8 6.1 15.8 32.6 61.2
Service workers/salesmen 9.2 43.1 11.6 45.1 26.1 4.6