Do labour market policies reduce the informal economy more effectively than enforcement and deterrence?

SARAÇOĞLU D. Ş.

JOURNAL OF POLICY MODELING, vol.42, no.3, pp.679-698, 2020 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 42 Issue: 3
  • Publication Date: 2020
  • Doi Number: 10.1016/j.jpolmod.2020.01.010
  • Journal Name: JOURNAL OF POLICY MODELING
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, Academic Search Premier, IBZ Online, International Bibliography of Social Sciences, ABI/INFORM, Business Source Elite, Business Source Premier, EconLit, Political Science Complete, Public Affairs Index, Sociological abstracts
  • Page Numbers: pp.679-698
  • Keywords: Segmented labour markets, Informal employment, Payroll taxes, Minimum wage, Dynamic modeling, MINIMUM-WAGE, SECTOR, IMPACT, EMPLOYMENT, TAXATION, PAYROLL, GROWTH, TAX
  • Middle East Technical University Affiliated: Yes

Abstract

In 2006, Turkish policymakers introduced new measures to reduce informality and encourage formality, in which the primary means of combatting informality were stricter enforcement of existing labor market laws and deterrence through fines, without any appropriate adjustments in formal labour costs. In this paper we show that even without any change in enforcement and deterrence, in an economy growing with capital accumulation like in Turkey, informality gradually and naturally declines. Furthermore, we propose alternative labour market policy changes like reductions in minimum wage and payroll taxes to reduce informal employment share, and assess the relative effectiveness of these policy changes. (C) 2020 The Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.