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This paper presents evidence on structural change in Turkey and provides an overview of the evolution of industrial policy in the last three decades. Turkey has experienced substantial growth in labor productivity in the last decade. About two thirds of the increase in aggregate labor productivity arises from reallocation of employment from low to high productivity sectors and one third from productivity increases within sectors. Decomposition of productivity growth using micro-data also reveals an important contribution from reallocation. We also document substantial change in the composition of exports. We argue that structural change was not a direct result of selective industrial policy, simply because the incentive system displayed little sectoral selectivity during the period when major structural change took place.

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This paper studies the evolution of wage inequality in Turkey using household labour force survey data from 2002 to 2010. Between 2002 and 2004, the relative supply of more‐educated workers to less‐educated workers remained constant while their relative wages decreased in favour of less‐educated workers. However, between 2004 and 2010, the relative supply of more‐educated workers to less‐educated workers rose, while their relative wages remained constant or kept increasing in favour of more‐educated workers. This suggests factors other than those implied by a simple supply‐demand model are involved, such as skill‐biased technical change or minimum wage variations. The decomposition of wage inequality reveals that the price (wage) effect dominates the composition effect particularly in the first period. Our results show that the real minimum wage hike in 2004 corresponds to a major institutional change, which proved to be welfare‐increasing in terms of wage inequality. The upper‐tail (90/50) wage inequality decreased between 2002 and 2004 and stayed constant thereafter, whereas the lower‐tail (50/10) wage inequality decreased throughout the period. Our findings thus provide evidence supporting the institutional argument for explaining wage inequality.