Exploring different measures of wage flexibility in a developing economy context: the case for Turkey

Abstract

In this paper we use Turkish household labor force data to address a number of conceptual issues pertaining to the wage curve, an empirically derived negative relationship between the real wage level and the local unemployment rate. First, we show that in developing economies where labor markets are prone to high degree of segmentation by skill level, local unemployment rates disaggregated by education provide more accurate measures of the degree of group-specific wage competition and hence yield more robust results of the wage curve analyses. Second, we estimate the wage curve using various definitions of the unemployment rate, including discouraged and marginally attached workers, and the long-term unemployment rate to explore the most relevant measure of local labor market tension in the wage setting process. We find that broader definitions of unemployment serve as a more effective reference point in measuring wage flexibility for women, whose attachment to the labor market is substantially weak in the Turkish context; while for men the official and long-term unemployment rates perform well. Finally, using quantile regression we show that wage responsiveness to unemployment cannot be assumed to be constant along the wage distribution. In the Turkish case, we find a higher unemployment elasticity of wages around the median segment of wage distribution. This effect is more pronounced for women.

The Turkish Spatial Wage Curve

“…It is likely that a worker competes with other workers within groups, such that unemployment rate of skilled workers may not be a threat for unskilled workers (Card 1995). The segmented labor markets based on worker qualifications might be even more pronounced in the developing countries such as Turkey according to Ilkkaracan et al (2013). If this is the case, using group-specific unemployment rate would be more appropriate in wage curve estimations.…”

“…However, using data representing one segment of the business cycle will introduce a bias in the wage curve estimation. The years 2005-2008 can be characterized by a boom period of the business cycle (Ilkkaracan et al 2013). Hence, using the data for the years 2004-2013 can take into account for the complete business cycle and eliminates this bias.…”

“…The existing standard wage curve estimates for Turkey excludes some groups of individuals, such as workers in the agricultural sector (Baltagi et al 2012(Baltagi et al , 2013(Baltagi et al , 2015, and workers in the public sector (Ilkkaracan et al 2013). We present the standard wage curve estimates for the whole labor force without excluding any group of workers in Table 2 using FE-2SLS in which we take into account the endogeneity of the unemployment rates.…”

“…First, the wage curve for Turkey is revisited, providing a broader picture than the existing studies. Baltagi et al (2012Baltagi et al ( , 2013 and Baltagi et al (2015) excluded the agricultural sector and use non-agricultural unemployment rate, while Ilkkaracan et al (2013) excluded public sector workers from their analysis. Unlike previous studies on the Turkish wage curve, we do not exclude those groups, so that we can examine the economy-wide existence and strength of the Turkish wage curve for a longer period; [2004][2005][2006][2007][2008][2009][2010][2011][2012][2013].…”

“…The above studies use data on a boom period in the Turkish economy, such that only one part of the business cycle has been considered in these analyses. Ilkkaracan et al (2013) use a longer period with regional skill level unemployment rates excluding the public sector workers. They find evidence on a wage curve for males.…”