Turkey - Country Economic Memorandum Informality : Causes, Consequences, Policies

Informality in Turkey, using various definitions, and despite the signs of a recent decline in certain segments of the economy, is widespread. The level of informality is not excessively high, however, taking into account Turkey's level of income. While firm non-registration is not very common, underreporting of revenues and wages and non-registration of workers with the social security system are more prevalent. This report argues that success in reducing informality requires an integrated policy response. While no single 'sufficient' policy tool will be likely to increase formalization significantly, a combination of policies may move the economy to a new equilibrium with higher formalization. The report discusses the need to strengthen auditing capacity, effectiveness and targeting, to ease labor market regulations, and to communicate effectively with the public on the costs of informality and the benefits of formalization. This report is organized in six chapters. The second chapter introduces definitions and the conceptual framework for the analysis conducted. The third chapter provides a portrait of informality in Turkey, outlines certain issues of measurement, and presents the main trends using various decompositions. The fourth and fifth chapters discuss the costs (consequences) and the causes of informality, respectively, with a specific focus on informal employment. The final chapter presents a suggested integrated policy approach to reduce informality and provides concluding remarks.