The relationship of informal economy and youth unemployment in Turkey

Abstract

The economic activities that are not recorded or that do not reflect the truth the records kept even if they are recorded are expressed as informal economy. In the literature, the informal economy with the names in regard to the area which it affects such as illegal economy, black economy, underground economy, shadow economy, unobservable economy is one of the main problems that countries try to solve. In particular, the role in our country’s economy of the informal economy, which has negative effects on tax policies, national economic indicators and competition powers of the countries, can not be ignored. Although it is possible for the informal economy to contribute positively to the economy by providing employment to the unqualified labor force, the redundancy of its long-run negative impacts requires focusing on the solution of this problem. The relationship between the informal economy which is struggled for its solution and the concept of unemployment, which is another problem, constitutes the motivation for this study. The aim of this study is to examine the existence of the long-run relationship between gender and education-related unemployment rates and the informal economy magnitude, and the direction of causality between these variables. It is focused on the relationship of the informal economy with young unemployment because it is gradually increasing in the overall unemployment rate. The relationship between the informal economy amount and young unemployment rates related to education levels has been estimated for Turkey data covering the period 2006:Q1-2016:Q2, considering the gender effect. The long-run relationship between the series was examined using the Gregory-Hansen cointegration test, which takes into account one single break, and the causality between the variables by using the Toda-Yamamoto test. Findings suggest that there exist the long-run relationships between the informal economy amount and the male and female youth unemployment rates at different levels of education. According to the results of the Toda-Yamamoto test applied on the purpose of determining the direction of relationships; as the size of the informal economy increases, only the rate of unemployment of young women graduating from higher education has increased, while the rate of unemployment among young men has increased in all levels of education. One-way causality in the unemployment rate of young women who graduated from higher education, while two-way causality in the rate of unemployment of young men in the same education level implies that the men in question may prefer to work in informal jobs while the women in question prefer not to work in informal working conditions. Hereby, it can be said that the rise of young female education level is a means of struggle with informal economy.