TFP growth in Turkey revisited: The effect of informal sector

Abstract

In this paper, we aim to contribute to the growth literature by presenting evidence that the presence ofan informal sector might signiŞcantly affect both the level as well as the course of the total factorproductivity (TFP). To this end, we develop a framework where we can compare the TFP in Turkeygenerated by a one-sector benchmark model to the one originating from an extended model with thepresence of formal and informal labor. Our results indicate that, over the course of 1950e2014, the TFPgenerated by the benchmark model generally underestimates the productivity of the formal sector andthis underestimation is mainly observed and is widened after 1980. Moreover, we alsoŞnd that thesubstitution between formal and informal labor signiŞcantly affects this underestimation.© 2017 Central Bank of The Republic of Turkey. Production and hosting by Elsevier B.V. This is an openaccess article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).