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Abstract

Using worker-level panel data for the period from 2002 to 2005, the author analyzes the separate employment effects of increases in the social security taxes paid by employers and increases in the minimum wage in Turkey. Variation over time among low-wage workers in the ratio of total labor costs to the gross wage gives rise to a natural experiment. The author’s regression estimates indicate that a given increase in social security taxes has a larger negative effect on the probability of a worker remaining employed in the next quarter than an equal size increase in the minimum wage. This result is incompatible with the textbook model of labor supply and demand, and it suggests that workers may increase effort in response to an increase in wages. The author’s comparison of the employment responses of workers in different demographic groups provides some indirect evidence that the central finding is consistent with this explanation.

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