Abstract
This paper investigates the role of consumer credit growth and expansion of consumer financial services on the reduction of informal employment in a developing country. I argue that financial services growth should lead to a decline in the share of informal employment given that consumers whose borrowing constraints are relaxed are more likely to purchase goods with consumer credit and more likely to demand formal contracts. I test this hypothesis by exploiting the regional variation in consumer credit growth in Turkey. In order to address the endogeneity of financial services, I employ minority population loss between 1893 and 1935 in as an instrument. The identification strategy relies on the fact that minorities were main users of financial instruments as they were the trading class in the former Ottoman Empire. The results provide evidence in favor of a positive causal impact of consumer credit growth on formal employment, especially on low-skilled labor.
Highlights
Informal employment presents an important policy problem in most developing countries as it has implications on social protection and access to safety nets for millions of individuals
Asık IZA Journal of Labor Policy (2018) 7:7 this paper explores to what extent the growth in consumer credits had a causal impact on the reduction of informal employment
In light of the overwhelming evidence which shows rapid consumer financial services sector growth and decline in informality, this paper aims to explore to what extent there is a causal relationship between the two phenomena
Summary
Informal employment presents an important policy problem in most developing countries as it has implications on social protection and access to safety nets for millions of individuals. On the other hand, during processes of globalization and financial integration, the increase in consumer credits, use of credit cards, and access to other financial services might produce positive externalities on formal employment through the electronization of payment systems. While there is abundant research on the dynamics of informality and on the impact of financial liberalization on growth, this paper, to my knowledge, is the first one to explore the channels through which consumer credits and changing modes of finance can affect formal employment. The use of consumer credits and credit cards (and formal financial services in general) has skyrocketed in Turkey in the last decade, and
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