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Observationally equivalent workers are paid higher wages in larger firms. This fact is often named as the "firm-size wage gap" and is regarded as a key empirical puzzle. Using micro-level data from Turkey, we document a new stylized fact: the firm-size wage gap is more pronounced for informal (unregistered) jobs than for formal (registered) jobs. To explain this fact, we develop a two-stage wage-posting game with market imperfections and segmented markets, the solution to which produces wages as a function of firm size in a well-defined subgame-perfect equilibrium. The model proposes two explanations. First, taxes on formal employment generate a wedge between formal and informal size wage gaps. Thus, government policy can potentially affect the magnitude of the firm-size wage gaps. The second explanation features a market-based framework with strategic interactions. Relative to small firms, large firms typically post higher wages for both formal and informal jobs they open. A high-wage formal job attracts a larger pool of applicants than a high-wage informal job. The larger pool of applicants for the formal job, in turn, allows the firm to somewhat lower the initial wage offer, while this second-round effect is negligible for informal jobs. As a result, size differentials are lower in formal jobs than informal jobs. We argue that the observed patterns in the use of social connections in job search and heterogeneity in job preferences can be used to justify the validity of this second mechanism.

This paper investigates the employment effects of a targeted subsidy scheme implemented in Turkey following the 2008 crisis. The Turkish government started a subsidy program in 2008 to generate new employment for younger men and all women, which are the relatively disadvantaged groups in the Turkish labor markets. The program puts men of age 18-29 and all women into the treatment group, while men of age 30 and above are placed into the control group. We use a nationally representative micro-level dataset and a difference-in-differences approach to estimate the causal effect of this program. On aggregate, the subsidy program seems to be ineffective in increasing the employment probabilities of those individuals in the target group. However, when heterogeneity is accounted for by dividing the treatment group into several sub-groups, we observe that the program has been notably effective on some of those sub-groups. In particular, the increase in employment probability is high for older women, while a weaker positive effect is observed for younger women and almost no effect is detected for younger men. The effect on older women is subject to further heterogeneity: the program has increased the employment probabilities of low-educated and/or low-skill older women rather than the high-educated and/or high-skill ones.