The role of minimum wage and employment subsidies on employment, investment and export decisions of firms: Evidence from Turkey

This thesis investigates how wage policies—both regulatory and incentive-based—shape firm behavior and labor market outcomes in a developing economy context. Using rich administrative microdata from Turkey and leveraging quasi-experimental variation, the study explores the effects of minimum wage hikes and employment subsidies on firm-level employment, capital accumulation, workforce composition, and export behavior. The first chapter analyzes the 2016 minimum wage hike using a bunching estimation framework. The results show that the employment effects are concentrated near the wage threshold, with negative impacts particularly evident among formal, low-skilled, and young workers. These findings underscore the importance of heterogeneity in the wage distribution when evaluating the impact of statutory wage floors. The second chapter explores the impact of a 2016 subsidy reform that extended a 6-percentage-point reduction in employer-side social security contributions to previously ineligible micro firms. Exploiting regional eligibility variation in a difference-in-differences design, the study finds that micro firms responded with significant employment gains, while small firms increased capital investment and capital–labor intensity in the form of tangible assets. However, the policy had no measurable effect on skill upgrading, highlighting its limits in fostering structural labor market transformation. The third chapter evaluates whether the same wage subsidy influenced export behavior. The analysis reveals that the policy significantly improved export performance along the intensive margin, particularly for micro firms. In contrast, the policy had no significant impact on the extensive margin, suggesting it did not induce non-exporting firms to enter foreign markets. Overall, the thesis shows that wage policies can effectively stimulate employment and investment in financially constrained firms, but their impact on structural upgrading and export expansion remains limited without complementary interventions. These findings inform labor market policy design in middle-income economies where informality, inequality, and productivity differentials continue to pose major challenges.