(In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico
AbstractThe laws that regulate relations between firms and workers in Mexico distinguish sharply between salaried and non-salaried workers, and they are at the root of the existence of informality. This paper provides a clear definition of informality, distinguishing it from illegality. Using Mexico’s Economic Census, the paper shows that the majority of firms are informal but legal, that there are more small formal firms than large ones, and that some large firms are informal. It also shows that informality and illegality increased in the period 1998-2008. Using a simple model of monopolistic competition to measure the productivity losses due to distortions that misallocate resources, the paper finds that one peso of capital and labor allocated to formal and legal firms is worth 28 percent more than if allocated to illegal and informal firms, and 50 percent more than if allocated to legal and informal firms. The paper concludes arguing that the distortions in the labor market created by informality reduce total factor productivity.
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Bibliographic InfoPaper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4789.
Date of creation: Aug 2012
Date of revision:
Find related papers by JEL classification:
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-20 (All new papers)
- NEP-DEV-2012-10-20 (Development)
- NEP-EFF-2012-10-20 (Efficiency & Productivity)
- NEP-IUE-2012-10-20 (Informal & Underground Economics)
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- Ghani, Ejaz & Kanbur, Ravi, 2013. "Urbanization and (in)formalization," Policy Research Working Paper Series 6374, The World Bank.
- Frías, Judith A & Kumler, Todd & Verhoogen, Eric A, 2013.
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CEPR Discussion Papers
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- Todd Kumler & Eric Verhoogen & Judith A. Frías, 2013. "Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico," NBER Working Papers 19385, National Bureau of Economic Research, Inc.
- Kumler, Todd J. & Verhoogen, Eric & Frias, Judith A., 2013. "Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico," IZA Discussion Papers 7591, Institute for the Study of Labor (IZA).
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