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Modeling the Informal Economy in Mexico. A Structural Equation Approach

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  • Brambila Macias, Jose

Abstract

This paper uses annual data for the period 1970-2006 in order to estimate and investigate the evolution of the Mexican informal economy. In order to do so, we model the informal economy as a latent variable and try to explain it through relationships between possible cause and indicator variables using structural equation modeling (SEM). Our results indicate that the Mexican informal sector at the beginning of the 1970’s initially accounted for 40 percent of GDP while slightly decreasing to stabilize around 30percent of GDP in the late 1980’s until our days. The model uses tax burden, salary levels, inflation, unemployment and excessive regulation as potential incentives or deterrents for the informal economy. The results confirm in particular the importance of salaries and excessive regulation as causes of the informal economy in Mexico and confirm a positive relation between informality and GDP.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8504.

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Date of creation: Apr 2008
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Handle: RePEc:pra:mprapa:8504

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Keywords: Informal Economy; Economic Growth; Structural Equations;

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  1. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, Econometric Society, vol. 40(6), pages 979-1001, November.
  2. Guillermo Javier Vuletin, 2008. "Measuring the Informal Economy in Latin America and the Caribbean," IMF Working Papers 08/102, International Monetary Fund.
  3. José Brambila Macias & Guido Cazzavillan, 2008. "The Dynamics of Parallel Economies. Measuring the Informal Sector in México," Working Papers 2008_42, Department of Economics, University of Venice "Ca' Foscari".
  4. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics, EconWPA 0507003, EconWPA, revised 25 Jul 2005.
  5. Roberto Dell’Anno & Friedrich G. Schneider, 2006. "Estimating the underground economy by using MIMIC models: A response to T. Breusch´s critique," Economics working papers 2006-07, Department of Economics, Johannes Kepler University Linz, Austria.
  6. Roberto Dell’Anno & Miguel Gómez-Antonio & Angel Pardo, 2007. "The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach," Empirical Economics, Springer, vol. 33(1), pages 51-84, July.
  7. Angel Alanon & M. Gomez-Antonio, 2005. "Estimating the size of the shadow economy in Spain: a structural model with latent variables," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(9), pages 1011-1025.
  8. Roberto Dell'Anno & Offiong Helen Solomon, 2008. "Shadow economy and unemployment rate in USA: is there a structural relationship? An empirical analysis," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 40(19), pages 2537-2555.
  9. Christopher Bajada & Friedrich Schneider, 2005. "The Shadow Economies Of The Asia-Pacific," Pacific Economic Review, Wiley Blackwell, vol. 10(3), pages 379-401, October.
  10. Friedrich Schneider, 2013. "The Shadow Economy in Colombia: Size and Effect on Economic Growth," Economics working papers 2013-19, Department of Economics, Johannes Kepler University Linz, Austria.
  11. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
  12. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics, EconWPA 0404005, EconWPA.
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  15. Dell'Anno, Roberto, . "Estimating the Shadow Economy in Italy: a Structural Equation Approach," Economics Working Papers, School of Economics and Management, University of Aarhus 2003-7, School of Economics and Management, University of Aarhus.
  16. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 45(1), pages 129-162, December.
  17. Kaufmann, Daniel & Kaliberda, Aleksander, 1996. "Integrating the unofficial economy into the dynamics of post-socialist economies : a framework of analysis and evidence," Policy Research Working Paper Series 1691, The World Bank.
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Cited by:
  1. Luisanna Onnis & Patrizio Tirelli, 2011. "Institutions, policies and economic development. What are the causes of the shadow economy?," Working Papers, University of Milano-Bicocca, Department of Economics 206, University of Milano-Bicocca, Department of Economics, revised Mar 2011.
  2. Luisanna Onnis & Patrizio Tirelli, 2010. "Challenging the popular wisdom. New estimates of the unobserved economy," Working Papers, University of Milano-Bicocca, Department of Economics 184, University of Milano-Bicocca, Department of Economics, revised Apr 2010.

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