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Disentangling the Effects of Large Minimum Wage and VAT Changes on Prices: Evidence from Mexico

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  • Calderón Cerbón Mariana
  • Cortés Espada Josué Fernando
  • Pérez Pérez Jorge
  • Salcedo Alejandrina

Abstract

In January 2019, the authorities increased the minimum wage and decreased the value-added tax (VAT) in an effort to boost activity on the northern Mexican border. In this paper we estimate the effects of both policies on prices. We find that the upward pressures on prices due to the minimum wage hike were more than offset by the downward pressures associated with the VAT. In the absence of the VAT reduction policy, average prices in the northern Mexican border would have been higher. We estimate that the effects of the minimum wage on prices tended to be smaller for goods or services produced with a larger share of informal labor.

Suggested Citation

  • Calderón Cerbón Mariana & Cortés Espada Josué Fernando & Pérez Pérez Jorge & Salcedo Alejandrina, 2022. "Disentangling the Effects of Large Minimum Wage and VAT Changes on Prices: Evidence from Mexico," Working Papers 2022-13, Banco de México.
    • Handle: RePEc:bdm:wpaper:2022-13
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    More about this item

    Keywords

    Minimum wage; Value-Added Tax; Prices;
    All these keywords.

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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