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A discrete choice model for labor informality in Mexico using restricted sets

Author

Listed:
  • Héctor Juan Villarreal Páez

    (School of Government and Public Transformation, Tecnológico de Monterrey)

  • Diego Vázquez-Pimentel

    (School of Government and Public Transformation, Tecnológico de Monterrey)

Abstract

This paper explores the dynamics of labor informality in Mexico by developing a discrete choice mixed logit model to explain the transitions between labor states—namely, not employed, formal employment, and informal employment—among individuals aged 18 to 65. The study offers critical insights into the informal sector’s heterogeneity, with particular focus on voluntary versus involuntary informality, while also contributing a novel estimation strategy that combines supply- and demand-side constraints within the informal labor market. The results highlight the persistent barriers to formal employment for a significant segment of the labor force, despite policy efforts aimed at reducing informality in Mexico.

Suggested Citation

  • Héctor Juan Villarreal Páez & Diego Vázquez-Pimentel, 2025. "A discrete choice model for labor informality in Mexico using restricted sets," Working Paper Series of the School of Government and Public Transformation 5, School of Government and Public Transformation, Tecnológico de Monterrey.
    • Handle: RePEc:gnt:wpaper:5
    as

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    References listed on IDEAS

    as
    1. Thoresen, Thor O. & Vattø, Trine E., 2015. "Validation of the discrete choice labor supply model by methods of the new tax responsiveness literature," Labour Economics, Elsevier, vol. 37(C), pages 38-53.
    2. Matías Busso & Maria Victoria Fazio & Santiago Levy Algazi, 2012. "(In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico," IDB Publications (Working Papers) 75698, Inter-American Development Bank.
    3. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2003. "Fifty Years of Mincer Earnings Regressions," NBER Working Papers 9732, National Bureau of Economic Research, Inc.
    4. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521766555, January.
    5. Matias Busso & Maria Victoria Fazio & Santiago Levy Algazi, 2012. "(In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico," Research Department Publications 4789, Inter-American Development Bank, Research Department.
    6. Robert Duval-Hernández, 2022. "Choices and Constraints: The Nature of Informal Employment in Urban Mexico," Journal of Development Studies, Taylor & Francis Journals, vol. 58(7), pages 1349-1362, July.
    7. Gong, Xiaodong & van Soest, Arthur, 2002. "Wage differentials and mobility in the urban labour market: a panel data analysis for Mexico," Labour Economics, Elsevier, vol. 9(4), pages 513-529, September.
    8. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling

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