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(In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico

Listed author(s):
  • Matias Busso

    ()

  • Maria Victoria Fazio
  • Santiago Levy Algazi

The 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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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4789.

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Date of creation: Aug 2012
Handle: RePEc:idb:wpaper:4789
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  1. William Maloney & Jairo Mendez, 2004. "Measuring the Impact of Minimum Wages. Evidence from Latin America," NBER Chapters,in: Law and Employment: Lessons from Latin America and the Caribbean, pages 109-130 National Bureau of Economic Research, Inc.
  2. Fields, Gary S., 2007. "Labor market policy in developing countries : a selective review of the literature and needs for the future," Policy Research Working Paper Series 4362, The World Bank.
  3. Chang-Tai Hsieh & Peter J. Klenow, 2014. "The Life Cycle of Plants in India and Mexico," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1035-1084.
  4. Christian Daude & Eduardo Fernández-Arias, 2010. "On the Role of Productivity and Factor Accumulation in Economic Development in Latin America and the Caribbean," IDB Publications (Working Papers) 1696, Inter-American Development Bank.
  5. Busso Matias & Madrigal Lucia & Pagés Carmen, 2013. "Productivity and resource misallocation in Latin America," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-30, June.
  6. Diego Restuccia, 2008. "The Latin American Development Problem," Working Papers tecipa-318, University of Toronto, Department of Economics.
  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. Margarida Duarte & Diego Restuccia, 2010. "The Role of the Structural Transformation in Aggregate Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 129-173.
  9. Mariano Bosch & Raymundo M. Campos-Vázquez, 2010. "The trade-offs of social assistance programs in the labor market: The case of the “Seguro Popular” program in Mexico," Serie documentos de trabajo del Centro de Estudios Económicos 2010-12, El Colegio de México, Centro de Estudios Económicos.
  10. Kanbur, Ravi, 2009. "Conceptualising Informality: Regulation and Enforcement," IZA Discussion Papers 4186, Institute for the Study of Labor (IZA).
  11. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1403-1448.
  12. Busso Matias & Madrigal Lucia & Pagés Carmen, 2013. "Productivity and resource misallocation in Latin America," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-30, June.
  13. Bell, Linda A, 1997. "The Impact of Minimum Wages in Mexico and Colombia," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 102-135, July.
  14. Christian Daude & Eduardo Fernandez-Arias, 2010. "On the Role of Productivity and Factor Accumulation in Economic Development in Latin America and the Caribbean," Research Department Publications 4653, Inter-American Development Bank, Research Department.
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