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Wage Differentials and Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico


  • Gong, Xiaodong

    () (NATSEM, University of Canberra)

  • van Soest, Arthur

    () (Tilburg University)


We analyze wage differentials mobility between the formal and informal sector in urban Mexico, using panel data on five quarters drawn from Mexico's Urban Employment Survey. We develop a dynamic random effects panel data model. It consists of two separate wage equations for the two sectors and a multinomial logit part explaining the labor market state,in which wages are included as explanatory variables. The model is estimated using simulated maximum likelihood. The estimates show that wage differentials increase with education level. The probability of formal sector mployment strongly increases with the wage differential. Simulated transition probabilities show that for male workers, the choice between formal and informal sector is driven by wage differentials and unobserved heterogeneity, while true state dependence is much less important. For women, nonparticipation is the most common labour market state, and true state dependence plays a much larger role.

Suggested Citation

  • Gong, Xiaodong & van Soest, Arthur, 2001. "Wage Differentials and Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," IZA Discussion Papers 329, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp329

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    References listed on IDEAS

    1. Gong, Xiaodong & Van Soest, Arthur & Villagomez, Elizabeth, 2004. "Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," Economic Development and Cultural Change, University of Chicago Press, vol. 53(1), pages 1-36, October.
    2. Pradhan, Menno & van Soest, Arthur, 1995. "Formal and informal sector employment in urban areas of Bolivia," Labour Economics, Elsevier, vol. 2(3), pages 275-297, September.
    3. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
    4. Strassmann, W Paul, 1987. "Home-Based Enterprises in Cities of Developing Countries," Economic Development and Cultural Change, University of Chicago Press, vol. 36(1), pages 121-144, October.
    5. Menno Pradhan & Arthur Van Soest, 1997. "Household Labor Supply In Urban Areas Of Bolivia," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 300-310, May.
    6. Siebert, W S & Addison, J T, 1991. "Internal Labour Markets: Causes and Consequences," Oxford Review of Economic Policy, Oxford University Press, vol. 7(1), pages 76-92, Spring.
    7. Magnac, Th, 1991. "Segmented or Competitive Labor Markets," Econometrica, Econometric Society, vol. 59(1), pages 165-187, January.
    8. Mellow, Wesley, 1982. "Employer Size and Wages," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 495-501, August.
    9. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
    10. Heckman, James J & Sedlacek, Guilherme, 1985. "Heterogeneity, Aggregation, and Market Wage Functions: An Empirical Model of Self-selection in the Labor Market," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1077-1125, December.
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    More about this item


    mobility; informal sector; Wage differentials; panel data; Mexico;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population


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