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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.

Suggested Citation

  • Brambila Macias, Jose, 2008. "Modeling the Informal Economy in Mexico. A Structural Equation Approach," MPRA Paper 8504, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:8504
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    References listed on IDEAS

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    1. 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.
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    3. Schneider Friedrich & Hametner Bettina, 2014. "The Shadow Economy in Colombia: Size and Effects on Economic Growth," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 20(2), pages 1-33, April.
    4. Macias, Jose Brambila & Cazzavillan, Guido, 2009. "The dynamics of parallel economies. Measuring the informal sector in Mexico," Research in Economics, Elsevier, vol. 63(3), pages 189-199, September.
    5. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
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    7. Guillermo Javier Vuletin, 2008. "Measuring the Informal Economy in Latin America and the Caribbean," IMF Working Papers 08/102, International Monetary Fund.
    8. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
    9. 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.
    10. Roberto Dell’Anno & Miguel Gómez-Antonio & Angel Alañon-Pardo, 2007. "The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach," Empirical Economics, Springer, vol. 33(1), pages 197-197, July.
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    12. 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, vol. 45(1), pages 129-162, December.
    13. Jos� Brambila Macias & Guido Cazzavillan, 2008. "The Dynamics of Parallel Economies. Measuring the Informal Sector in M�xico," Working Papers 2008_42, Department of Economics, University of Venice "Ca' Foscari".
    14. 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.
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    16. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, EconWPA, revised 15 Dec 2005.
    17. Dell'Anno, Roberto, "undated". "Estimating the Shadow Economy in Italy: a Structural Equation Approach," Economics Working Papers 2003-7, Department of Economics and Business Economics, Aarhus University.
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    19. repec:hrv:faseco:30728045 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Mai Hassan & Friedrich Schneider, 2016. "Modelling the Egyptian Shadow Economy: A Currency Demand and A MIMIC Model Approach," CESifo Working Paper Series 5727, CESifo Group Munich.
    2. Luisanna Onnis & Patrizio Tirelli, 2010. "Challenging the popular wisdom. New estimates of the unobserved economy," Working Papers 184, University of Milano-Bicocca, Department of Economics, revised Apr 2010.
    3. Luisanna Onnis & Patrizio Tirelli, 2011. "Institutions, policies and economic development. What are the causes of the shadow economy?," Working Papers 206, University of Milano-Bicocca, Department of Economics, revised Mar 2011.
    4. Marcus Ruge, 2010. "Determinants and Size of the Shadow Economy - A Structural Equation Model," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 511-523.
    5. Zubarev, Andrey & Potashnikîv, Vladimir & Shilov, Kirill, 2017. "Determination of the Factors of Economic Development within the Framework of Sem (Structural Equation Modeling)," Working Papers 051737, Russian Presidential Academy of National Economy and Public Administration.
    6. repec:eee:jpolmo:v:39:y:2017:i:5:p:928-941 is not listed on IDEAS
    7. Mahieddine Adnan Ghecham, 2017. "The Impact of Informal Sector on Income Distribution: Could Concentration of Income be Explained by the Size of Informal Sector?," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 594-600.

    More about this item

    Keywords

    Informal Economy; Economic Growth; Structural Equations;

    JEL classification:

    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy

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