Fiscal policy, labor market and informal employment in Mexico

Abstract

Changes in economic policy and the labor market can influence the informal economy in Mexico. The aim of this article is to analyze the effects of a variety of macroeconomic variables on informal employment in Mexico. To determine these effects, a simultaneous equations model was designed and estimated using the two-stage ordinary least squares method. The results indicate that the price levels, production in the service sector, and the minimum wage have an effect on informal employment. There are multiple determinants of informality and it is complex to include them in one model; however, the estimated model provides elements to guide the economic policy in order to counteract its growth. It is concluded that an increase in the purchasing power of formal wages and job creation in the secondary sector may reduce informal employment. Up till now, no model showing the factors affecting growth in formal and informal employment has been estimated.