Informality and Aggregate Productivity: The Case of Mexico
IMF Working Papers, November 27, 2019
Source details
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- Informality and Aggregate Productivity: The Case of Mexico
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Bibliographic details
- Authors: Jorge A Alvarez, Cian Ruane
- Published: November 27, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513519920.001
Overview
- Objective: Assess the aggregate productivity impact of distortions arising from labor regulations in Mexico and how they interact with informality.
- Approach: Use employment surveys and a firm-level economic census to document features of informal firms; construct and estimate a model of heterogeneous firms and endogenous informality to study micro and macro impacts of policy reforms.
- Principal summary finding: Some reforms may have large impacts on informal employment but small impacts on aggregate productivity.
Data and empirical findings
- Data sources:
- Employment surveys (unspecified in the summary).
- Firm-level economic census (unspecified in the summary).
- Empirical contribution: Document a number of novel features about informal firms in Mexico.
Model and methodology
- Model type: Heterogeneous firms with endogenous informality.
- Key modeling elements (as described):
- Firm value function.
- Firm's idiosyncratic productivity.
- Profit function.
- Size distribution and classification of incumbent firm versus unproductive firm.
- Endogenous decision to operate informally or formally.
Key findings and analysis
- Aggregate productivity impact assessment:
- Distortions from labor regulations interact with informality to affect aggregate productivity.
- Micro and macro impacts of policy reforms are evaluated through the estimated model.
- Principal quantitative conclusion reported in the summary:
- Some reforms may have large impacts on informal employment but small impacts on aggregate productivity.
Policy implications and recommendations
- Implication: Policy reforms targeting informality can substantially change informal employment shares.
- Caveat: Large reductions in informality do not necessarily translate into large gains in aggregate productivity, according to the model-based analysis.
Content in this bundle
- Working Paper