## Informality and Aggregate Productivity: The Case of Mexico

_IMF Working Papers, November 27, 2019_

## Source details

**Canonical URL:** [Informality and Aggregate Productivity: The Case of Mexico](https://www.imf.org/en/publications/wp/issues/2019/11/27/informality-and-aggregate-productivity-the-case-of-mexico-48754)

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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

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### 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.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2019/11/27/informality-and-aggregate-productivity-the-case-of-mexico-48754_