## Minimum Wages and the Informality Constraint

_IMF Working Papers, June 19, 2026_

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## Bibliographic details
- Authors: Nils H. Lehr, Johanna Schauer, Hugo Tuesta
- Published: June 19, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229051040.001

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### Central question and context
- Research question: How does informality shape the impact of minimum wage policy?
- Empirical context: Mexico’s 145% real increase in the minimum wage since 2016.
- Methodology: Combination of reduced-form empirical estimates and a calibrated general equilibrium model featuring endogenous informality and household heterogeneity.

### Key empirical findings (reduced-form)
- Implemented minimum wage increases indicate limited effects on employment.
- Implemented minimum wage increases indicate limited effects on formalization.
- Observed modest wage gains at the bottom of the formal wage distribution that arguably reflect incomplete enforcement.

### Model predictions and mechanisms
- The calibrated model reproduces the empirical patterns under observed enforcement conditions.
- Under full enforcement, higher wage floors generate nonlinear effects:
  - The share of firms reallocating toward informality rises sharply.
  - Reallocation toward informality lowers productivity.
  - Aggregate welfare declines as a result of the shift toward informality.
- Welfare losses fall disproportionately on low-skill households:
  - Low-skill households bear the brunt of reductions in transfers caused by lower tax revenue.
  - Low-skill households, as predominantly informal workers, gain little directly from the minimum wage increase.

### Policy implications and conclusions
- The minimum wage’s effectiveness as a redistributive tool is limited.
- Enforcement matters crucially: incomplete enforcement helps explain observed modest formal-wage gains, while full enforcement can trigger strong reallocations to informality with adverse productivity and welfare consequences.
- Distributional impacts are adverse for low-skill households due to fiscal effects (lower tax revenue → reduced transfers) combined with limited direct gains for informal workers.

### Keywords and thematic tags (as presented)
- Employment, Labor, Labor supply, Minimum wages, Wages, endogenous informality, household heterogeneity, informality Constraint, labor markets, welfare

*Source: Nils H. Lehr; Johanna Schauer; Hugo Tuesta. June 19, 2026.*

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_Source: https://www.imf.org/en/publications/wp/issues/2026/06/19/minimum-wages-and-the-informality-constraint-577070_