The Unassuming Economist

An IMF country report on Mexico documents “the composition, trends, and labor market implications of informality using data from the National Employment Survey (ENOE). Over half of the employed population has informal contractual relationships in Mexico both at formal and informal firms. Informality is found to be associated with lower levels of pay –even when accounting for worker composition differences– and lower wage growth over the life cycle.”
“Future labor market reforms should take a holistic approach that addresses both distributional concerns and formality barriers. One alternative is to reduce dependence on payroll taxes that are biased towards formal salaried workers while transitioning towards a social insurance system that provides good-quality services for all, irrespective of their salaried/non-salaried status. Another is easing firing and hiring restrictions of salaried workers while increasing protections to the unemployed through a more universal unemployment insurance scheme. This type of profound long-term transformations should, of course, only be implemented after careful review of policy alternatives guided by experiences in other countries and detailed impact analysis.”

“Short-term reforms should build towards a system where the non-exclusive targets of boosting social protection and removing distortionary restrictions are achieved. Policy proposals, such as hikes in the minimum wage, should be gradual, viewed in the context of other distortionary polices, and carefully weigh equity benefits against the potential displacement of labor towards unproductive informality.”