Modelling the Informal Economy in Mexico: A Structural Equation Approach
Jose Brambila Macias
Trade and Markets Division, FAO of the UN
Ca Foscari University of Venice - Department of Economics
November, 25 2008
University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 41/WP/2008
This paper uses annual data for the period 1970-2006 in order to estimate and investigate the evolution of the Mexican informal economy. In order to do so, we model the informal economy as a latent variable and try to explain it through relationships between possible cause and indicator variables using structural equation modeling (SEM). The model uses tax burden, salary levels, inflation, unemployment and excessive regulation as potential incentives or deterrents for the informal economy. Our results indicate that the Mexican informal sector at the beginning of the 1970's accounted for 40 percent of GDP, and then it slightly decreased to stabilize around 30 percent of GDP from the late 1980's onwards. The results also confirm the importance of salaries and excessive regulation as causes of the informal economy in Mexico and the existence of a positive relationship between informality and GDP.
Number of Pages in PDF File: 18
Keywords: Informal Economy, Economic Growth, Structural Equations
JEL Classification: C39, E27, O17working papers series
Date posted: November 25, 2008
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