Abstract

http://ssrn.com/abstract=2207240
 


 



(In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico


Matias Busso


Inter-American Development Bank (IDB)

Maria Victoria Fazio


affiliation not provided to SSRN

Santiago Levy Algazi


affiliation not provided to SSRN

August 2012

IDB Working Paper No. IDB-WP-341

Abstract:     
The laws that regulate relations between firms and workers in Mexico distinguish sharply between salaried and non-salaried workers, and they are at the root of the existence of informality. This paper provides a clear definition of informality, distinguishing it from illegality. Using Mexico's Economic Census, the paper shows that the majority of firms are informal but legal, that there are more small formal firms than large ones, and that some large firms are informal. It also shows that informality and illegality increased in the period 1998-2008. Using a simple model of monopolistic competition to measure the productivity losses due to distortions that misallocate resources, the paper finds that one peso of capital and labor allocated to formal and legal firms is worth 28 percent more than if allocated to illegal and informal firms, and 50 percent more than if allocated to legal and informal firms. The paper concludes arguing that the distortions in the labor market created by informality reduce total factor productivity.

Number of Pages in PDF File: 56

JEL Classification: D24, L25, O47

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Date posted: January 26, 2013  

Suggested Citation

Busso, Matias and Fazio, Maria Victoria and Algazi, Santiago Levy, (In)Formal and (Un)Productive: The Productivity Costs of Excessive Informality in Mexico (August 2012). IDB Working Paper No. IDB-WP-341. Available at SSRN: http://ssrn.com/abstract=2207240 or http://dx.doi.org/10.2139/ssrn.2207240

Contact Information

Matias Busso (Contact Author)
Inter-American Development Bank (IDB) ( email )
1300 New York Avenue NW
Washington, DC 20577
United States

Maria Victoria Fazio
affiliation not provided to SSRN
No Address Available
Santiago Levy Algazi
affiliation not provided to SSRN
No Address Available
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