Cross‐Subsidies, and the Elasticity of Informality to Social Expenditures: The Case of Mexico's Seguro Popular

31 Pages Posted: 5 Jun 2018

See all articles by Jorge Alonso‐Ortiz

Jorge Alonso‐Ortiz

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica

Julio Leal

Banco de México

Date Written: June 2018

Abstract

How is the size of the informal sector affected when the distribution of social expenditures across formal and informal workers changes? How is it affected when the tax rate changes along with the generosity of these transfers? In our search model, taxes are levied on formal‐sector workers as a proportion of their wage. Transfers, in contrast, are lump‐sum and are received by both formal and informal workers. This implies that high‐wage formal workers subsidize low‐wage formal workers as well as informal workers. We calibrate the model to Mexico and perform counterfactuals. We find that the size of the informal sector is quite inelastic to changes in taxes and transfers. This is due to the presence of search frictions and to the cross‐subsidy in our model: for low‐wage formal jobs, a tax increase is roughly offset by an increase in benefits, leaving the unemployed approximately indifferent. Our results are consistent with the empirical evidence on the recent introduction of the “Seguro Popular” healthcare program.

Keywords: informality, social expenditures, cross‐subsidies, Seguro Popular

JEL Classification: E26, J46, O17

Suggested Citation

Alonso‐Ortiz, Jorge and Leal, Julio, Cross‐Subsidies, and the Elasticity of Informality to Social Expenditures: The Case of Mexico's Seguro Popular (June 2018). Review of Income and Wealth, Vol. 64, Issue 2, pp. 482-512, 2018. Available at SSRN: https://ssrn.com/abstract=3189540 or http://dx.doi.org/10.1111/roiw.12284

Jorge Alonso‐Ortiz (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10370
Mexico

Julio Leal

Banco de México ( email )

Av. 5 de Mayo 18
Piso 4
Mexico City, 06059
Mexico

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