Wage inequality and informality: evidence from Mexico

Abstract

While several studies have documented the expansion of the informal sector and its detrimental impact on development, few have noted that informality and wage inequality tend to move together. Using Mexico as a case study, I show that between 1987 and 2002 wage inequality within informal workers accounted for over 60 % of total wage inequality and that the Mexican financial crisis of the mid-1990s increased the share of informal workers and, via this, wage inequality. The results provide supportive evidence that in Mexico higher wage dispersion is one of the channels through which informality negatively affects development. JEL codes: O17, J31, C36.

Economic sector, demographic composition, educational attainment, and earnings in Brazil

“…An important aspect that relates to our study is that countries with high prevalence of informal markets tend to have higher levels of wage inequality and lower levels of economic development (Binelli, 2016). In Mexico, wage inequality within informal workers accounted for more than 60 percent of the overall wage inequality between 1987 and 2002 (Binelli, 2016). The 1995 Mexican financial crisis increased the share of informal workers and wage inequality, which affected the national economy and resulted in significant unemployment among formal employees.…”

“…Increases in wage inequality are related to differences in inequality within formal and informal workers, relative to inequality between formal and informal workers. Results from instrumental variable regressions and decomposition exercises suggest increases in wage inequality with the rise in informal economic sector (Binelli, 2016).…”

“…Jobs in the informal economic sector tend to be widespread in low-income and middle-income countries (Gasparini and Tornarolli, 2009). Informal sectors have been noted to represent a gross domestic product (GDP) of around 10 and 15 percent in most high-income nations, as compared to a GDP of between 25 and 80 percent in most low-income and middle-income countries (Binelli, 2016). In developing nations, informal labor markets facilitate economic growth by minimizing effects of regulation (Meghir et al, 2015).…”

“…The development of an informal economic sector is correlated with poorly functioning institutions, labor rigidness, high taxation levels, and elevated corruption levels (Binelli, 2016).…”

Labour income inequality and the informal sector in Colombian cities

“…More recently, Binelli (2016) contributed to the literature by studying the case of Mexico from 1987-2002. When considering salaried employees, she found that wage inequality for informal workers accounts for 60% of the total wage inequality.…”