Taxes, Transfers and the Distribution of Employment in Mexico

Jorge Alonso Ortiz and Julio Leal Ordóñez
Authors registered in the RePEc Author Service: Jorge Alonso Ortiz ()

MPRA Paper from University Library of Munich, Germany

Abstract: The informal sector accounts for a substantial fraction of employed population in Mexico and other Latin American countries. In this paper we study the interaction between the tax and transfers system and the size and composition of informal sector. To do that we build a search model that can be calibrated to the Mexican data. Our model features two employment statuses: employed and unemployed; and two sectors: formal and informal. We estimate our model to data from Encuesta Nacional de Ocupaci ́on y empleo (ENOE) by simulated GMM. Then we perform three different policy analyses: changes in the distribution of the transfers between formal and informal sector workers, changes in the size of the transfer system, and changes in the progressivity of taxes and transfers (pending). Our model is able to capture key features of Mexican labor markets, such as the distribution of the labor force across sectors and the distribution of accepted wage offers. Dividing transfers equally between formal and informal sector workers increases the size of the informal sector by 5 percentage points, it also increases average wages in the formal sector by 6% whereas wages in the informal sector fall by 4%. When we double the size of transfers, the size of informal sector falls by 5 percentage points. However, it has a big effect on the distribution of accepted wage offers: average wages increase by 10% in the formal sector and they raise by 16% in the informal sector.

Keywords: Informal Sector; Mexico; Taxes; Transfers; General Equilibrium; Frictions (search for similar items in EconPapers)
JEL-codes: E24 E62 H30 H53 J21 J31 (search for similar items in EconPapers)
Date: 2011-07-04
New Economics Papers: this item is included in nep-dev, nep-iue, nep-lab and nep-mac
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