 Cross†Subsidies, and the Elasticity of Informality to Social Expenditures: The Case of Mexico's Seguro PopularJorge Alonso†Ortiz and Julio Leal Ordóñez Review of Income and Wealth, 2018, vol. 64, issue 2, 482-512 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. Date: 2018 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:revinw:v:64:y:2018:i:2:p:482-512 Ordering information: This journal article can be ordered from Access Statistics for this article Review of Income and Wealth is currently edited by Conchita D'Ambrosio and Robert J. Hill More articles in Review of Income and Wealth from International Association for Research in Income and Wealth Contact information at EDIRC. |
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