Labor law, informal sector and multifactor productivity in Mexico

Abstract

We analyze the Mexican labor regulations and its effects on the informal sector and multifactor productivity levels. It is found that hiring and firing cost are the most rigid prescriptions of the Mexican labor code, compared to the labor legislation of a sample of countries, while minimum wage and collective bargaining prescriptions do not impose special inflexibilities on the operations of the Mexican labor market. Our empirical findings suggest that legislation by itself does not explain the long term persistence of the informal sector, unless it is taken into account the influence of factors beyond de labor market, namely the limited capability of the Mexican institutions to enforce the law and guarantee the governability of the country. Therefore, it is concluded, a labor code reform to increase its flexibility, by itself, will not reduce the size and persistence of the informal sector, and increase the efficiency of the labor market, and boost multifactor productivity standards of the Mexican economy, if simultaneously the country does not embark upon a comprehensive process of institutional and technological modernization