Mexico's Informal Economy

Why over half of Mexican workers are informal, how economist Santiago Levy argued social programmes worsened it, and parallels with India.

More than half of Mexico’s workers are in the informal economy.

What it means

Workers without social security, contracts or pensions.
Small unregistered businesses.
Street vendors and domestic workers.

Why it persists

Payroll taxes and contributions raise the cost of formal jobs.
Complex regulation.
Weak enforcement.

Santiago Levy’s argument

Economist Santiago Levy, who designed Progresa, argued in “Good Intentions, Bad Outcomes” (2008) that Mexico’s social policy taxed formal work (through contributions) while subsidising informal work (through free non-contributory benefits), encouraging informality.

Productivity

Informal firms tend to be small and low-productivity, dragging on growth.

Parallels with India

India has an even larger informal workforce, around 80 to 90 percent of workers, with similar debates about labour laws and social security.

Reforms

Mexico has tried simplified tax regimes and outsourcing reforms (2021) to push formalisation.

The informal bakery

A family bakery in Puebla stays unregistered to avoid taxes and social security costs, remaining small and unable to get bank loans.

Thinking informality is only about avoiding taxes

Policy design can also encourage it.

Key takeaways

Over half of Mexico's workers are informal.
Payroll costs and regulation encourage informality.
Levy argued social policy subsidised informal work.
India faces similar informality challenges.