Modeling the Informal Economy in Mexico. A Structural Equation Approach

Brambila Macias, Jose (2008): Modeling the Informal Economy in Mexico. A Structural Equation Approach.

Abstract

This paper uses annual data for the period 1970-2006 in order to estimate and investigate the evolution of the Mexican informal economy. In order to do so, we model the informal economy as a latent variable and try to explain it through relationships between possible cause and indicator variables using structural equation modeling (SEM). Our results indicate that the Mexican informal sector at the beginning of the 1970’s initially accounted for 40 percent of GDP while slightly decreasing to stabilize around 30percent of GDP in the late 1980’s until our days. The model uses tax burden, salary levels, inflation, unemployment and excessive regulation as potential incentives or deterrents for the informal economy. The results confirm in particular the importance of salaries and excessive regulation as causes of the informal economy in Mexico and confirm a positive relation between informality and GDP.

• Item Type: MPRA Paper
• Language: English
• Keywords: Informal Economy; Economic Growth; Structural Equations
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C39 - Other; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy

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