(with Daniela Puggioni)
Abstract: This paper studies Mexico’s 2019 reform, which doubled the minimum wage in 43 northern municipalities while raising it only modestly elsewhere. Using matched employer–employee administrative records, we show that despite unprecedented wage increases in affected regions, formal employment remained essentially unchanged, yielding employment elasticities far smaller than those typically found in the literature. We argue that this puzzle can be explained by the presence of partial informality within the formal sector: firms complied with the new wage floor by raising reported wages while keeping informal “envelope” payments constant. We formalize this mechanism in a monopsonistic model where firms strategically choose both wages and the extent of underreporting. We then test the model’s predictions by complementing administrative records with self-reported income data from a labor force survey similar to the U.S. Current Population Survey. The results show that the gap between self-reported and administrative wages fell sharply after the reform, driven mainly by small firms, suggesting improved compliance in wage reporting. While workers’ disposable income declined by about 3 percent, higher reported wages translated into larger pension contributions, creating a trade-off between current earnings and future retirement income. These findings highlight how underreporting shapes the distributional and fiscal consequences of minimum wages, offering new insights into the evaluation of labor market policy in developing economies.
(with Daniela Puggioni, Mariana Calderon, Alfonso Cebreros Zurita, Leon Fernandez Bujanda, and David Jaume)
Quantitative Economics, 2022
Abstract: We characterize the salient features of the distribution of (log) earnings of formal workers in Mexico using social security records for the period 2005–2019. The analysis is based on a nonparametric approach and is focused primarily on the properties of the distribution of earnings changes. We find strong evidence of deviations from normality of this distribution in terms of negative skewness and high kurtosis, with these deviations varying with income and along the worker's life cycle. A comparison between results obtained with administrative data and household survey data suggests that this latter source of information is inadequate to fully capture the evolution of inequality and the properties of earnings changes as nonresponse is nonrandom and concentrated among formal and highly educated workers—likely the highest earners. Due to the relative size of the informal sector in the Mexican economy, which results in a large number of workers maintaining a weak attachment to formal employment, we also study the impact of transitions out of and back into formal employment on wages earned in the formal sector. We document that workers who exit formal employment experience a significant wage penalty upon reentry taking, on average, 3 or more years to achieve comparable preexit wage levels.
Spatial Within-firm Reallocation: Evidence from Mexico
(with Daniela Puggioni)
Abstract: This paper studies how multi-location firms adjust to geographically differentiated labor cost shocks. We exploit Mexico’s 2019 minimum wage reform, which doubled the wage floor in the Free Zone of the Northern Border while raising it only moderately elsewhere, to examine the internal reallocation of labor across regions within firms. Using administrative records from the Mexican Social Security Institute (IMSS) and an event-study design, we document that highly exposed multi-location firms reduced their employment share in the north by up to five percentage points in the months following the reform. Transition rate decompositions reveal an immediate spike in within-firm worker switching and a subsequent rise in separations, consistent with rapid reallocation to lower-cost regions. Comparisons with single-location firms, reweighted through entropy balancing, show that while both groups eventually shifted employment, multi-location firms adjusted almost instantaneously. These findings highlight spatial reallocation within firms as a key margin of adjustment to place-based policies, exhibiting the need to account for cross-regional spillovers when evaluating geographically targeted interventions in developing economies.
Digital Nomads and Gentrification in Mexico City
(with Benjamin Pirie)
Abstract: This paper investigates the local economic impacts of gentrification driven by digital nomads in Mexico City. Unlike conventional gentrification, digital nomads do not compete for local jobs but generate new demand for goods and services, allowing us to isolate demand-side channels. We construct a novel dataset combining block-level establishment outcomes from Mexico’s National Directory of Economic Units (DENUE) with geolocated AirBnB listings as a proxy for digital nomad presence. Using within-neighborhood comparisons of blocks with varying exposure to AirBnBs between 2019 and 2023, we find that a 10 percent increase in nearby AirBnB units leads to an average gain of 0.41 employees per block, representing 12% of average block-level employment growth. These effects are concentrated in high-end consumer service industries, such as restaurants, coffee shops, and retail, while non-consumer service establishments are more likely to close. Commuting data suggest that many of the workers who benefit from these new jobs reside outside the most gentrified neighborhoods, potentially mitigating exposure to rising local prices. Our findings highlight the importance of demand-driven mechanisms in shaping urban labor markets and provide new evidence on how remote work reshapes city economies in developing-country contexts.