Informality and Dualism in Mexican Economy

Abstract

This paper analyzes the trajectory of informality as it has evolved since 1950. For doing so, the analytic frame elaborated by Arthur Lewis was applied. For Lewis, the informal employment results from the incapacity of an economy, with unlimited labour supply, to absorb all the working force at a given equilibrium salary. Therefore, in this essay, informality represents the residual labour that remains stacked in the non-modern sector, once the modern sector has absorbed all the labour it can employ at a given equilibrium wage and available capital. The analysis starts with a mathematical formalization of the Lewis model and proceeds to evaluate one of its main conclusions using observed data of the Mexican economy. The model accurately represents the stylized facts of the economy and allows concluding that, after the introduction of the structural reforms, the modern sector of the Mexican economy experienced a large increase in capital intensity which enlarged its capital/labour ratio and inflated the costs of generating formal employment. In these conditions, and taking into consideration the meagre investments registered during the last two decades it is not surprising the immovability of the share of formal in total employment as well as the almost negligible increases in total labour productivity and total income per head.