Distortion and Protection in the Mexican Labor Market

The Mexican labor market is characterized by two dramatic features: a very large share of the work force is informal, defined as workers in firms of under six employees who do not enjoy labor protections; and labor turnover is very high. After synthesizing research emerging over the last few years, I offer a view of the dynamics of the market substantially at odds with more traditional views that see severe government or union intervention in wage setting as segmenting the markets into good formal jobs and inferior informal jobs. This turns out to have important implications, both for what types of labor market "reform" are desirable and for how we use these two features as diagnostics of labor market distortion and rigidity.