| Informality in the labor market is a phenomenon that hinders productivity growth causing low tax collection and social security imbalances, among other pervasive effects to any country's economy. This situation is particularly striking in Mexico, where more than 30 million people are working either in not registered firms and/or not have access to social security. Stringent regulation that causes high transaction costs has been regarded as one of the many causes of informality in the labor market. To curb that effect, in 2012 a labor reform in Mexico was passed to improve resolution in labor conflicts, incorporate different ways of contracting, and include productivity as a way to determine job promotions. In this work, I assess if the labor market in Mexico became more flexible due to the reform. I define flexibility as the ability for both workers and firms to match accordingly to their productivity levels. In the presence of lower firing and hiring costs, worker turnover will be higher and employment spells will be shorter. To that purpose, I use labor data collected quarterly through household surveys. The methodological approach is an exponential hazard model and a difference-in-difference analysis. The objective is twofold. First, analyze if there was a change in the duration of employment spells in the formal sector relative to the informal sector. Second, study if the changes affected the employment spells for the youngest workers. For the former, I find that both sectors diminished their duration of employment, although the reduction in the formal sector was higher (of almost 4 months). For the latter, I find no significant change for younger workers. In addition, I study the impact of the reform according to age, education, and sector of the economy. I conclude that the labor reform increased flexibility in the labor markets, although not enough or to the extent needed to create widespread incentives to work in the formal sector. In this sense, additional policies are needed to complement and enhance its effects. |
