Analysis of Job Transitions in Mexico with Markov Chains in Discrete Time

Abstract

In this paper, we suggest a holistic explanation for the role currently played by self-employment in less developed countries and, consequently, a reason for its persistence and growth in recent years. At the same time, we link this explanation with current discussions on the role of very small economic units and informality and their relation to unemployment rates. In general, countries where the combined share of self-employment and very small units is high exhibit lower unemployment rates than countries of similar levels of development, but where the small units’ share is less significant. Using a rich set of labor data for Mexico, we examined flows between seven different labor statuses. Equilibrium vectors estimated through Markov matrices show that flows are linked to the economic cycle and that there exists a gender difference in behavior in these flows. We found that a dichotomic explanation of self-employment persistence (entrepreneurial reservoir/survival strategy) is not supported by evidence. We also found that strong links exist between the size of the self-employed sector and unemployment rates. With the help of a set of surveys on very small economic units, we identified a three-tier structure for very small economic units in Mexico. Thus, self-employment and small-sized economic units are both a source of income and a source of cheap goods for lower-income sectors. They serve as a buffer against unemployment and help to provide subsistence conditions for the poorest segment of the population. Finally, we discuss some questions that were raised along the text that help to guide future research.