Long-lasting effects of a depressed labor market: Evidence from Mexico after the great recession

Abstract

This paper investigates the magnitude of employment and earnings losses in Mexico induced by the Great Recession. Using longitudinal social security data and exploiting regional variation in local shocks, we identify a variety of labor market responses during the recession. We find that the costs of the recession were substantial and unequal. In the short run, a local shock of one standard deviation above the average reduced the probability of employment by 0.53% and daily wages by 0.86% in the formal sector, compared to pre-recession levels. In the long run, formal employment and wages for affected workers never returned to pre-recession levels. The effects of the recession were heterogeneous across workers, and they were disproportionately negative for men and younger workers. We also estimate the different dimensions of workers’ adjustment in response to the recession: we find that a shock that is one standard deviation above the mean reduced employment by the end of the recession, while increasing unemployment, informality, the economically inactive population, and migration to the U.S.