The decline of the labor income share in Mexico, 1990–2015

Abstract

• Mexicós labor share fell from 1990 to 2015 because of reductions in formal sectors. • Stagnant productivity in the self-employment sectors held real formal wages back. • With formal wages anchored, formal productivity gains accrued to profits. • Slow economic growth had a crucial role in the decline of the labor share. • A remaining puzzle is why a rising profit share failed to stimulate growth. The paper studies the decline of the labor income share ( LIS ) in Mexico during the period 1990–2015. The decline is mostly explained by reductions within the economy’s major sectors (including manufacturing, tradables, and non-tradables) rather than by a recomposition of value added towards sectors with low labor shares. In contrast to agriculture—where LIS fell due to a shift of labor force from self-employment to wage-employment—in other major areas of the economy the fall in LIS is explained by reductions within the wage-employment sector. Econometric estimations indicate that parallel declines in the wage share and relative productivity of non-tradables and in the US manufacturing labor share all played a large role in the reduction of the manufacturing wage share in Mexico. More generally, the analysis suggests that the lagging productivity of the economy’s informal non-tradable sector—itself a reflection of the country’s low aggregate rate of economic growth—is a crucial factor in the fall of LIS in the formal sectors. The paper concludes by discussing possible explanations for the paradox of the slow rate of economic growth in Mexico despite the rise in the profit share.