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Over the last decade, Mexico’s unit labour costs decreased relative to other emerging markets’, especially compared to China’s. This decrease boosted Mexico’s trade competitiveness, particularly in the manufacturing sector. However, Mexico’s increasing competitiveness masks one of the country’s fundamental concerns, which is the absence of productivity improvements. The aim of this paper is two-fold: first, we examine the evolution of total factor productivity in Mexico’s manufacturing sector, as compared to China’s. Firm-level data is employed to analyse the distribution and characteristics of productivity across Mexico’s regions. Second, using regional data for the period 2005–2012, we study the policy impediments behind sluggish productivity improvements, particularly to determine how labour informality may have contributed. The study takes advantage of Mexico’s heterogeneity across regions in terms of productivity, market regulation, financial constraints and firm size to identify economic policies that can help to boost productivity in the future.

Economics --- China, People’s Republic

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Informality has important implications for productivity, economic growth, and the inequality of income. In recent years, the extent of informal employment has increased in many of Mexico's states, though highly heterogeneously. The substantial differences across states in terms of informal employment can be helpful in explaining differences in economic growth outcomes. This paper studies the determinants of informal employment using states' diverging outcomes to identify causal factors, taking into account potential endogeneity. The results suggest that multiple factors explain differences in informal employment across states, including per capita income, the quality of labour skills, differences in the prevalence of microenterprises, the cost to start a business, restrictions on foreign investment, the rule of law and incidence of corruption.

Economics --- Mexico