The Impact of Minimum Wage Increases on Job Transitions: Evidence from Mexico

Abstract

This study examines the impact of a substantial increase in the minimum wage on labor market transitions in Mexico, with a focus on formal and informal employment, and unemployment status. Leveraging a 2019 policy that doubled the minimum wage in 43 northern border municipalities while implementing only modest increases elsewhere, we employ a difference-in-differences design using panel data from the Mexican National Survey of Occupation and Employment (ENOE) for 2016–2024. By 2024, the minimum wage in the affected municipalities had more than tripled relative to 2018 levels, while it more than doubled elsewhere. Our findings indicate that while the policy significantly raised labor incomes in both formal and informal sectors, its impact on employment transitions was modest. We observe a short-term increase in transitions from informal to formal employment, but no lasting effects on broader labor dynamics, including transitions to and from unemployment. These results contrast with theoretical models predicting substantial reallocation effects. Future research should consider theoretical frameworks that incorporate alternative adjustment mechanisms in highly informal economies.