The effect of drug-related violence on labor productivity in Mexico: A spatial panel data analysis

Abstract

This study examines the determinants of labor productivity for Mexico at the state level over the period 2003-2016 using annual data. The GMM technique is used to estimate a spatial panel data model that includes a spatial weight matrix (W), the spatial lag of the dependent variable ( ), the spatially weighted average of lagged drug-related violence rate ( ), the spatial lag of the error term ( ), and adds instrumental variables to control for the endogeneity of drug-related violence. Our results indicate that drug-related violence exerts a negative and significant impact on labor productivity. Similarly, there is evidence of the negative spillover effects of drug-related crimes on regional GDP per worker. Public investment per capita has a highly significant effect on labor productivity while the impact of the 2008-2009 financial crisis was negative.