Increasing wage dispersion and the changes in relative employment and wages in Mexico's urban informal sector: 1987-1993

This study analyses the role of changes in informal/formal relative employm ent, wage levels and wage inequality in explaining increasing wage dispersi on in Mexico during the 1987-1993 period. From 1987 to 1993, the variance o f the log of hourly wages for Mexican workers increased by more than 50 per cent. Using data from the Encuesta nacional de empleo urbano we find that this increase in the overall wage dispersion was mainly driven by increasin g wage dispersion in the formal sector coupled with a faster growth in form al sector employment as a percentage of total employment. However, compress ion in the distribution of wages within the informal sector contributed to substantially slowdown the increasing overall wage inequality. About 60 per cent of the 1987-1993 4.65 percentage point reduction in the informal sect or share of total employment is explained by changes in the structure that determines sectoral employment; the rest is explained by changes in the com position of the labour force, particularly increases in the sectoral educat ion gap and a change in the regional relative share of sectoral employment. Also, from 1987 to 1993 the sectoral wage ratio increased from 0.59 to 0.6 3. It seems that a relative improvement in unobserved skills in the informa l sector helped to close the wage differential but this effect was partiall y offset by an increase in the relative prices of both observed and unobser ved skills, as well as increases in relative observed skills in the formal sector, particularly education.