This study analyses the role of changes in informal/formal relative employment, wage levels and wage inequality in explaining increasing wage dispersion in Mexico during the 1987-1993 period. From 1987 to 1993, the variance of 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 increasing wage dispersion in the formal sector coupled with a faster growth in formal sector employment as a percentage of total employment. However, compression 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 sector share of total employment is explained by changes in the structure that determines sectoral employment; the rest is explained by changes in the composition of the labour force, particularly increases in the sectoral education 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 0.63. It seems that a relative improvement in unobserved skills in the informal sector helped to close the wage differential but this effect was partially offset by an increase in the relative prices of both observed and unobserved skills, as well as increases in relative observed skills in the formal sector, particularly education.

The paper analyzes the intertemporal relationship between oil duties, taxes, government spending, and GDP in Mexico during the 1981-98 period. The results from estimating a VAR model, impulse response functions, and variance decompositions on the quarterly series of taxes, government spending, oil duties, and GDP suggest that there seems to be a substitution effect between oil duties and tax revenues, and that tax revenues are not able to absorb temporary decreases in oil duties. Also, increases in tax revenue might lead to increasing government spending, but short-run increases in government spending are not likely to lead to political pressure to reduce the expected budget deficit via increased taxation and/or oil revenues. Lastly, GDP is not stimulated in the short-run by temporary increases in government spending and, thus, stabilization measures adopted in recent years to reduce the size of the government are not likely to significantly undermine GDP growth.

This article analyzes the effect of changes in the valued-added tax (VAT) rate on real VAT revenue in Mexico. Recently, there has been a heated debate on the optimal VAT system and the potential economic impact of a reduction in the VAT rate in the country. The results from estimating a VAT revenue model suggest that there seems to be a positive relationship between VAT revenue and the tax rate around the actual VAT rate, contrary to the assertion that there is a Laffer curve for the VAT in Mexico. A 1 percentage point change in the VAT rate results in a 2.4% change in real VAT revenues. Leaving aside other fiscal reform considerations, the results appear to be robust to alternative empirical specifications.

As a response to the 1994 Mexican peso crisis, in April 1995 the Mexican government increased the Value Added Tax (VAT) rate from 10 to 15%. More recently, policy makers have debated the potential economic impact of a reduction in the VAT rate on VAT revenue. Using a vector autoregression (VAR) model, this article analyzes the dynamics between government spending, inflation, the VAT rate, and VAT revenue in Mexico. The results from the estimated impulse response functions and variance decompositions indicate that VAT rate hikes lead to increases in government tax receipts. Further, tax collections play an important role in explaining movements in the rate of inflation in the Mexican economy. Overall, the findings are consistent with the view that increases (decreases) in the VAT rate result in larger (smaller) tax revenues. (JEL C32, E62, H21)