The Hidden Response to Minimum Wages: Wage Under-Reporting and Compliance in Mexico

• In Event: Tax Enforcement and Wage Reporting

Abstract

This paper examines the effects of a large and spatially targeted minimum wage reform on compliance and wage reporting in Mexico. In 2019, the government doubled the minimum wage in 43 municipalities along the northern border. Using detailed administrative data covering formal workers and firms, we document sharp increases in reported wages but surprisingly limited effects on employment, worker mobility, or firm exit, especially at the bottom of the wage distribution. To reconcile these patterns, we develop a simple monopsonistic model in which firms can under-report wages to reduce payroll tax liabilities. In this environment, a binding minimum wage constrains only the reported component of pay, potentially raising observed wages without affecting total compensation. The model predicts that firms will respond by narrowing the gap between actual and reported wages. Empirically, we find suggestive evidence of this mechanism: after the reform, the distribution of wages in administrative records converges toward self-reported wages in household survey data in treated cities, but not in control cities. These results imply that in contexts with weak enforcement, minimum wage policy can serve not only as a redistributive tool but also as a lever to improve compliance in the formal sector. This has important implications for tax capacity and social protection systems in developing countries.

Author

• Jose Inguanzo, UCLA