Informality and the expansion of social protection programs

This paper examines the impact of the expansion of social protection programs on informality using the case of Mexico. A social protection system based on two components was created during the last decade in the country. The first is Seguro Popular which provides a minimum set of health benefits to the population not covered by formal social security. The other component of the system is a conditional cash transfer called Oportunidades. Both theoretically affect incentives to work in the informal sector. Seguro Popular decreases the cost of working informally and Oportunidades increases the benefits of concealing income by working informally. Using the fact that both systems were introduced in different municipalities at different times, we show that, surprisingly, neither significantly affected overall informality. While informality significantly increased for some sub-groups after the introduction of Seguro Popular, the increase was less than 2 percentage points. We also find no effect of Seguro Popular on transitions between formal and informal jobs, and no effect on wage differentials between the formal and the informal sector. These results suggest that payroll financed health insurance does not affect wages or labor mobility in Mexico. Overall, Mexico’s expansion of social protection system came at little to no cost in terms of labor supply distortions.