The decline of the labour share in Mexico: 1990-2015

This paper studies the decline of the labour share in Mexico during the period 1990-2015. It calculates the wage share and alternative measures of the labour income share (which includes labour income of the self-employed) for the whole economy, the private business sector, and its major economic sectors. It carries out a shift-share analysis showing that the decline in the labour share is mostly explained by reductions within the economy's major sectors (including within manufacturing, tradables, and non-tradables) rather than by a recomposition of value added towards those with low labour shares. It distinguishes within each major area of economic activity a modern wage-employment sector and an informal self-employment one. In contrast to agriculture - where the labour share fell due a shift of labour force towards the wage-employment sector - in other major areas of the economy the fall in the labour share is explained by reductions within the wage-employment sector. Econometric estimations indicate that parallel declines in the wage share and relative productivity of non-tradables and in the US manufacturing labour share all played a large role in the reduction of the manufacturing wage share in Mexico. More generally, the analysis suggests that the lagging productivity of the informal non-tradable sector of the economy - itself a reflection of the country's low aggregate rate of economic growth - is a crucial factor in the fall of the labour share in the formal sectors. The paper concludes by discussing possible explanations for the paradox of the slow rate of economic growth in Mexico despite the rise in the profit share, and by pointing out remaining challenges for reconciling the different sources of data in the calculation of the labour share in Mexico.