Workers, Workplaces, Sorting, and Wage Dispersion in Mexico

With Jorge Pérez Pérez. More recent version. Alianza EFI Working Paper WP2-2022-012.

Between 2004 and 2018, the spread of wages in Mexico’s private labor sector remained stable. Nonetheless, the underlying factors behind salary dispersion underwent significant shifts nationally and regionally. To uncover these changes, we analyze a matched employer-employee dataset comprising the near-universe of Mexico’s formal workforce. We estimate log wage models with worker and workplace fixed effects capturing over 90% of wage variation. We then decompose national and regional earnings dispersions into worker, workplace and assortative matching components. At the national level, we find that sorting increased its importance over time, from explaining 16% of total wage variance to 19\% by the end of the period. Worker- and workplace-specific factors contributed between 35% to 42% and 33% to 38% to the total spread of remunerations, respectively. However, while worker-level factors were the main contributors to salary variability in the 2004-2008 period, workplace factors became the more important force in the 2014-2018 time segment. The influence of workplace factors on wage dispersion correlates negatively with regional economic development: it is lowest in the North, Mexico’s most-developed region, and largest in the South, the country’s least-prosperous region.