Long-lasting effects of a depressed labor market: Evidence from Mexico after the great recession

This paper investigates the magnitude of employment and earnings losses in Mexico induced by the Great Re-cession. Using longitudinal social security data and exploiting regional variation in local shocks, we identify a variety of labor market responses during the recession. We find that the costs of the recession were substantial and unequal. In the short run, a local shock of one standard deviation above the average reduced the probability of employment by 0.53% and daily wages by 0.86% in the formal sector, compared to pre-recession levels. In the long run, formal employment and wages for affected workers never returned to pre-recession levels. The effects of the recession were heterogeneous across workers, and they were disproportionately negative for men and younger workers. We also estimate the different dimensions of workers' adjustment in response to the reces-sion: we find that a shock that is one standard deviation above the mean reduced employment by the end of the recession, while increasing unemployment, informality, the economically inactive population, and migration to the U.S.

Automated summary

This paper examines the effects of the Great Recession on employment and earnings in Mexico. Using social security data and regional variation in shocks, the study finds that the recession had substantial and unequal costs. In the short run, a local shock above average reduced employment probability and daily wages in the formal sector. In the long run, formal employment and wages for affected workers never fully recovered. The recession had heterogeneous effects, with men and younger workers experiencing disproportionate negative impacts. The study also explores different dimensions of workers' adjustment, such as unemployment, informality, economically inactive population, and migration to the U.S.