Informality as a Buffer of the Labor Market in Contractionary Phases of the Business Cycle

Abstract

Given its structural persistence in the Mexican economy, labor informality constitutes a complex phenomenon that constrains economic and social development while reflecting deep conditions of vulnerability within the labor market. In this context, this study aims to analyze the joint impact of key macroeconomic variables—namely gross domestic product, the interest rate, and the unemployment rate—on the labor informality rate, in order to understand its cyclical dynamics and transmission mechanisms. To this end, a two-stage least squares (2SLS) econometric model is employed, using quarterly data for the period 2006–2024. This methodology allows for the identification of both direct and indirect effects among variables, particularly in the presence of potential multicollinearity. The results indicate that labor informality behaves as a countercyclical variable, increasing during periods of economic slowdown and functioning as a buffer mechanism within the labor market during contractionary phases of the business cycle. As its main contribution, this study provides empirical evidence on the role of informality as an adaptive response to macroeconomic shocks and highlights the need for public policies that not only reduce its prevalence but also improve working conditions in this sector, thereby breaking its structural link with vulnerability.