The effect of doubling the minimum wage and decreasing taxes on inflation in Mexico. Raymundo M. Campos-Vazquez. Gerardo Esquivel. Economic Letters. 2020.
Introduction. Doubling the minimum wage and halving taxes in the northern border in 2019.
Predictions.
- The significant increase in the minimum wage might increase prices 1.5% approx.
- The halving of VAT would imply a decrease in prices approx 1.4%
Methods.
- Construct a synthetic control
- A fixed effects regression
Results.
- After application of policies in 2019, inflation started to decrease more in the border municipalities than in the rest of the country. The synthetic control quasi mimicked the treatment group before policies, and changed to adapt more to the rest of the country after policies.
- The dif. in inflation between treatment group and synthetic control before policies moved around zero. After policies, it started to be negative. Dif. between the control units and its associated synthetic controls move around zero, but after policies, their variances increase.
- The two methods produce similar estimates of the joint impact on inflation of the minimum wage and VAT cut.
- There is no statistically significant positive effect on products without VAT. The effect of the minimum wage increase on prices was either null or very small.
Conclusions.
- Inflation decreased in border municipalities an average of 1.8 percentage points in the first year. This means that the effect of the cut in VAT predominated over the effect (if any) of the minimum wage increase.
- The empirical estimates for goods without VAT, suggests that the effect of doubling the minimum wage in the Mexican border municipalities was either very small or null.
Further readings.
- Check Abadie on Synthetic Controls.
