Financial Access and the Structural Persistence of Labor Informality: Evidence From Mexico

Abstract

Despite two decades of financial sector expansion and rising educational attainment, labor informality still affects more than half of Mexico's employed workers, suggesting the persistence of structural rather than transitional forces. Using official quarterly Mexican data for 2005–2024, this paper estimates the long-run relationships among labor informality, labor poverty, labor force participation, and access to capital (financial access). The empirical strategy combines an autoregressive distributed lag (ARDL) error-correction model with unit-root and cointegration tests, complemented by OLS estimates using HAC standard errors. Access to capital emerges as the determinant most robustly associated with informality; its negative sign and magnitude remain stable across logarithmic and dynamic specifications and in specifications that include a COVID-19 dummy, whereas the labor force participation channel appears cyclical and becomes statistically insignificant once the pandemic period is explicitly modeled. Labor poverty retains a stable positive association throughout. A negative and statistically significant error-correction coefficient points to gradual mean reversion toward the estimated long-run relationship. Although formal statistical support for cointegration is mixed, the estimated long-run relationships remain sufficiently stable to be interpreted as persistent structural associations rather than causal effects. These findings suggest that enforcement-based formalization policies are unlikely to reduce informality unless accompanied by measures that expand access to productive finance and raise labor incomes, particularly for households and micro- and small-scale enterprises facing binding financial constraints.