The effect of minimum wage on poverty and household income in Mexico: an empirical analysis

Abstract

Since 2019, Mexican authorities have implemented differentiated increases in the minimum wage. By 2020 and 2022, the minimum wage in the border with the US was 50.6% higher than in the rest of the country. Official national poverty measures from 2018 to 2022, indicate a decline in the percentage of the population in income poverty and extreme poverty by 6.4% and 1.9%, respectively. This research examines the impact of substantial minimum wage hikes on poverty and household income in Mexico. Utilizing Differences-in-Differences and Changes-in-Changes approaches, along with ENIGH data, we find that increases in the minimum wage lead to: 1) a 6.8% rise in household per capita income; 2) a reduction in the probability of being in income poverty, with minimum wage elasticities with respect to the poverty rate of -0.17 and -0.43 for 2020 and 2022, respectively; 3) a decrease in the probability of being in labor poverty, with elasticities of -0.14 and -0.31 for the same years, respectively; and 4) no significant effect on the probability of being extremely poor. Further analysis of the quantile treatment effects reveals that the most substantial impacts are concentrated among non-poor households with formal workers and middle incomes. These results remain robust after accounting for concurrent policy measures such as increased transfers and a reduction in VAT.