Remittances and Informal Employment
Ximena lives in Guadalajara. Every month her uncle, who works at a construction site in Texas, sends money to her mom. One month the uncle sends the same amount in dollars, but less money arrives in pesos. How is that possible? And her mom sells clothes at a street market (tianguis), with no contract and no IMSS (social security): what does that mean for her and for the country? This section answers both questions.
What Remittances Are
A remittance is money that a person working abroad sends to their family in their home country. In Mexico's case, almost all of it comes from the United States and is received in dollars, which the family exchanges for pesos to pay for food, rent, school, or medical services.
Remittances are an inflow of dollars into the country, just like an export. That is why they appear in the external sector accounts, and Banxico (Mexico's central bank) publishes every month how much arrives. For many households they are an important source of income, especially in states such as Michoacán, Zacatecas, Oaxaca, or Guerrero.
Remittances and the Exchange Rate
The family receives dollars, but spends in pesos. What they get depends on the exchange rate: how many pesos are paid for one dollar.
$$\text{pesos recibidos} = \text{dólares enviados} \times \text{tipo de cambio}$$When the dollar costs fewer pesos, the peso appreciates. When it costs more, the peso depreciates.
| Situation | Exchange rate | Family receiving remittances | Mexican tourist in the U.S. |
|---|---|---|---|
| Peso appreciates | goes down (17.20 → 16.50) | Receives fewer pesos: loses | Each dollar costs fewer pesos: gains |
| Peso depreciates | goes up (17.20 → 18.00) | Receives more pesos: gains | Each dollar costs more pesos: loses |
The logic: whoever receives dollars gains when the dollar rises; whoever spends dollars gains when the dollar falls.
Remittances are the money that people working abroad send back to their families in Mexico. A family in Guadalajara receives $450$ dollars every month from a relative…
Remittances are the money that people working abroad send back to their families in Mexico. A family in Guadalajara receives $450$ dollars every month from a relative working in the United States.
- a) At an exchange rate of $\$17.20$ pesos per dollar, how many pesos does the family receive each month?
- b) If the peso appreciates and the exchange rate drops to $\$16.50$, how many pesos does it receive now? Explain who wins and who loses when the peso appreciates: the family receiving remittances or the Mexican tourist traveling to the United States?
What Informal Employment Is
A person works in the informal sector when their job does not meet the protections required by law: they have no written contract, are not enrolled in the IMSS, and do not receive benefits such as the year-end bonus (aguinaldo), vacation, or profit sharing (PTU). Examples: street vendors, tianguis workers, domestic workers without a contract, or construction workers hired by the day.
INEGI (Mexico's national statistics institute) measures employment with the ENOE (National Survey of Occupation and Employment). With it, it calculates the informal employment rate:
$$\text{tasa de informalidad} = \frac{\text{personas ocupadas informales}}{\text{total de personas ocupadas}} \times 100$$In Mexico, more than half of employed people are in this situation.
Consequences and Public Policy
For the worker:
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Without IMSS: no medical service or paid sick leave if they get sick.
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No contributions toward a pension (Afore) or housing loan (Infonavit): retirement will be hard.
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No year-end bonus, paid vacation, or profit sharing: lower and less stable income.
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They can be fired without severance pay.
For public finances:
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Less tax is collected (income tax, or ISR, and VAT, or IVA) and fewer IMSS contributions.
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The government has less money for public services, and the burden falls on those who do pay.
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Informal businesses tend to be less productive, which slows growth.
Possible public policy measures:
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Simplify tax registration (such as the SAT's Simplified Trust Regime) so that paying taxes is easy.
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Make it easier for self-employed and household workers to enroll in the IMSS.
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Reduce the costs of formal hiring for MSMEs (micro, small, and medium-sized businesses), with temporary support.
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Strengthen labor inspection (STPS, the Ministry of Labor) and training to improve productivity.
In Mexico, more than half of employed people work informally: with no contract, no social security (IMSS), and no legal benefits. a) At a street market, $40$ out of $70$…
In Mexico, more than half of employed people work informally: with no contract, no social security (IMSS), and no legal benefits.
- a) At a street market, $40$ out of $70$ stalls are informal. Compute the percentage they represent and compare it with the national figure mentioned above.
- b) Explain two consequences of informality for the worker and one for the country's public finances.
- c) Propose a public policy measure that could reduce informality and justify it.
Go back to the beginning: the same shipment of dollars arrived with fewer pesos because the peso appreciated, and Ximena's mom, by selling at the tianguis without a contract or IMSS, is part of the majority of employed people in Mexico who work in the informal sector.