Can the informal sector affect the relationship between unemployment and output? An analysis of the Mexican case

Abstract

A key aspect of developing countries is the existence of a large informal sector. In the present paper, we analyse the effect of this feature on the relationship between unemployment changes and output growth for Mexico, a country characterized by the existence of a large informal sector. Following recent studies on Okun’s coefficient, we first test whether the relationship between the cyclical components of unemployment and output is asymmetric. We then explore the possibility that this non-linear relationship may be affected by changes in the informal sector. Our results indicate that there is evidence of an asymmetric relationship between the cyclical components.