NAIRU and Informality in the Mexican Labor Market
The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is an essential indicator for the reading of the economic cycle. However, estimation of this rateis complexsince it is not directly observable. Insome emerging economies, such as Mexico, the presence of a sizeable number of informal workers imposes an additional challenge when estimating and interpreting the NAIRU. The informal sector has the wage flexibility needed to incorporate the majority of the individuals that cannot find a job in the formal labor market. As a result, the unemployment rate in Mexicois low since it only includes frictional employment and a fraction of the cyclical unemployment. To address this issue, in this paper we propose a new measure of NAIRU that includes informality in the labor market as an indicator of labor underutilization. Weestimate the NAIRU over time using both the traditional unemployment rate (NAIRU-trad) and the rate that takes into account both unemployment and informal labor(NAIRU-inf). We find that both measures of NAIRU and their corresponding labor market slack follow a similar pattern overtime. The slack in the labor market estimated with the indicator that includes informality (slack-inf) could be a valuable alternative variable to the traditional measure of slack (slack-trad) given the presence of a significantinformal sector in Mexico. We conclude that this new indicator of slack could become a useful tool for monetary policy in countries with a sizeable informal sector and a relatively low unemployment level.