The historical evolution of the minimum wage policy in Mexico: from local to federal determination

There are challenges to defining an adequate minimum wage policy without causing severe distortions in the labour market. A critical decision is whether to set a federal minimum wage or regional rates, which are more common in developing nations. From 1940 to 2021, Mexico substantially reduced minimum wage zones across states, significantly transforming its minimum wage policy from local to federal determination. By analyzing eight decades of data, our study examines how this policy shift affected the manufacturing sector. We employ the Kaitz index to measure minimum wage binding and assess labour market flexibility. By accounting for causal relationships, our findings reveal that reducing minimum wage zones is correlated with higher average wages and increased labour market flexibility. The minimum wage policy increased wages and proved more effective in regions where minimum wage zones underwent dramatic reductions.