For the last eight years or so, going back before the pandemic, Mexico’s economy has been growing at 1% per year or less, which is barely faster than the population of Mexico has been growing. It is a fact of arithmetic that an upper-middle-income country, as Mexico is classified by the World Bank, will not become an upper-income country unless it grows faster than the upper-income countries. Tony Payan, Gabriela Siller Pagaza, José Iván Rodríguez-Sánchez explore the dimensions of the problem in “Locked in Low Gear: Mexico’s Struggling Economy” (Rice University Baker Institute for Public Policy, April 15, 2026).
As a starting point, it’s useful to recognize that Mexico’s economy is readily divided into “formal” and “informal.” The informal economy is essentially not taxed or regulated by the government, and workers in this sector tend to be lower-skilled, with less equipment or machinery to do their jobs, and less connection to the modern economy. In addition, informal workers are not eligible for many government benefits. This formal/informal division is common in developing economies. The hope is that over time, the formal sector will include the more modern, productive, and expanding firms, so there will be a gradual shift to the formal economy.
But survey data for 2024 suggests that over half of Mexico’s workforce is still in the informal economy. Indeed, a combination of higher tax rates, higher minimum wages, and more government-mandated vacation days seems to be causing a number of smaller firms to move from the formal to the informal economy. There’s also some belief that informal firms may be less exposed to official corruption and to organized crime.
A vicious cycle emerges here. If workers know that most of the jobs available to them will be low-skill jobs in the informal sector with low-wage employers, their incentives to gain education and skills are reduced. Firms expecting to be in the informal sector have little reason to invest in machinery or equipment, and no reason to invest in research and development, because they have little desire to expand or to become prominent. There is little pressure from the business community for the government to improve infrastructure or institutions, because a large part of business community is hiding in the shadows. With a large informal economy, it’s harder for the government to collect revenues that could go into improvements in education, health care, infrastructure, or technology diffusion. Instead, Mexico’s government spending is heavily aimed at pensions and corporate subsidies, and government debt continues to rise.
Of course, the Trump administration tariffs haven’t helped to improve Mexico’s economic outlook either–although Mexico’s economy has been somewhat protected from the tariffs by the pre-existing US-Mexico-Canada Trade Agreement (the update of the earliet North American Free Trade Agreement).
This diagnosis is not especially new. Back in 2019, I was writing in “Mexico Misallocated” about how Mexico’s institutional framework does not create a situation in which higher-productivity firms are likely to expand, thus expanding the formal economy. There is no magic-bullet policy solution either; instead, an array of legislative, budgetary, regulatory, and judicial policies need rethinking.
