۱- Introduction

۲- Theory: Predictions

۳- Methods

۴- Results

۵- Conclusions

References

Abstract

We analyze the effect on inflation of doubling the minimum wage and cutting the value-added tax in half. Annual inflation decreased by 1.8 percentage points, suggesting that the minimum wage increase had a limited or even null effect on prices.

Introduction

Mexico elected a new government in the summer of 2018, in a context of high levels of violence in municipalities on the U.S. border and throughout the country, and of growing antiimmigration rhetoric in the U.S. For these reasons, and also because of concerns about migration from Central American countries, the newly-elected president of Mexico, Andrés Manuel López Obrador, announced his intention to generate better working conditions at the border to reduce incentives to cross to the U.S. The new government implemented a set of place-based policies that went into effect in the bordering municipalities beginning in January 2019. These included doubling the nominal minimum wage, halving the value-added tax (VAT) from 16 to 8 percent, reducing the corporate income tax by one-third, and adjusting the price of energy goods to make them comparable to those in bordering counties in the U.S. This set of policies is one of the boldest recent place-based policies in the world. In this paper, we restrict our analysis to the effects of these policies on inflation, taking advantage of their regional variation to estimate their joint effect. In particular, by using a rich dataset that includes the prices of goods with and without VAT in different cities throughout Mexico, we are able to shed some light on the magnitude of the effect on prices of doubling the minimum wage.