Disentangling the Effects of Large Minimum Wage and VAT Changes on Prices: Evidence from Mexico (Submitted)

2021

Coverage: Banxico , El CEO , 24 Horas , El Financiero

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With Mariana Calderón, Josué Cortés and Alejandrina Salcedo

In January 2019, the minimum wage at the Mexican border with the United States increased by 100 percent. At the same time, the value-added tax (VAT) rate decreased by half. We propose an identification strategy that separates the effects of the minimum wage and the VAT on prices. We account for the differential effects of the minimum wage on the prices of goods with and without VAT. We find that the increase in the minimum wage is associated with economically and statistically significant increases in the prices of VAT goods and with smaller, imprecisely estimated increases for Non-VAT goods, particularly in food Non-VAT goods. The increments in prices due to the minimum wage were more than offset by decreases associated with the VAT so that in the absence of both policy changes, average prices would have been higher.