The Contribution of Workers, Workplaces, and Sorting to Wage Inequality in Mexico

Published:

With José G. Nuño Ledesma

Abstract: We use a matched worker-workplace dataset comprising the universe of formal private-sector workers in Mexico to estimate the contribution of average workplace-specific wage premia, worker-level characteristics, and assortative matching on Mexico’s wage inequality between 2004 and 2018. To this end, we regress log earnings on sets of worker and workplace fixed effects and perform a decomposition of total wage variance. We find that assortative matching explains between 16% and 19% of total wage variance, while worker- and workplace-specific factors contribute between 35% to 42% and 33% to 38%, correspondingly. The importance of workplace factors in determining wage inequality correlates negatively with regional economic development: it is lowest in the North, Mexico’s most-developed region, and largest in the South, the country’s least-prosperous region.