Local Labor Supply Elasticities in Mexico

With Lorenzo Aldeco

We estimate the inverse elasticity of labor supply at the local-labor-market level in Mexico for 1990-2020, using shift-share instruments to address the endogeneity of local labor demand. Excluding agriculture, a 1% demand-driven increase in male employment raises male wages by 0.36%, a more elastic response than in the U.S. When including agriculture, however, male local labor supply appears inelastic, consistent with demand shocks reallocating employees out of agricultural work. We find evidence that female local labor supply is even more elastic: demand shocks raise female employment, particularly among married women, with no detectable effect on wages. Our results suggest local demand shocks in Mexico mainly create jobs rather than raise wages.