Can Temporary Wage Incentives Increase Formal Employment? Experimental Evidence from Mexico — Martin Abel

Sprecher

Martin Abel(Middlebury College; IZA)

Abstract

Entry level formal sector jobs for Mexican youths offer low starting salaries but substantial wages growth of almost 40% over the first year. We experimentally test whether a six-months wage incentive can increase formal employment among secondary school graduates. Combining survey and high-frequency social security data, we offer four main findings. First, the incentive does not distort short-run choices of graduates planning to continue their education. Second, formal employment rates among graduates of vocational schools increase by 12% over the first year, which is driven by a 27% increase in jobs with permanent contracts. Third, we document short-term gains in retention. However, once the incentive expires, hazard rates start to converge. Fourth, in line with predictions of a search model, treatment effects are largest for graduates with reservation wages just above starting salary levels of formal jobs. The combination of very high discount rates and an underestimation of formal sector wage growth highlights the importance of short-term benefits for youths' career choices.

Autoren

Martin Abel(Middlebury College; IZA) – Eliana Carranza (World Bank) – Kimberly Geronimo (World Bank) – Maria Elena Ortega (World Bank)

Raum

Virtuell über Zoom
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