The roots and costs of Mexico’s vast informal economy

A street vendor selling ice cream in Zacatecas, Mexico. Image credit: Prisma/Heeb Christian/Alamy.

by Macario Schettino.

For some time now, there has been a belief that previous generations lived better than today's. Many young people, for example, complain that they cannot afford to buy a home in a central location, as their parents or grandparents did. In the United States, there is nostalgia for the 1950s — a nostalgia that, as always, erases the negative parts, such as racism and discrimination against women, among other things.

In Mexico’s case, this nostalgia was fed in classrooms when emphasis was placed on something called the “Mexican economic miracle,” or by its local name: desarrollo estabilizador (stabilizing development). The story goes that from 1946 to 1971, Mexico achieved very high growth rates (6% annually, 3% in per capita GDP), and nostalgia paints a picture of orderly, clean cities with abundant jobs.

As with all legends, there’s some truth — but not too much. In Mexico, during the time being referred to, the country was still essentially rural. It wasn’t until 1960 that half the population lived in cities, and it was precisely that process of urbanization that began to complicate everything. Cities could not expand their infrastructure at the same rate as the population was growing, and even less so when the demographic growth rate exceeded 3% annually. By the 1970s, medium and large cities in Mexico already had belts of poverty and “lost cities”: towns swallowed up by urban expansion.

If in the 1960s it seemed like there were jobs for everyone, it was because only half the population lived in urban areas. As that urban population grew, the myth of full employment began to fade. To prevent this urban growth from spinning out of control, Mexico took on excessive external debt in the 1970s — just as all Latin American countries did — taking advantage of abundant petrodollars and the end of restrictions on international capital flows. In 1981, with anti-inflationary programs in the US and UK, everything collapsed.

Since then, a large segment of the population has become a permanent fixture: people selling goods on the street, offering services, or producing in small workshops without proper safety or facilities. We call this the “informal economy.” It's not that there used to be jobs for everyone — it's that people weren’t living in cities yet.

The informal economy is a fundamental element for understanding Mexico’s overall economy. According to data from INEGI, in the first quarter of 2025, nearly 17 million Mexicans were working in the informal sector — that is, in small family-run businesses that are not formally registered. Another 18 million have jobs in formal businesses but without health benefits, and they are also considered informal. That means 35 million Mexicans out of the 60 million in the labor market (Economically Active Population) are actually outside the formal economy: 58%.

This segment of Mexican workers contributes, according to INEGI estimates, just over 22% of GDP, meaning the remaining 78% is produced by the 42% of formal workers. In other words, formal workers are 4.75 times more productive than informal ones. That makes sense, as formal businesses are much larger, with better infrastructure, administrative capacity, and are more integrated into the global economy. Income differences aren’t as stark, but on average, a formal worker earns more than twice as much as an informal one.

Informality is not evenly distributed. In states like Guerrero, Oaxaca, and Chiapas, informality exceeds 75% of the employed population, while in Nuevo León it is around 30%.

Moreover, the rule-breaking that comes with informality extends, in some places, to other areas. It’s not just that informal workers lack health services or social security; their activities also aren’t taxable, and the goods they trade aren't easy to track. This leads to an economy whose boundaries with illegality are unclear, creating space for organized crime.

Therefore, when we talk about the Mexican state's low fiscal capacity, its difficulty in enforcing laws, and the large number of people without access to healthcare or social security, this phenomenon must be taken into account — it can now be considered historical. It was precisely the lack of social security (pensions) that the populist government took advantage of to cement its power. It did so, in part, by destroying what little existed in the healthcare system.

As for the ties between informality and organized crime, perhaps that’s a topic for another time.