The Trade-Offs of Welfare Policies in Labor Markets with Informal Jobs: The Case of the “Seguro Popular” Program in Mexico

In 2002, the Mexican government began an effort to improve health access to the 50 million uninsured in Mexico, a program known as Seguro Popular (SP). The SP offered virtually free health insurance to informal workers, altering the incentives to operate in the formal economy. We find that the SP program had a negative effect on the number of employers and employees formally registered in small and medium firms (up to 50 employees). Our results suggest that the positive gains of expanding health coverage should be weighed against the implications of the reallocation of labor away from the formal sector. (JEL E26, I13, I18, I38, J46, O15, O17)