Economic Implications of Changes in Labor Standards: A Computational Analysis for Mexico

In this paper, we study the economics of one form of inadequate labor standards in Mexico. In particular, it is often alleged that Mexican workers are misinformed about the inherent danger of the jobs they perform and, accordingly, are not fully compen-sated for accepting these hazards. We provide a simple theoretical model of the impli-cations of this informational problem for real wages, employment, and safety levels. Given the ambiguity that results in some of these predictions, we simulate the effects of tighter enforcement of safety standards in a computable general-equilibrium odel of the Mexican economy. Our results indicate that such enforcement has a noticeably pos-itive impact on the economic welfare of workers. It is also possible for capital owners to gain welfare in a Pareto improvement, due to induced increases in demand for capital for risk abatement purposes. Welfare gains for workers are strengthened if we allow for capital imports. Finally, enforcing the labor standard tends to move workers into the safer sectors, while output and exports expand in those sectors as well