Enlisting Employees Reduces Employer Wage Underreporting in Mexico

A fresh comparison of employer and worker wage records reveals widespread underreporting by formal firms, with better compliance among larger employers.

📊 Two Wage Records Compared

• Firms' reports to the social security agency
• Individuals' responses to a household survey

These two sources show extensive underreporting of wages by formal firms when employer declarations are compared with worker-reported earnings.

🧾 A Natural Policy Test: The 1997 Pension Reform

• The 1997 reform made pension benefits more closely tied to reported wages for younger workers.
• Evidence shows a relative decline in underreporting for younger age groups after the reform, consistent with stronger incentives to report higher wages for those cohorts.

🔍 Key Findings

• Substantial wage underreporting by formal firms is documented through the record comparison.
• Larger firms exhibit better payroll-tax compliance than smaller firms.
• The pension reform's stronger link between reported wages and benefits for younger workers is associated with reduced underreporting among those groups.

💡 Why It Matters

These patterns suggest that empowering employees—by providing incentives and information that make accurate wage reporting valuable to workers—can be an effective strategy to improve employer reporting and overall payroll-tax compliance.