Acute morbidity and labor outcomes in Mexico: Testing the role of labor contracts as an income smoothing mechanism

Economic development is associated with an increase in the share of workers in salaried jobs. This process may be accompanied by a reduction in wage fluctuations if labor contracts are used as income smoothing mechanisms. This paper tests to what extent salaried jobs help reduce the volatility of wages by insuring workers against productivity shocks. Analysis of MxFLS data indicates that the average contractual arrangement in Mexico insures the worker against idiosyncratic productivity fluctuations associated with episodes of illness. The evidence is stronger for workers in formal jobs. To validate the methodology, the test is also implemented on a sample of self-employed workers. In this case, it correctly rejects the presence of insurance against productivity shocks.