Wage shocks and consumption variability in Mexico during the 1990s

This paper presents evidence on the relationship between shocks to relative male wages and changes in household consumption in Mexico during the 1990s decade, which is a period characterized by high volatility. Apart from performing analysis of this type for Mexico for the first time, the paper has mainly two contributions. The first is the use of alternative data sources to construct instrumental variables for wages. The second is to examine differences across four consumption categories: nondurable goods, durable goods, education, and health. Our results for nondurable goods consumption reject the hypothesis that Mexican households are able to ensure idiosyncratic risk. For the comparisons across consumption categories, the conclusion is that households in Mexico tend to react to temporary shocks by contracting the consumption of goods that represents longer run investment in human capital, which makes them more vulnerable in the future. (C) 2003 Elsevier B.V All rights reserved.