Mexico has a relatively large informal sector by OECD standards. While this is in part a symptom of limited development and low productivity, it can also be to some extent its cause, as informal firms stay small to hide their activities and have limited access to productivity-enhancing government services, such a protection of property rights and training. A long-term and broad-based strategy with education at its core is needed for Mexico to reach its productivity potential and fight informality. Lowering the costs of formality, while enhancing its benefits and increasing the cost of non-compliance with labour and tax laws, will be an important part of this strategy. This would include more flexible labour laws, a further reduction in the business regulatory burden and a rethink of the social security package to enhance its attractiveness for low-wage workers and limit costs by making service provision more efficient. This Working Paper related to the 2011 OECD Economic Survey of Mexico. (www.oecd.org/eco/surveys/Mexico)