Will A Minimum Wage Hike Boost Mexico’s Struggling Economy?
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So far Mexico’s popular but polarizing president Andres Manuel Lopez Obrador has failed to kick-start broad-based economic growth and has focused instead on delivering increases to the country’s minimum wage on two separate occasions. Lopez Obrador raised Mexico’s minimum wage by 16% in 2019 and by additional 20% at the start of 2020.
“We continue to gradually recover the value that the minimum salary has lost over time. This is an important increase,” Lopez Obrador explained.
The move is an attempt to ameliorate the deep divisions that continue to define Mexico’s economy. Mexico has transformed over the last thirty years, buoyed by success in attracting investment in the electronics, automotive and aerospace sectors. But, while the products Mexico’s fabricates and exports have become ever more complex, overall wages in Mexico remain very low in comparison to other OECD countries. In 2018 a minimum wage worker in Mexico took home just over $2,000, around a tenth of the salary earned by minimum wage workers in France, the U.K. and Canada, and less than half of the take-home pay of minimum wage workers in Brazil and Colombia.
Overall, among industrial economies Mexico has become an anomaly for tolerating minimum wages that are dismally low by global standards. Stagnant wages have helped Mexico maintain competitiveness with China in low productivity, labor-intensive work, but low wages have also stifled the growth of a domestic market for goods and services.
Mexico’s new minimum wage won’t affect most workers but will still impact a few million families. In the third quarter of 2019 Mexico recorded nearly 10 million workers earning less than the minimum wage salary.
In 2020 minimum wage workers in Mexico will now take home 123.22 pesos (around $6.50) per day. The increase is notable, but Mexico’s daily minimum wage will still be around half of the hourly minimum wage in Arizona and California.
According to official statistics the wage hike will help at least three million people. But, it’s difficult to measure the impact of the wage hike since many workers in Mexico are employed by small family-run companies and receive cash salaries under the table. Overall in Mexico over 56% of the workforce is employed in informal sector jobs. In the under-developed south the problem is even more acute. In Chiapas, the poorest state in Mexico, a major target of attention for Lopez Obrador, over 73% of workers are employed in informal jobs. Overall in Mexico 99% of employers are small and medium sized enterprises (SMEs) and while a few major employers may be affected by the new minimum wage laws, the salary increase isn’t likely to catalyze broad improvements for the bulk of the population. Economists are still trying to predict whether the increase in the minimum wage in Mexico could have an impact on inflation or affect hiring in formal sector jobs.
To ask about the impact of Mexico’s new minimum wage law, I reached out to David Kaplan, Senior Labor Markets Specialist at the Inter-American Development Bank.
Nathaniel Parish Flannery: When we look at Mexico's labor market in the NAFTA-era we see signs of wage stagnation. How significant is this wage hike?
David Kaplan: Overall, Mexican wages are quite low compared to the rest of Latin America, and much lower than in countries with similar levels of GDP per capita. In 2018, in terms of average hourly wages, Mexico sat in 14th place out of the 17 Latin-American countries analyzed in the IDB’s Labor Markets and Social Security Information System, despite being the fourth richest country in terms of GDP per capita. Average wages have increased a bit in recent years but are still below 2005 levels in real terms.
A 20% increase of the minimum wage from 2019 to 2020 is obviously significant when inflation is below 3%, but in 2020 Mexico will still have one of the lowest minimum wages in the region, significantly lower than in countries with similar levels of GDP per capital like Argentina or Chile. In November of 2019, 16% of formal workers were registered with a wage less than or equal to the 2020 minimum wage. The 2020 minimum wage is equal to 54% of the median formal wage in November of 2019, which does not seem alarmingly high by international standards. For these reasons my impression is that the 2020 minimum wage will likely not be high enough to reduce formal employment in a significant way.
It is worthwhile to also consider the timing of the minimum-wage increase. Real GDP growth over the first three quarters of 2019 was close to zero. From May 2017 to May 2018, employment registered with social security increased by 4.5%. From November 2018 to November 2019, employment registered with social security grew by only 1.7%. The fact that this ambitious increase of the minimum wage comes at a time of zero economic growth and extremely sluggish growth of formal employment lends more credence to concerns of a negative impact on formal employment.
Parish Flannery: Mexico's economy is characterized by having high levels of labor market informality. What impact will this wage increase have on states in Mexico's south where the majority of people work in informal jobs?
Kaplan: A minimum-wage increase is more likely to reduce formal employment in low-wage areas, which also tend to be high-informality areas. The 2020 minimum wage is more than 60% of the November 2019 median wage in 11 states and more than two thirds of the November 2019 median wage in four states. A recent report for the UK government by Arindrajit Dube suggests that one may become more concerned about the negative impacts of minimum wages when they reach these levels.
It is useful to analyze the impact of the 2019 increase of the minimum wage at the northern border where the daily minimum wage was doubled from 88.36 pesos in 2018 to 176.72 pesos in 2019. The 2019 minimum wage at the northern border was 81.3% of the November 2018 median wage. The first impact evaluation by the Minimum Wage Commission has not shown a significant impact on formal employment, although it will be important to replicate this analysis over a longer timeframe. In general, given that an even more ambitious increase of the minimum wage at the northern border in 2019 appears to have generated small effects on formal employment, my impression is that the 2020 generalized increase of the minimum wage will not cause important reductions of formal employment, even in low-wage states.
It is also worth noting that there is an economic model that would predict that an increase of the minimum wage could increase formal employment. If employers have excessive bargaining power in the labor market, which economists call monopsony power, the increase of wages of formal jobs could attract workers from informal jobs. Some support for this hypothesis can be found in a recent study from the United States by Jose Azar, Emiliano Huet-Vaughn, Ioana Marinescu, Bledi Taska, and Till von Wachter.
Parish Flannery: Overall, what impact do you expect this wage increase to have on Mexico's economy?
Kaplan: I am extremely confident that the increase of the minimum wage will not have an important effect on inflation. The minimum wage at the northern border increased by 94.2% in real terms from November 2018 to November 2019. The average real wage for jobs registered with social security increased by only 10%. Given that the generalized minimum-wage increase in 2020 will be about 17%, it seems unlikely to me that the average real wage will increase by more than 4%. We saw average wages grow by 3.5% in 2019 overall, including the border region. So, any inflationary pressure should be manageable for the Central Bank, particularly since the annual inflation rate is currently below 3% and the annual core inflation rate has fallen from 3.85% in June to 3.65% in November. Of course, one would expect that an increase of the minimum wage would have a larger percentage effect on the wages of low-wage workers.
I am fairly confident that the increase of the minimum wage will not have an important impact on aggregate formal employment for the reasons I mentioned in my answers to the previous two questions, although the fact that the increase comes at a time when the labor market is showing clear signs of weakness is a reason for some concern. There is an economic argument developed by Daron Acemoglu that a minimum wage set to a meaningful but moderate level can cause firms to invest more in worker training and in new technologies, but I would not be confident making such a prediction.
Follow me on Twitter. Check out some of my other work here.
Nathaniel Parish Flannery
I am a Latin America focused political analyst and writer. I split my time between New York City and Mexico City. My book, Searching For Modern Mexico, was published in 2019. I have written feature articles and op-eds on business, organized crime, and politics for The Atlantic, Foreign Affairs, Americas Quarterly, Fortune and a number of other publications. I have a Master's degree in International Affairs from Columbia University (SIPA). In the last few years I've had the chance to work on projects in Colombia, Mexico, Guatemala, Chile, Argentina, Peru, Ecuador, Bolivia, India and China.
So far Mexico’s popular but polarizing president Andres Manuel Lopez Obrador has failed to kick-start broad-based economic growth and has focused instead on delivering increases to the country’s minimum wage on two separate occasions. Lopez Obrador raised Mexico’s minimum wage by 16% in 2019 and by additional 20% at the start of 2020.
“We continue to gradually recover the value that the minimum salary has lost over time. This is an important increase,” Lopez Obrador explained.
The move is an attempt to ameliorate the deep divisions that continue to define Mexico’s economy. Mexico has transformed over the last thirty years, buoyed by success in attracting investment in the electronics, automotive and aerospace sectors. But, while the products Mexico’s fabricates and exports have become ever more complex, overall wages in Mexico remain very low in comparison to other OECD countries. In 2018 a minimum wage worker in Mexico took home just over $2,000, around a tenth of the salary earned by minimum wage workers in France, the U.K. and Canada, and less than half of the take-home pay of minimum wage workers in Brazil and Colombia.
Overall, among industrial economies Mexico has become an anomaly for tolerating minimum wages that are dismally low by global standards. Stagnant wages have helped Mexico maintain competitiveness with China in low productivity, labor-intensive work, but low wages have also stifled the growth of a domestic market for goods and services.
Mexico’s new minimum wage won’t affect most workers but will still impact a few million families. In the third quarter of 2019 Mexico recorded nearly 10 million workers earning less than the minimum wage salary.
In 2020 minimum wage workers in Mexico will now take home 123.22 pesos (around $6.50) per day. The increase is notable, but Mexico’s daily minimum wage will still be around half of the hourly minimum wage in Arizona and California.
According to official statistics the wage hike will help at least three million people. But, it’s difficult to measure the impact of the wage hike since many workers in Mexico are employed by small family-run companies and receive cash salaries under the table. Overall in Mexico over 56% of the workforce is employed in informal sector jobs. In the under-developed south the problem is even more acute. In Chiapas, the poorest state in Mexico, a major target of attention for Lopez Obrador, over 73% of workers are employed in informal jobs. Overall in Mexico 99% of employers are small and medium sized enterprises (SMEs) and while a few major employers may be affected by the new minimum wage laws, the salary increase isn’t likely to catalyze broad improvements for the bulk of the population. Economists are still trying to predict whether the increase in the minimum wage in Mexico could have an impact on inflation or affect hiring in formal sector jobs.
To ask about the impact of Mexico’s new minimum wage law, I reached out to David Kaplan, Senior Labor Markets Specialist at the Inter-American Development Bank.
Nathaniel Parish Flannery: When we look at Mexico's labor market in the NAFTA-era we see signs of wage stagnation. How significant is this wage hike?
David Kaplan: Overall, Mexican wages are quite low compared to the rest of Latin America, and much lower than in countries with similar levels of GDP per capita. In 2018, in terms of average hourly wages, Mexico sat in 14th place out of the 17 Latin-American countries analyzed in the IDB’s Labor Markets and Social Security Information System, despite being the fourth richest country in terms of GDP per capita. Average wages have increased a bit in recent years but are still below 2005 levels in real terms.
A 20% increase of the minimum wage from 2019 to 2020 is obviously significant when inflation is below 3%, but in 2020 Mexico will still have one of the lowest minimum wages in the region, significantly lower than in countries with similar levels of GDP per capital like Argentina or Chile. In November of 2019, 16% of formal workers were registered with a wage less than or equal to the 2020 minimum wage. The 2020 minimum wage is equal to 54% of the median formal wage in November of 2019, which does not seem alarmingly high by international standards. For these reasons my impression is that the 2020 minimum wage will likely not be high enough to reduce formal employment in a significant way.
It is worthwhile to also consider the timing of the minimum-wage increase. Real GDP growth over the first three quarters of 2019 was close to zero. From May 2017 to May 2018, employment registered with social security increased by 4.5%. From November 2018 to November 2019, employment registered with social security grew by only 1.7%. The fact that this ambitious increase of the minimum wage comes at a time of zero economic growth and extremely sluggish growth of formal employment lends more credence to concerns of a negative impact on formal employment.
Parish Flannery: Mexico's economy is characterized by having high levels of labor market informality. What impact will this wage increase have on states in Mexico's south where the majority of people work in informal jobs?
Kaplan: A minimum-wage increase is more likely to reduce formal employment in low-wage areas, which also tend to be high-informality areas. The 2020 minimum wage is more than 60% of the November 2019 median wage in 11 states and more than two thirds of the November 2019 median wage in four states. A recent report for the UK government by Arindrajit Dube suggests that one may become more concerned about the negative impacts of minimum wages when they reach these levels.
It is useful to analyze the impact of the 2019 increase of the minimum wage at the northern border where the daily minimum wage was doubled from 88.36 pesos in 2018 to 176.72 pesos in 2019. The 2019 minimum wage at the northern border was 81.3% of the November 2018 median wage. The first impact evaluation by the Minimum Wage Commission has not shown a significant impact on formal employment, although it will be important to replicate this analysis over a longer timeframe. In general, given that an even more ambitious increase of the minimum wage at the northern border in 2019 appears to have generated small effects on formal employment, my impression is that the 2020 generalized increase of the minimum wage will not cause important reductions of formal employment, even in low-wage states.
It is also worth noting that there is an economic model that would predict that an increase of the minimum wage could increase formal employment. If employers have excessive bargaining power in the labor market, which economists call monopsony power, the increase of wages of formal jobs could attract workers from informal jobs. Some support for this hypothesis can be found in a recent study from the United States by Jose Azar, Emiliano Huet-Vaughn, Ioana Marinescu, Bledi Taska, and Till von Wachter.
Parish Flannery: Overall, what impact do you expect this wage increase to have on Mexico's economy?
Kaplan: I am extremely confident that the increase of the minimum wage will not have an important effect on inflation. The minimum wage at the northern border increased by 94.2% in real terms from November 2018 to November 2019. The average real wage for jobs registered with social security increased by only 10%. Given that the generalized minimum-wage increase in 2020 will be about 17%, it seems unlikely to me that the average real wage will increase by more than 4%. We saw average wages grow by 3.5% in 2019 overall, including the border region. So, any inflationary pressure should be manageable for the Central Bank, particularly since the annual inflation rate is currently below 3% and the annual core inflation rate has fallen from 3.85% in June to 3.65% in November. Of course, one would expect that an increase of the minimum wage would have a larger percentage effect on the wages of low-wage workers.
I am fairly confident that the increase of the minimum wage will not have an important impact on aggregate formal employment for the reasons I mentioned in my answers to the previous two questions, although the fact that the increase comes at a time when the labor market is showing clear signs of weakness is a reason for some concern. There is an economic argument developed by Daron Acemoglu that a minimum wage set to a meaningful but moderate level can cause firms to invest more in worker training and in new technologies, but I would not be confident making such a prediction.
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Follow me on Twitter. Check out some of my other work here.
Nathaniel Parish Flannery
I am a Latin America focused political analyst and writer. I split my time between New York City and Mexico City. My book, Searching For Modern Mexico, was published in 2019. I have written feature articles and op-eds on business, organized crime, and politics for The Atlantic, Foreign Affairs, Americas Quarterly, Fortune and a number of other publications. I have a Master's degree in International Affairs from Columbia University (SIPA). In the last few years I've had the chance to work on projects in Colombia, Mexico, Guatemala, Chile, Argentina, Peru, Ecuador, Bolivia, India and China.
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