This past August México City’s mayor, Miguel Angel Mancera, a leftist politician associated with the Party of the Democratic Revolution (PRD), proposed increasing the minimum wage from 67.29 pesos to 82.86 pesos per day.
It seems obvious that his recommendation is aimed in part to boost his profile in the PRD. But nevertheless, it has started a debate throughout the country among its political parties, government officials and business leaders.
Like most expatriates, I know the country’s minimum wage is low. But the ongoing debate raised my curiosity as to “how low is too low” and what impact would an increase in the minimum wage have on México’s inflation and the rapid growth in manufacturing the country has seen because of its low wages. I would like to share with my readers what I have learned and the conclusions I have reached.
For purposes of México’s minimum wage, the government has created two geographical zones, i.e., A and B. Zone A covers Mexico City and its metropolitan area, the states of Baja California and Baja California Sur and the cities of Acapulco, Guerrero; Ciudad Juarez, Chihuahua; Guadalajara, Jalisco and its suburbs; Monterrey, Nuevo León and its metropolitan area; Hermosillo, Sonora; Matamoros and Reynosa, Tamaulipas; and Coatzacoalcos, Veracruz.
Areas that are within the country’s lower economic stratum are in Zone B, which includes the states of Aguascalientes, Campeche, Coahuila, Colima, Chiapas, Durango, Guanajuato, Hidalgo, Michoacán, Morelos, Nayarit, Oaxaca, Puebla, Querétaro, Quintana Roo, San Luis Potosí, Sinaloa, Tabasco, Tlaxcala, Yucatán and Zacatecas. It also covers specific municipalities within the states of Chihuahua, Guerrero, Jalisco, Estado de México, Nuevo León, Sonora, Tamaulipas and Veracruz that are not included in Zone A.
On January 1st of this year México’s minimum wage for workers within Zone A increased to 67.29 pesos ($5.18) per day. Zone B’s minimum wage increased to $63.77 pesos ($4.91) per day.
Unlike the United States, Canada, and most other countries, México’s minimum wage is not a wage many people earn. The minimum wage has for years been well below market wages and in most cases serves as a benchmark for other wage negotiations during the year.
About 6.6 million Mexicans, or 12.5 percent of the 51.8 million people who comprise México’s labor force, earn the minimum wage. Most of them work in the informal sector, which President Enrique Peña Nieto said last year employed three out of five workers. Only about 1.2 million minimum-wage workers are in formal jobs, in which they are registered with the government and protected by labor codes.
This two percent of the formal labor market working for the minimum wage is far below the almost five percent seen in the United States or the 6.5 percent in Canada.
Notwithstanding the few who actually work for the minimum wage, México’s minimum wage is quite low. Argentina’s monthly minimum wage of $432.50 is the highest in Latin America. Nicaragua had the lowest minimum wage in Latin America until an increase, effective September 1st, put its average minimum wage (it is calculated by industry sectors) at $159 a month and left México in last place with roughly $144 a month.
One of the reasons México’s minimum wage is so low is that it has not kept up with inflation. According to the Economic Commission for Latin America and the Caribbean (ECLAC), a part of the United Nations, in the past 20 years the minimum wage has dropped by 43 percent after accounting for inflation. Data from the National Institute of Statistics and Geography says the minimum wage has lost 71 percent of its purchasing value since 1976.
México’s minimum wage is so low that it is beginning to conflict the country’s Constitution. The Constitution says the minimum wage “shall be enough to fulfill normal family needs from a material, social, and cultural point of view.”
Both the government and research institutions commonly refer to la canasta básica in evaluating consumers’ purchasing power. The term is best translated as the “the shopping cart” and includes not only foodstuffs and household products, but fuel, transportation costs, basic services and children’s educational needs.
Earlier this year academic investigators at the University of Guadalajara concluded that the shopping cart has a current acquisition cost of at least 6,900 pesos ($531) per month, over three and one half times the minimum monthly income. Even skilled or better educated workers who earn two or three times the minimum wage fall short of the mark.
According to ECLAC’s data, Mexico is the only country in the region where the minimum wage is significantly below the poverty line. It says the country’s minimum wage is 34 percent below México’s poverty line.
Jonathan Heath, a well-regarded Mexican economist, said, “No one can seriously think the minimum wage is OK. Either we change the Constitution and don’t do anything to the minimum wage, or we change the minimum wage.”
The conservative Political Action Party (PAN) has joined with the PRD to address this issue. It proposed a referendum coinciding with next year’s midterm election to let Mexicans decide on whether the minimum wage has to rise. On September 8th the PAN officials gave the National Election Institute (INE) the 2.5 million signatures it had obtained to support a referendum on the minimum wage. In order to have a public referendum on an issue the INE must receive the supporting signatures of no less than two percent of the number of people who voted in the preceding federal election, which in this case was 1.5 million signatures.
Last month Agustin Carstens, the head of México’s central bank, Bank of México (Banixco), warned a wage increase could trigger inflation. Labor Secretary Alfonso Navarrete Prida called the proposal to increase the minimum wage dangerous, saying it could hobble economic growth, spark inflation and stall efforts to increase productivity.
I think increasing the country’s minimum wage would have an impact on México’s inflation rate, as increased wages put an upward pressure on prices. However, any negative impact could be minimized by phasing in a reasonable minimum wage over a predetermined number of years. It goes without saying that the annual increases would have to exceed the projected inflations rates. Such an approach would also lessen the adverse impact higher wages may have on employment.
Another thing that opponents seem not to take into consideration is that two-thirds of the labor force works in the informal market, so an increase in the minimum wage would not necessarily affect that segment of the labor force.
As everyone knows, México’s low wages is one of the primary reasons it has attracted so much foreign investment. However, there is really no reason to believe an increase in the minimum wage would decrease that investment. This is so because the vast majority of those working in the manufacturing industries make more than the minimum wage. Any reasonable increase in the minimum wage would still leave México with a competitive advantage when it comes to the cost of labor.
I think over the past two years México has accomplished a lot. It has reformed its energy, telecom and broadcasting industries. Its fiscal reforms have started to broaden its sources of revenues. Its teachers now face more scrutiny and its banks more competition. Although President Peña Nieto has been the orchestra leader, he is not the only one who deserves credit for these achievements. So does Mexico as a whole.
Its political parties have largely co-operated in pushing through the reforms, many of them requiring constitutional changes. Its people have reacted with maturity to the dismantling of a taboo around foreign investment in Mexico’s natural resources.
The timing could not be more perfect for another bold move. Give México’s working poor a minimum wage that over a reasonable period of time will permit them to fulfill their normal family needs from a material, social, and cultural point of view, as guaranteed by their Constitution.
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