Economics: Potential impact of strong minimum wage hikes

MEXICO - Report 14 Oct 2019 by Mauricio González and Francisco González

At a time when the economy seems to be heading for a further slow down, the Government appears focused on trying to significantly expand minimum wages, which has seen their buying power eroded over the years by as much as 70%. Despite concerns as to how such increases might impact labor market conditions generally, through the first half of the year and even into August, employment and occupational indicators in the aggregate were relatively stable or slightly improved compared to the same period of last year.

Moreover, 2.1% more people were employed in Mexico than a year earlier, with slightly over half that growth consisting of people moving into formal sector employment.

However, some indicators don’t paint a similarly sanguine picture, particularly those related to work quality. The percentage of people laboring in critical occupational conditions has increased.

As could be expected, there has been an expansion in the number of people in the very lowest wage levels (those making less than a minimum wage or no more than one or two) in the first half of the year, an indication that in the absence of a proper policy for formalizing labor and inspection mechanisms for determining whether labor rights are being respected, minimum wage increases will not be as effective a means to building an income floor for the employed population. Moreover, there has been a notable contraction in the number of jobs in mid and high-range wage segments. And a while it is clearly positive that the less educated, especially those with only a primary education or less, are finding employment at a faster pace, we should be concerned by the lack of job openings for those with higher levels of formal education.

The real wage now shows a positive recovery trend, but growth in formal sector employment is clearly trending lower, and abrupt decline that is troubling. It will be important to consider the potential effect of future minimum wage hikes on employment, particularly in a scenario in which productivity and economic growth are expected to stall.

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