Mexican workers are paid less and work more than their counterparts in the rest of the OECD, and the situation has only been getting worse. By broaching reform Mexico’s new president Andrés Manuel López Obrador has taken a step in the right direction, but he inherits a labour market plagued by informality, precarity, and lack of union representation, whereas automation poses a serious threat in the longer term, writes Rodrigo Aguilera.

Pity the Mexican worker.

Of all the countries in the Organisation for Economic Cooperation and Development (OECD), Mexico’s workers put in the most hours but earn the lowest wages. They are unlikely to have a formal job, much less a formal, full-time job. And the real-terms purchasing power of their minimum wage plummeted during the 1982 crisis and has never recovered.

Source: OECD

On top of all that, despite working in one of the richest, most technologically sophisticated economies in Latin America, Mexican workers’ have the fourth lowest minimum wage in the region, with only El Salvador, Cuba, and Venezuela ranking lower.

Source: Wikipedia (click to enlarge)

Worse still, their fate is not tied to that of the economy as a whole. Despite being one of the fastest growing economies in the OECD since the global financial crisis, Mexico is one of just five OECD counties to have experienced negative real wage growth since 2007 (a cumulative 6.4%). Only crisis-ridden Greece has done worse.

Source: OECD

What explains such poor outcomes for Mexico’s workforce? Much of the blame has gone to neoliberal policies implemented after the 1982 crisis and in particular after the entry into force of NAFTA in 1994; it was at this point that “wage competitiveness” – an unfortunate euphemism for a deliberate policy of maintaining low wages – became a pillar of Mexico’s strategy to attract foreign investment. But even this explanation falls short. The raw deal that Mexico’s workers have gotten for nearly four decades is the result of unique institutional arrangements that characterise the Mexican economy, many of which preceded the post-1982 neoliberal era but which subsequent governments used to their advantage.

How Mexico’s labour market became dysfunctional

Aside from low wages, the Mexican labour force is characterised by three phenomena: informality, precarity, and lack of union representation. Public attention has mostly focused on informality, but the latter two problems are arguably of far more critical concern.

According to the most recent estimates of the National Institute of Statistics and Geography (INEGI; Q3 2018), 56.6 per cent of Mexico’s economically active population is categorised under the broadest definition of informality; that is, they either work for an informal (legally unincorporated) firm or work in a formal firm under an informal contract outside the scope of the social security system. This figure, which shot up after the 1994-95 crisis and is high even by Latin American standards, has proved incredibly difficulty to bring down. For example, the previous government of Enrique Peña Nieto launched an ambitious “Crusade Against Informality” in 2013 with the intention of reducing informality to 30 per cent, but the target was missed by a mile.

Source: INEGI ENE (1995-2000), ENOE (2005-18); all data for Q2 of relevant year

Precarity has received less attention but is increasingly recognised not just for its detrimental effect on workers’ well-being but also for its microeconomic impact on firm productivity. Less than a third of the economically active population in Mexico has a permanent, full-time contract, a level that has remained roughly unchanged since the turn of the century. In a recent book for the Inter-American Development Bank, Mexican economist Santiago Levi makes a compelling argument that precariousness is one of the root causes of Mexico’s weak productivity growth because much of Mexico’s corporatist welfare system has been designed solely to benefit formal, salaried workers. The creation of separate welfare schemes to cover non-salaried workers (such as Seguro Popular) has instead raised the incentive for the proliferation of informal employment and other non-permanent arrangements.

Source: INEGI ENE (1995-2000), ENOE (2005-18); all data for Q2 of relevant year

Mexican workers also suffer from low unionisation rates in practice, though not on paper. This is a result of the proliferation of so-called “protection contracts” (contratos de protección). These contracts are negotiated between businesses and a “ghost” union that serves the interests of employers rather than workers, the latter being forced to join as a condition of their employment. It is estimated that around 90 per cent of all collective bargaining agreements in Mexico are protection contracts with ghost unions, which in some cases are created even before the company has hired its first worker or finished building its plant.

This system is a legacy of one-party rule by the Institutional Revolutionary Party (PRI, 1929-2000), a period in which groups like the Confederation of Mexican Workers (CTM) were given extraordinary powers over collective bargaining. Despite the loyalty of these confederations to the PRI, subsequent governments have found it highly convenient to let the system survive well into the 21st century in order to maintain wage competitiveness.

Mexicans work the longest hours in the OECD while also earning the lowest wages (Eneas De TroyaCC BY 2.0)

AMLO’s labour force challenge

The recently inaugurated government of Andrés Manuel López Obrador (AMLO) is the first in recent memory to explicitly challenge Mexico’s low wage labour policy, most notably by vowing to increase the minimum wage to $170MXN (inflation-adjusted) by the end of his six-year term. In an act as symbolic as it was practical, the head of Mexico’s minimum wage commission (CONASAMI), Basilio González, has also been removed from the position that he held for 27 years and across five different presidencies.

During his campaign López Obrador also promised to strengthen collective bargaining on a sectoral level by creating a new public agency to coordinate dialogue between businesses and workers. Two other events could also spell the death knell for protection contracts. On 20 September, the ILO’s Convention 98 on the right to organise and engage in collective bargaining was passed by the Senate, now under the control of AMLO’s Morena party. This will force a reform of Mexico’s federal labour law to allow freedom of association. An unlikely helping hand from Donald Trump will speed up the process: Annex 23-A of the new USMCA trade agreement that replaces NAFTA obliges Mexico to enact this legislation by 1 January 2019 at the latest.

But even if conditions for Mexican workers improve, a much more serious challenge awaits: the looming threat of automation. According to a 2017 McKinsey study, as many as 52 per cent of Mexican jobs are at risk from automation, which is higher than up north in the US. Worse yet, Mexico is unlikely to benefit in other ways when some of these jobs are lost: a large share of Mexico’s most lucrative export-oriented manufacturing comes from foreign firms, particularly the entirely foreign-owned car industry. Reshoring of foreign-owned capital once Mexican workers lose their wage-competitive edge to robots and artificial intelligence could damage the country’s long-term growth prospects irrevocably.

For all its reformist impulses, the previous Mexican administration never seemed particularly concerned about reforming Mexico’s archaic labour environment. Nor did it ever put on its agenda the long-term risks posed by automation. That the López Obrador administration is the first in recent memory to broach reform is a positive step towards ensuring Mexican workers are fairly rewarded and finally allowed the freedom of association denied to them for decades.

But resolving Mexico’s labour market dysfunctions will take more than that: it calls for a comprehensive reimagining and transformation of Mexico’s welfare system that will ultimately bring in universal coverage. And in the even longer run, governments will have to face up to the future of work if any potential benefits reaped this term are not to prove short-lived.

• The views expressed here are of the authors and do not reflect the position of the Centre or of the LSE
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Rodrigo Aguilera
Rodrigo Aguilera is a Mexican-born, London-based economist who has worked as an international economist for Chatham House and the Economist Intelligence Unit, where he was the lead analyst for Mexico from 2012 to 2017 (as well as covering other countries such as Chile, Peru, and Venezuela). Rodrigo holds a BSc in Economics from Universidad de las Américas-Puebla and an MSc in Social Policy and Development from LSE.

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