Low minimum wage and informality play in favor of increases

Specialists consulted by Expansion They point out that increasing the minimum wage, which around 22.5 million people in the country receive, is a positive measure, although estimates suggest that the increases should be 7% annually.

The minimum wage in 2024 in the border area is 375 pesos and 248.93 in the rest of the country, while the minimum wage registered in the IMSS is 581.42 pesos. This means a difference or space of more than 330 pesos.

“The proposal (to raise the minimum wage 12%) is positive, but going forward we believe that the country has to be much more cautious and not increase the minimum wage so much because there would be an inflationary risk,” said Carlos Serrano, an economist at head of BBVA Mexico. “For it to be enough to acquire 2.5 basic baskets, it implies that on average the increases must be 7%; “Increases greater than that could begin to create pressure on inflation.”

During López Obrador’s six-year term, the minimum wage increased every year by double digits, at rates of 20%. Mexico is the Latin American country that has increased the minimum wage the most in the last six years, considerably surpassing Chile, Colombia and Brazil.

An analysis by Citibanamex highlights that in 2010 the minimum wage in Mexico was equivalent to 26.6% of the average salary of full-time workers, the lowest proportion among OECD member countries and towards 2021 the increases positioned Mexico better.

“By 2023, the most recent data available, this proportion stood at 55.2%, above the OECD average of 44.2%. With this, it already exceeds various advanced and emerging OECD economies,” highlights the report.

The bank points out that, in international experience, raising the minimum wage increases the burden on companies, discouraging job creation, which can in turn have a negative impact on poverty, having effects contrary to those desired. It stands out that these costs are faced more by SMEs, which are the ones who generate the most jobs.

Inflationary effect?

In the years prior to López Obrador’s six-year term, the Bank of Mexico – with Agustín Carstens at the helm – warned that increasing the minimum wage would be risky for inflation.

“There was a perception within the Bank of Mexico and the academic world that minimum wages could not be raised much above the productivity of the economy because this would lead to inflationary pressures,” said Rafael de la Fuente, an economist at UBS.

The reality is that Mexico has a high rate of informality, with more than 54% of the population, and according to analysts, this works for and against increases.

“There is always a risk that raising minimum wages well above inflation will translate into higher inflation. Raising salaries may translate not so much into generalized salary increases, but rather into a greater shift towards informality,” added de la Fuente.

For the UBS specialist, the real challenge of increasing the minimum wage is to do so above the worker’s productivity.

“In Mexico, productivity has shown a decreasing trend in recent years, and for the economy as a whole, labor productivity is 5% lower than 6 years ago and 5% lower than 10 years ago,” notes Citibanamex,

Rafael de la Fuente believes that even in times of economic slowdown, Mexico cushions the blows more effectively than other economies because workers can transfer from a formal to an informal sector and at least maintain a certain income.

“The Mexican economy cushions the blows in a very special way and to a large extent to its large informal sector,” he assured.

For his part, Franklin Templeton estimates that given the slowdown of the Mexican economy, the increase in the minimum wage could encourage employment in the informal sector.

How could the minimum wage increase policy be improved?

For Citibanamex specialists, greater investment in infrastructure, improvements in human capital and greater female participation can help complement government policies.

“Greater investment in infrastructure and technology that boosts the productive capacity of companies should also be a policy that goes hand in hand with increases in the minimum wage because investment in machinery, technology and innovation allows increasing the productivity of the workforce. “, highlights the bank.

During López Obrador’s six-year term, investment decreased as a proportion of GDP, while salary increases have been significantly higher.

In the period 2019-2024, investment was 22.7% of GDP, while in the immediate previous six-year periods it was 23.4% and 23.7%.

In terms of human capital, Citibanamex considers that investment in education (formal and in the workplace) as well as health would increase the capacity of workers to perform more advanced tasks.

“The education gap has been reversed and women have more years of education than men in Mexico, and, as a consequence, there is a percentage of qualified labor that is being left out of the labor market,” he added.