Increase in the minimum wage: good news?

It is pertinent to recognize that the treatment that this administration has given to the minimum wage, after decades of meager adjustments and a very restrictive policy, has been disruptive and quite possibly positive. Mexico had to act to recover the lost purchasing power and the standard of living of the most disadvantaged segments of the population in Mexico. According to Luisa María Alcalde, Secretary of Labor, as of January 1, 2023, the general daily minimum wage will increase 20%, equivalent to an increase from 9 to 10.8 dollars a day, thanks to the consensus reached by the government with the employers and the workers. At least immediately, the measure will benefit 6.4 million formal workers.

In the opinion of the Council of Representatives of the National Minimum Wage Commission (Conasami), there are three factors that are the main determinants of the lag in the purchasing power of the minimum wage: 1. The low economic growth of the country in the last four decades, the crises recurring, episodes of inflation and omission of productivity performance in the factors for fixing the minimum wage. 2. For three decades, the minimum wage was gradually and extensively used as a unit of account, index, base, or reference measure for aspects outside its constitutional mandate, and 3. The entrenchment of the belief, or expectation, in the workplace regarding of a forced link between the increase in the minimum wage and increases in most of the wages in force in the country that would inevitably have inflationary repercussions.

This last belief was the main basis of a fear that was generalized in public wage policy in the 1980s when the great deals were made in which it was used as an anchor for price control. However, the analyzes and conditions have evolved, and today there is evidence that shows that the de-indexation of the minimum wage and the gradual increases for this segment of the population are convenient and socially fair. In fact, in Mexico we have had three double-digit increases to date, and we have not noticed relevant inflationary effects. Recently, both the Organization for Economic Co-operation and Development (OECD) and the World Bank recommend that countries carry out periodic reviews. The International Monetary Fund, for its part, has called for caution in the revisions, especially in the context of global inflationary pressures in the food and energy markets.

For Mexico, it has been estimated that the increase in 2022 will raise its costs by an average of 1.3%. The options of the companies in these cases would be: transfer it to prices directly and lose customers (if the price of their product rises, consumers may stop consuming it); laying off workers, reducing their production and sacrificing profits; or raise the minimum wage and cover the cost by financing it with its profit margin, since it is marginal with respect to total costs. Each company will maximize and make its corresponding decision, the net effect on the economy being a combination of the three options. However, it is possible to anticipate that the less competitive the labor market is in the short term, the more companies will tend to temporarily sacrifice profits to maintain or increase their production. For those of us who believe that in Mexico there is still a long way to go before labor markets are competitive, it is possible that there is room to finance a rise in the minimum wage. The most affected companies would be those located in Chiapas, Oaxaca and Tlaxcala where subordinate and paid workers who earn up to a minimum wage represent 55%, 43%, and 49%, respectively, as indicated by the Mexican Institute for Competitiveness.

Of the 36 countries that make up the OECD, the international organization, 13 of them are below the average salary of the OECD, which is 15 thousand 180 dollars per year, Mexico is the one that has had the worst performance and stagnation when registering an average annual growth of 0.6 percent until 2018, while Chile, the next lowest performing country, grew at 3 percent in the same period, that is, five times more than Mexico. The real minimum wage in Mexico has been stagnant in the international context, standing at 1,788 dollars in 2000, and reaching 3,888 dollars with the increase for 2023, according to Conasami based on OECD data. Of the countries analyzed in Latin America, Ecuador has the highest minimum wage, totaling $5,100 per year. Chile, for its part, reaches 4,932 dollars per month, according to the latest data from the Labor Directorate. Panama, where a worker in a small company gets at least $3,912 per month, and one in a large company, around $4,836 per year.

Empirical studies in numerous countries and economic conditions have corroborated two conclusions. The first, confirmed by Oi & Idson, from the Handbook of Labor Economics, which states that larger companies pay better wages. The second, by Card, Divicienti & Maida, which discovered that the most profitable companies share a part of these profits with their workers in the form of higher wages. These two studies are clearly interconnected and compelling: larger, more profitable companies pay higher wages, and that’s not just because they attract more skilled workers. In Latin America, the descriptive evidence coincides in the same direction: larger companies pay more and better salaries that imply higher productivity.

Perhaps we are reaching the limits of the minimum wage so that it does not cause worrying inflationary effects. In the future we should also think about making adjustments by regions or states, considering their specific realities. For now, with the increase for 2023, the government anticipates that purchasing power will have recovered by 90% since 2018, after the loss registered in the last 40 years. And therefore, it is good to recognize that it is good news.