In recent years, the debate about raising the minimum wage has gained momentum all over the world. In Chile and Brazil, for example, the high levels of inequality and the low standard of living have led to wage recovery policies. Four states in the wealthy United States have recently increased the minimum wage.
Did the best-selling Capital cause this in the 21st Century book of economist Thomas Picketty? It may be international migration or political polarisation. The idea that workers should be paid a “living wage” has become a global movement.
In the 1970s & 1980s, the minimum wage was used to help control inflation. By setting a low wage minimum, the government can reduce costs and limit inflation. This policy, however, reduced the purchasing power for all wages, even the lowest-earning brackets.
Since the late 90s, when the Mexican Economy was essentially stabilized, the minimum wage has largely kept pace with low inflation. It has also served as a signal for the labor market: an increase in the minimum wage will lead to other salaries increasing. We have not seen the same transfers of productivity gains as in the 1950s or 1960s.
Minimum wage: Official vs.’ market’
Few Mexicans earn the minimum wage. According to official figures, around 8 million workers (more than 10% of the workforce) earn between one and two times the minimum wage.
It’s because tax and fiscal incentives are available to encourage employers to understate wages. The employer’s social security contributions are calculated progressively, so employers tend to understate salaries and pay the employees for the difference.
The labor market’s daily minimum wage is higher than the minimum wage set by the government despite regional differences and work-related characteristics.
This is a difficult minimum wage to calculate, even if it’s unofficial. We can draw some conclusions based on the fact the lowest-paid worker in construction earns more than 150 pesos per day ($8), which is more than twice the minimum wage.
The “lighthouse effect.”
Many businesses and banks are asking themselves: Why worry about Mexico’s minimum wage?
The Mexican Central Bank does not support an increase in the minimum wage, as it wants to maintain low inflation. Some in the business community also believe that a higher minimum would increase wages in general, which will lead to inflationary pressures. It is known as the “lighthouse effect,” and no one wants it.
A low minimum wage can also have a “reverse-lighthouse effect,” which means that businesses are more likely to pay lower wages because they use the low minimum wage as a reference. Employers believe that the wages they pay are sufficient to support a worker because they exceed the official minimum wage. This is not always the case, especially if the wage comparison doesn’t cover tortillas.
The Mexican economy is also oligopolistic. There’s not enough competition for it to be able to prevent excessive profits. The labor market is also deficient, with high transaction costs. While official unemployment rates are at an extremely low 4.9%, around 65% of the workforce belongs to the informal sector.
Due to the excess of labor available, employers can pay low wages without worrying about labor shortages. A very low minimum wage can also lower other wages.
No money for a vacation or car
According to the Consejo Nacional de Evaluacion de la Politica Social, which measures poverty using a multidimensional method, for a minimum daily basket to be enough to support two people, the minimum wage must increase by more than 145% to 178 pesos ($8.75) per day.
This amount will cover the following for a family with one income earner and a dependent:
- Rent for a small apartment
- Three simple meals per day
- Commuting expenses
- Some basic healthcare services
There would be no money left for holidays or to buy and maintain a car.
Mexico’s minimum wage is not enough to buy all of this. Daniel Aguilar/Reuters
In a country where the currency has just fallen by 20%, it is impossible to increase wages in this way. Employers would still resist vehemently.
A rapid and significant rise would affect businesses and employment in general. A high minimum wage that is suddenly above the market rate would be undesirable from an economic standpoint.
Mexico should instead adopt a policy that gradually increases the minimum wage over several years. This would curb inflationary pressures while allowing businesses to adjust and manage their wages.
Chile, Brazil, and the US have already done this with no impact on employment or inflation. In Mexico, when the government increased the minimum wage to two different regions, there were no significant effects.
It is difficult to predict the impact of an increase in minimum wage on inequality. Brazil and Mexico have increased their minimum wages in recent years, but not everyone. Most countries have used conditional transfers in order to lift the poor out of poverty. Even if Mexico raised the minimum wage over time in a reasonable way, the Gini Coefficient, which measures inequality, could remain static.
The lives of those who earn the least would improve. This is not only a matter of justice, but it could also improve Mexico’s economic situation, increase social cohesion, and reduce unwanted migration into the United States. This is a priority, given the abrupt shift in Mexico’s region.
