Mexico Is About to Find Out If Minimum Wage Raises Kill Jobs

(Bloomberg) -- Economists debating the impact of a minimum wage on inequality, inflation and the jobless rate are about to get a ton of new evidence from Mexico.

The country is boosting its minimum wage 20% next year, an increase seven times faster than inflation, on top of a 16% jump this year.

The leftist government of President Andres Manuel Lopez Obrador is using the wage as a tool to fight poverty and inequality. This is a stark break from Mexico’s recent policies, when increases to the minimum salary barely topped inflation to help exporters to the U.S. keep costs down.

Before Lopez Obrador took office, Mexico’s minimum wage was the second-lowest among more than 30 countries in a study by the Organisation for Economic Co-Operation and Development as a proportion of what an average worker made. Only the U.S. was lower.

Mexico Is About to Find Out If Minimum Wage Raises Kill Jobs

Economists are split on whether increases in the minimum wage hurt job creation.

Harvard University’s Gregory Mankiw, who used to chair the U.S. Council of Economic Advisers, has argued that it reduces job opportunities for unskilled workers. Nobel Laureate Paul Krugman says there’s no evidence that raising the minimum wage costs jobs.

Mass Protests

The wage increase comes as policy makers are debating how to reduce social disparities amid mass protests in several Latin American countries.

So how is Mexico’s experiment going?

Despite the warnings of Mexico’s central bank, the 16% increase to the minimum salary this year hasn’t stoked inflation -- at least not yet.

The inflation rate has fallen to about 3% from 4.8% a year ago. Core inflation, which aims to track underlying price trends by excluding the most volatile goods such as food and energy, hardly budged during 2019.

Some economists also point to strong consumer demand as a benefit of workers’ higher spending power.

Banxico board member Gerardo Esquivel, an appointee of Lopez Obrador and a dovish member of the famously hawkish central bank, celebrated the additional wage increase which takes effect Jan. 1, saying it was “fair and necessary.”

Inflation, Jobs

Some other economists have warned that the cumulative impact of two double-digit increases will affect prices far more in 2020 and will force the central bank to slow its series of interest rate cuts.

“We’re starting to see some effect of high minimum wage increases on inflation in the form of higher core inflation, and that will make the central bank more prudent,” said Ernesto Revilla, head of Latin America economics at Citigroup Inc. in New York. “It will make Banxico go slowly in the easing cycle.”

In addition, Mexico created 30% fewer formal jobs through November compared to last year. The central bank had said in an August note that the wage hike at the start of the year contributed to that job creation slowdown.

Banxico, which is forecast to cut its key interest rate by a quarter point on Thursday, didn’t reply to a comment request on the impact of this week’s increase on jobs and prices.

Mexican salaries are rising across the board which, along with higher remittances, will allow consumer spending to grow faster than the rest of the economy next year, according to Bank of America’s Carlos Capistran.

Still, even after the increase, the minimum wage will still be at just $6.50 per day.

The adjustment is “very good for the country, very good for businesses and especially good for workers,” Gustavo de Hoyos, who heads Coparmex, one of Mexico’s largest business chambers, said in a video posted on his Twitter account. This is the “biggest increase in real terms since 1988.”

What Our Economist Says

“The salary hike may have helped moderate the deceleration in consumption this year, but the positive effect has been eroded in part by the negative effect on employment and the risks for inflation.”

--Felipe Hernandez, Latin America economist for Bloomberg Economics

Amplified Impact

Mexico’s minimum wage is soaring so rapidly that it now will cover a much larger number of workers, amplifying its impact.

This year’s minimum wage hike only boosted about 1% of salaries in the formal economy. Next year, that figure may reach 10%, as more workers are earning less than the new income floor of 123.22 pesos per day, according to Jose Luis de la Cruz, director of the Industrial Development and Economic Growth Institute in Mexico City

“The positive impacts, as well as the challenges for inflation and for companies, will be greater,” he said.

©2019 Bloomberg L.P.

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