Government, employers and unions agree to the largest increase to the minimum wage in 46 years

Dec 1 (Common Sense) – The Government of Mexico, with the support of business and union leaders, decided to raise the national minimum wage at a double-digit rate, with the intention of trying to maintain the purchasing power of people in times of high inflation rates that affects the local and global economy.

The increase for 2022 will be 22%, the sixth year in a row in which it exceeds inflation growth – which will close 2021 by approximately 7% – and the highest rate in the last 46 years, according to government data.

Starting in January of next year, the minimum pay in Mexico will go from 141.7 to 172.87 pesos for an eight-hour workday, while in the northern border area the payment will rise from 213.4 to 260.34 pesos, announced in a statement the Business Coordinating Council (CCE).

“With this agreement, the CCE and the organizations that comprise it endorse their solidarity and commitment to improve the income of workers, and overcome, in the short term, the Family Welfare Line defined by the National Council for the Evaluation of the Social Development Policy (Coneval) ”, the employer organization wrote in the statement.

The increase improves the purchasing power of workers, said the agency, which calculated that now the national minimum wage will be enough to cover 74% of the Family Welfare Line – a sufficient monthly income for a working couple to meet the needs of a family made up of up to four members–, while the figure for the northern border will cover 112% of that parameter of basic expenses.

The increase could benefit 6.3 million workers, or 30.5% of those registered with the Mexican Social Security Institute, who have a lower salary than the minimum current in 2022, according to calculations by David Kaplan, a leading specialist in labor markets of the Inter-American Development Bank.

The proportion would be 35.9% of formal workers for the border area of ​​Mexico with the United States, according to the specialist.

The announcement was also celebrated by the Confederation of Industrial Chambers of the United Mexican States (Concamin).

“The Mexican economy is in a recovery phase with a high level of inflation, which must be contained,” the agency wrote. “The Mexican private sector has shown, time and again, to have the ability to react to current challenges, and this will not be the exception.”

The increase occurs at a time when inflation in Mexico exceeded 7% in November, more than double Banco de México’s target of 3%, the highest in 20 years.

Both authorities and experts agree that the current inflation is part of a global phenomenon connected to the covid-19 pandemic, which has caused bottlenecks in supply chains, higher prices of commodities and particularly of energy and a recovery in demand greater than that of supply.

The minimum wage, which in 2022 will be equivalent to 4,300 pesos a month ($ 200), must be sufficient to cover the material, social and cultural needs of a head of the family in accordance with the Political Constitution of the United Mexican States.

The basic basket, a set of goods considered minimally necessary, has a cost of 11,439 pesos per month (532 dollars) according to a study by the University of Guadalajara with data as of July 2021, so – even excluding inflation in the second half of the year – it will still take more than two minimum wages in 2022 to be able to acquire it.

Beyond the immediate impact on workers paid with that salary, which is 13.3% of the total according to the latest Monthly Report on the Behavior of the Economy of the Technical Directorate of the National Commission of Minimum Wages (Conasami), the increases the salary always brings to the table the discussion of its effects in the medium and long term.

As the labor market is governed by a supply of labor and a demand from companies, many take wages as an equilibrium point that, when rising, could have an adverse impact on the level of employment.

In addition, higher wages, argue some experts, could mean an impact on money in circulation, one of the main factors of inflation, which would end up driving the latter phenomenon.

However, these mechanisms are based on what in basic economic theory is known as perfect competition, which assumes a labor market with a salary equal to productivity; that workers have identical preferences, freely change jobs, and have homogeneous productivity; and that companies do not decide salaries – given by balance -, according to Luis Felipe Munguía, president of Conasami.

“Nothing could be further from reality,” the official wrote in an opinion column for the daily El Financiero in January. “Unfortunately, when considering basic economic models, the explanation falls short when contrasted with the real world.”

For the head of the body in charge of studying increases to the minimum wage in Mexico, the local labor market looks more like a monopsony, where workers cannot always change jobs, have different preferences and companies can choose the wage they pay even below equilibrium – which is not unique.

The insignificant effect of wage rises on inflation and employment is a position defended by the American economist Paul Krugman, Nobel Prize in Economics in 2008, and is part of the works that gave him the same recognition in 2021 to also American David Card.

Of course, each country has specific characteristics that could develop this type of phenomenon in a different way.

A study prepared by the World Bank Group published in 2017, based on data from the Mexican labor market, concluded that the increase in salaries does not have a relevant impact on the aforementioned economic variables.

“There are no economically and statistically significant associations of an increase in the minimum wage on employment, wages, and productivity,” wrote Enrique Seira, Leonardo Iacovone and Isaac Mesa, experts from the international body in charge of the investigation.

* Ricardo Garduño contributed to this story