MEXICO - Big Issues Behind Minimum Wage

On 16 December the government announced a 20% hike in the minimum wage, one of the largest ever. Two considerations lie behind the decision: first, a political imperative to get the economy moving again, and second, a quiet rebuilding of bridges with top private sector companies.

Effective from 1 January, the national minimum wage for a day’s work will increase by 20% to M$123.22 (US$6.50). This is the biggest increase in the last four decades (there was a 16% increase last year shortly after President Andrés Manuel López Obrador took office). In the border region with the US, where it was doubled last year, the minimum wage will now rise by 5% to M$185.56 (US$9.79). The higher border rate is intended to act as a disincentive to migration to the US.

There is some concern that the rise could be inflationary (it significantly outstrips 12-month inflation currently running at 3%). But potentially outweighing that worry is the need to stimulate a largely stagnant economy (growth this year is expected to be around zero). Although still riding relatively high in the opinion polls, President López Obrador is aware that his government needs to deliver on its promises of growth and redistribution in favour of Mexico’s poor.

Interestingly, the private sector is supporting the wage hike. The rise was voted through by the minimum wage commission (Conasami) on which employers are represented. Top business associations applauded it. In fact, last month a group of 100 tier one Mexican companies (including Corporación Zapata, Citibanamex, and Nestlé Mexico) formed an association called Empresas por el Bienestar, whose aim is to ensure all their employees and those of their key contractors are paid a minimum of M$6,500 (US$343) a month.

López Obrador started his presidency on a bad footing with big business, who he regularly criticised for corruption and for supporting what he described as the neo-liberal and anti-popular economic policies of his predecessors. Big points of disagreement included his cancellation of the US$13bn contract to build the new Mexico City airport and his move away from the liberalisation of the oil and gas sector initiated by the previous government. However, and according to a number of sources, it seems as if a major dispute over pipeline contracts earlier this year has led to a rapprochement.

State-owned power company CFE had wanted to renegotiate seven gas pipeline contracts worth US$13bn, claiming they were over-priced, and that there had been corruption in the way they were awarded. The companies involved included heavyweights such as Grupo Carso (owned by billionaire Carlos Slim), TC Energy of Canada, and Sempra Energy of the US.

According to sources cited by Reuters, business leaders Carlos Salazar (Consejo Coordinador Empresarial – CCE) and Antonio del Valle (Consejo Mexicano de Negocios) were able to persuade López Obrador not to cancel the contracts, showing him a pipeline map and arguing that building the new connectors would help supply cheap energy to Mexico’s south, boosting economic growth and helping the poor. In August López Obrador announced that a deal had been reached and that the pipelines would go ahead. For some, the outcome of this incident has been the establishment of a better understanding between López Obrador and business, that has paved the way for a shared approach to the minimum wage.

  • Better relations with big business

President López Obrador has reportedly agreed to tone down his confrontational language and stop using the derogatory slang word ‘fifi’, said to refer to the economic elite or, in his words, to “two faced conservative hypocrites”. Whether the improved relationship will last remains to be seen. Some business leaders remain concerned over what they see as López Obrador’s unpredictability and hostility towards the private sector. One off-the-record source involved in the pipeline talks commented “They have no idea how close they were to a nuclear disaster in terms of financial markets, in terms of trade talks.”