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The effects of the minimum wage increase in Mexico

by | Dec 30, 2023

During the final week of November 2023, the corporate director of economic studies for Latin America at Scotiabank pointed out that “the Mexican economy will maintain its good dynamism at least until the first half of 2024 because the public deficit will focus on consumption, but further onward and with the change of government the progress will be slower.” This statement was given at the same time that the Timely Indicator of Economic Activity, prepared by Mexico’s National Institute of Statistics and Geography (INEGI), disclosed that during October, economic activity decreased by 0.1% compared to the previous month of September. However, when making an annual comparison, the economy would have expanded 2.9% for that month.

Mexico will get a boost from nearshoring

To a large extent, the positive expectation maintained by various analysts is related to nearshoring. The president of the Association of Banks of Mexico declared that due to the relocation of industry supply chains, “Mexico’s exports could experience an increase of between 15 billion and 50 billion dollars for the next four years, but there are several challenges ahead.” On the other hand, in the words of the Secretary of Foreign Affairs, Alicia Bárcena, Mexico still does not understand this phenomenon and the critical opportunity it represents to boost the economy,” which is taken  better advantage of by other nations like Vietnam, for example.” However, it is worth noting that Mexico attracted 5.4 billion dollars in foreign direct investment to manufacture cars and trucks in the first three quarters of 2023. According to data from Mexico’s Ministry of Economy, this amount represents an increase of 67.7% year-on-year and a record high.

At the same time, according to data also from the Ministry of Economy, Mexico attracted 2.7 billion dollars of foreign direct investment in the mining industry in the first three quarters of 2023, the most significant amount in similar periods in the last decade. Finally, it is worth noting that Banco Santander estimated that in just over a year, foreign direct investment in Mexico will exceed the capture of remittances due to the nearshoring phenomenon. After presenting the “Nearshoring Data Monitor,” the bank specified that this dynamic would benefit employment, growth, development, banking, and credit. Despite implementing a minimum wage increase in Mexico at the beginning of 2024, more nearshoring will occur.

The agriculture sector has lost some productivity

The positive FDI figures and their promising impact on developing sectors such as manufacturing, financial services, and automobiles, among others, contrast with the recent data published regarding the primary or agricultural sector. It serves as an example to detail that corn production has not rebounded under the current government and presented a productivity loss between 2018 and 2022. It decreased from 27 million 169 thousand tons to 26 million 553 thousand during that period. In parallel to these figures, in November 2023, it was published that the “2022 Agricultural Census” prepared by the INEGI showed that the high costs of inputs, losses due to inclement weather, decreased sales, and even insecurity are some of the problems facing Mexican agricultural producers.

These data serve to expand the context in which, according to some analysts, the price of tortillas is headed for a new increase during the first months of 2024, also caused “by the transgenic corn war by which Mexican President Lopez Obrador banned genetically modified (GM) corn for human consumption, the increase in the cost of electricity, gas and the maintenance costs of the tortilla machines .”

It will be necessary to review how the abovementioned variables impact employment and consumption in the country. For now, we must be attentive to the minimum wage increase in Mexico that will be implemented in 2024.

The minimum wage increase in Mexico will have both positive and negative effects

The Mexican government has said that the new proposal for a minimum wage increase in Mexico will benefit more than 6.3 million workers. However, analysts also point out that micro and small businesses will be put in an adverse circumstance due to increased labor costs since up to 90% of their employees are compensated at that income level. The questions that must be raised are: How will Mexico better involve the primary sector in the dynamics of integration with the US economy? Will the minimum wage increase in Mexico go hand in hand with increases in the marginal productivity of work and competitiveness? In the international context the country faces, which sectors will benefit most from this situation? Where will it be worth investing in the Mexican economy?

The minimum wage increase in Mexico in 2024 can have multifaceted effects on the country’s economic landscape. On the one hand, an increase may lead to higher business costs, potentially diminishing their competitiveness in domestic and international markets. This could result in reduced foreign investment and a shift of some industries to lower-cost regions. However, from a productivity standpoint, higher wages can incentivize Mexican workers to enhance their skills and output, potentially driving innovation and efficiency in various sectors. Additionally, an uptick in purchasing power among lower-income groups can stimulate domestic consumption, fostering economic growth and reducing income inequality. Thus, while a minimum wage hike may introduce short-term challenges for businesses, its long-term impact on Mexico’s overall economic health depends on a balanced approach that considers both competitiveness and the welfare of its workforce.

Contact LATAM FDI to discuss your foreign direct investment plans in Latin America.

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