Minimum Wage Doubling Impact at the Border

Category: News
Published: 2019-02-01

Even though the minimum wage at 23 Mexican border municipalities is expected to double to $176.72 Mexican pesos a day or US$8.79 starting January 1, 2019, the economic impact would most likely be moderate, since most of the businesses in this region already pay even higher wages, experts agreed.

“In most of the cases, the economic effect is going to be neutral, because in this region, the biggest employer is the maquiladora, and the salaries in this sector are higher than the minimum wage in other regions of the country,” explained economist and researcher Miguel Angel Calderon. “Other sectors, such as the retail and services, are adjusting their budgets, but the changes are going to be minimal.” 

The top 10 Mexican border cities account for 1.8 million formal workers, but less than 7% of them earned one minimum wage per day in 2018, according to data from the Social Security Mexican Institute (IMSS). However, these data do not account for informal workers or for labor that works outside the IMSS system.

“It’s going to affect us, but minimally, because right now everyone is paying above minimum wage,” said Eleazar Coronado, head of the Nogales Industrial Relations Association.

In the last five years, the salary of a line worker has gone up. Nowadays, they earn between US$8.5 and US$10.5 daily, depending on the border city and the kind of industry they work at, according to Manpower figures. A few years before, the average range of salary was US$4 to US$6.4 daily.

The wage increase will be effective in a band that varies from 20 to 100 kilometers inclusive of all the municipalities that are located along the 3,000 mile U.S.-Mexico border 

In addition, the Andres Manuel Lopez Obrador administration has a lower corporate income tax project for this region, but still needs the Mexican Congress approval.

“It is essential to generate compensation and incentives to sustain jobs, to promote productivity and without generating economic distortions to allow us to absorb the increase in costs together, workers and employers, with public policy that facilitates it. Otherwise, there will be the risk of generating job losses and investment in the area that seeks to favor,” expressed Juan Pablo Castañon, president of the Business Coordinator Council (CCE).

The wage increase agreement has the support of the private sector in Mexico and Mexico’s Central Bank. Still some experts doubt the wage increase might not spike inflation. 

“Hopefully, this wage increase will rise the purchase power of the employees at the border, but historically, with every wage increase comes price increases as well. Even now some prices are higher than a few months ago, and some industries such as the cement sector said the prices are going to be up 17% while the tortillas will cost an extra $1 peso starting 2019,” Calderon said.

Irma Chavez, a Human Resources specialist in Ciudad Juarez, explained that some companies are going to have a negative impact since they pay one minimum wage per day but added several bonusses and benefits to their employees to increase their salary.

“Some companies did it this way to lower the taxes they must pay as employers to IMSS and Infonavit. The changes are going to increase their spending in payroll and some small companies cannot afford this and might layoff some workers.”

The fee employers pay to IMSS might also go up because it is linked to the minimum wage. The Infonavit fee is not going to be affected because it was unlinked from the minimum wage a few years ago.

Nowadays, maquiladoras at the border have more than 40,000 vacancies; therefore, specialists consider that the possible laid off workers in the retail and services sectors might find a job in manufacturing. Also, many workers from south and central Mexico might consider moving to the border to get a better-paid job.

However, some experts did not consider that some people from the informal sector might move to the formal sector since they do not have a real incentive to move because they do not pay taxes and have a flexible schedule.

Tax attorney Miguel Angel Diaz Marin said once the minimum wage in entry level is up, some maquiladoras must adjust up some of the wages because the line worker and the line supervisor wage must be similar, even though the responsibility is different.

“The operative jobs might go slightly up in some maquiladoras and this can be an incentive for the workers and might increase competitiveness,” he added.

The project Lopez Obrador has for the border includes other economic incentives such as a lower the Value Added Tax (VAT) from the existing 16% to 8%, which it is intended to improve the purchasing power of all border residents, the corporate income tax would go from 30% to 20%, and the project also aims to homologate gasoline and natural gas prices of Mexican border cities with their neighboring U.S. sister cities. These changes have not been approved yet, but they might be effective as soon as 2019, given that Lopez Obrador’s party has the congress majority and might pass legislation without the support of the other political parties.

These changes aim to reduce the cost of goods and services, while the workers’ income increases because they will pay less VAT taxes. As a result, the Lopez Obrador administration hopes to increase the quality of life of the border population.

Pablo Reyna, economist and president of the National Chamber of Restaurants (Canirac) in Matamoros, said the VAT reduction is going to be positive for the region because, in this region, people South of the Texas Valley are going to find the Mexican border attractive due to lower prices.

The incoming administration hopes the initiatives increase sales and consumer spending, create more jobs and attract corporate investments in manufacturing and retail.

Some economists disagree with minimum wages, never mind increasing them, they argue that they would eventually stir inflation and unemployment. US economist Thomas Sowell says that those countries with minimum wages invariably have higher unemployment rates than those without them; he argues that, regardless of the laws, the real minimum wage is always zero.

But the Mexico side of the border is unlike any other region in the world, and the combination of the higher wages with the other incentives for consumers and businesses might very well work.