What does a rise in the minimum wage mean for the Mexican labour market?

The idea of a minimum working wage has been a controversial topic within economics for many years. The basic goal of establishing a minimum level of earnings is to ensure that independently of the job performed, all workers can earn a salary that is high enough to satisfy their basic needs.

Over the last 30 years the minimum wage in Mexico has lost more than 70 per cent of its real purchasing power because it has not been increased in line with price inflation. As a consequence, the value of the minimum wage in Mexico (73.04 pesos, less than three pounds) is the lowest among the Organisation for Economic Co-operation and Development (OECD) and Latin American countries.

Moreover, the minimum wage in Mexico is not high enough to escape poverty. If a person with one economic dependant works full time earning the minimum wage, they are kept under extreme poverty conditions, which in Mexico translates as the impossibility of covering the cost of a person’s daily calorific intake. Other needs such as housing, clothing, transport and education are not met by Mexico’s current minimum wage (poverty data obtained from the National Council of Evaluation of Social Development Policy).

So why is the minimum wage such a controversial topic? Public policy aimed at improving the living conditions of the poorest sector of the population seems to be a worthwhile cause. The problem however, is that a minimum wage increase could have negative repercussions on the level of employment. For example, employers are required by law to increase wages, which means the cost of labour is increasing the cost of the production process. In order to absorb increasing labour costs, firms could respond by making job cuts, resulting in some workers losing their jobs.

Classic economic theory states that a minimum wage increase generates unemployment. Empirical research in the United States during the 1970s and 1980s supported this prediction, achieving an apparent consensus: a minimum wage increase of 10 per cent would reduce the level of employment by between 1 per cent and 3 per cent].

In contrast, during the 1990s a new wave of research turned this common wisdom on its head. Economists such as David Card and Alan Krueger proved through theory and empirical evidence that the minimum wage does not necessarily affect employment and that it could even increase it.

Current research at the University of Birmingham estimates the causal effect of a minimum wage rise on the Mexican labour market. To carry out such an evaluation, a policy change is used as a natural experiment. In November 2012 there was a small increase in the minimum wage in only one of the three national wage zones in Mexico. Thus, the policy intervention included only one treated zone, while the other two are used as a control group.

Using econometric procedures and data from the National Survey on Employment, preliminary results pointed to three interesting findings.

Firstly, as a consequence of the intervention, real wages increased. So legislation truly affected earnings. Secondly, the employment rate grew. Thus, instead of generating dismissals, it began raising the level of employment. And thirdly, the policy change also affected incentives in the informal labour market. The proportion of workers under informal conditions decreased and informal employers also increased salaries in order to retain their workers.

The analysis suggests that there is no harm in terms of employment by increasing minimum wages from low levels. On the contrary, there are some important positive effects on the labour market providing formal evidence that the minimum wage in Mexico can be a powerful instrument in the fight against poverty.

Jorge Bouchot Viveros

Doctoral Researcher, Economics, Birmingham Business School, University of Birmingham