Economics: Minimum wage hikes consequences
One of the first initiatives of the administration of President Andrés Manuel López Obrador upon taking office was to announce a major hike in the federal minimum wage for 2019 (+16.2% in most of the country, and by 100% in the northern border region). Over the past 12 months that decision has had repercussions throughout the economy as the real base wage and benefits paid to formal sector workers grew 3.8% as opposed to a mere 0.5% rise in 2018.
Fortunately, consumer inflation fell to its second lowest level since the authorities began recording such data and the producer price index was also strikingly tame as companies avoided passing along any cost increases incurred in their procurement of intermediate goods and accepted lower profit margins. But not all the news was positive. The jobless rate began to climb as a broader change in the composition of employment occurred, with growth in formal sector employment slowing alongside a corresponding increase in the number of people laboring in the informal sector. Worse yet, the informal sector saw a 0.6% real erosion of average wages, a development that goes a long way toward explaining the deceleration of private consumption and the extent to which such household expenditures are expected to remain flat during 2020.
The government’s decision to implement a 20% minimum wage increase this year may prove to have more adverse consequences at a time when the economy has largely stalled and business owners contemplate whether they can continue to absorb higher production costs and sustain output as domestic demand slows and the international outlook remains uncertain.
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