Workers’ 15-Year Nightmare

Last month, after the Mexican government announced that it was raising the minimum wage by 14% to 15%, the archbishop primate of Mexico, Norberto Rivera Carrera, called the resulting wage “criminal.” His concern, as his homily made clear, is the persistent suppression of real wages in Mexico over the last 15 years, a problem that could upset the march toward democracy.

Mexico has three geographic zones for which minimum wages are set, based on the cost of living. The government rationale for its most recent hike was that projected inflation for 1998 is about 12%, meaning that a 14% increase in the minimum wage would provide a real increase in take-home pay. Critics point out, however, that inflation in 1997 was about 17%. Thus, a 14% increase this year does not quite catch up with last year’s real-wage deterioration.

In zone A, the most expensive, which includes Mexico City, the new minimum wage will be 30.20 pesos a day--the equivalent of $113 a month at the official exchange rate of about 8 pesos a dollar--if a person works seven days a week. The official exchange rate is not the most appropriate measure for translating the purchasing power of this monthly pay, but its level, by any reckoning, is most definitely not a wage on which a person, let alone a family, can live.

The minimum wage is more of a bellwether, a sort of measuring rod, than a concrete definition of what most people earn. Calculations made by the Mexico City newspaper Reforma, using official data, show that about 15% of the population of Mexico City earn the minimum wage; another 32% twice the minimum wage; about 20% three times the minimum wage, and so on. Only 17.2% earn more than five times the minimum wage--roughly $550 a month.

Real wages of workers have been on a steady downward slide since the early 1980s, following the debt catastrophe of 1982. Before the economy started a modest recovery in 1987, real wages fell by between 40% and 50% in the four-year interval. The Mexican economy plummeted again in 1995, and the real purchasing power of wages fell by at least another 20% that year.

According to data compiled by the U.S. Bureau of Labor Statistics, the hourly wage of a Mexican worker in manufacturing was 22% of that earned by a comparable U.S. worker in 1980. This rate dropped to 12% of the American’s in 1985. After rising to 15% in 1994, the year before the bottom fell out of the economy again, the hourly wage fell to 8% of the U.S. rate in 1996, the lowest in decades. Figured in absolute numbers, hourly compensation for U.S. production workers in 1996 was $17.74, while for Mexican workers it was $1.50.

The hit taken by working men and women in Mexico was thus due in part to unfortunate conditions in the economy. In both 1982 and 1994, Mexico faced severe foreign-exchange problems, and the peso was devalued each time. A devaluation entails a fall in incomes because, failing that, inflation will skyrocket. In other words, Mexican workers were buffeted by the combination of a collapsing economy and a depreciating currency, and the double blow has been devastating.

But this does not tell the full story of Mexico’s wage predicament. A hit is necessary if a country is to recover from a depression and, at the same time, correct a balance-of-payments problem without rekindling inflation. Still, there is no doubt that Mexican workers have disproportionately shouldered the resulting hardships.

In the United States, compensation of employees, including wages and benefits, comes to around 72% of national income. In Mexico, the comparable figure for returns to labor is less than 30%. The rest goes to returns to capital, depreciation and indirect taxes. Labor, in other words, has been squeezed in favor of business. Some trickle-down occurs, to be sure, but this requires steady economic growth, something Mexico has not experienced during the past 15 years.

The corporatist structure of Mexico has contributed to this outcome. Mexico was lauded by money managers for the way it tried to rid the country of inflation after 1987. This was done in a series of pactos, a form of agreement among business, government and labor, under which each would limit its demands. Business would gouge less on prices, government would cut its fiscal deficits and labor would ask for only modest wage increases. In the end, the highest price was paid by labor. This was done with the cooperation of a compliant labor confederation, the Confederation of Mexican Workers (CTM), which was part and parcel of the political structure of the ruling party, the Institutional Revolutionary Party (PRI).

Opponents of the North American Free Trade Agreement contended that the pact would lead to wage suppression in order to stimulate foreign investment in Mexico and subsequent exports from the country. Clearly, there has been wage suppression, but it is not simply a post-NAFTA phenomenon. It is much more an artifact of the way the Mexican economic and political model was structured, compounded by inept economic policy that crippled the economy in each of the last two decades. Much of the wage suppression came from the government itself, which set the rules and hired many of the workers in the years before privatization.

The system functioned well as long as the government delivered steady economic growth, as it did before the 1980s. It worked as long as the politically conscious middle class received its share of the growing pie. Indeed, one of the major accomplishments of the post-World War II Mexican model is that it generated a thriving middle class with a major stake in the system.

But that system is changing. The PRI no longer enjoys a monopoly on governance. The head of government in Mexico City, Cuauhtemoc Cardenas, is from the opposition Party of the Mexican Revolution (PRD), which shares control of the lower house of Congress with the more conservative National Action Party (PAN) and other splinter parties. Fidel Velasquez, long-time leader of the CTM, died last year and a labor movement independent of the PRI is emerging. The middle class took its share of the hit in 1995 and many could not meet their mortgage and car payments without working two or three jobs. This helps explain the victory of Cardenas in the mayoralty election last year.

Reaction to the recent increase in the minimum wage makes it evident that the old norms no longer apply. In past years, authorities could suppress the real purchasing power of this wage and, while the persons most affected would grumble, that would be that. There was nobody in Congress who would make much of a fuss. The labor confederation supposedly protecting workers was complicit in suppressing their wages, claiming this was done for the good of the country. Sacrifice now, the worker was told, because nirvana will come in the future. Sacrifice, in fact, begot more sacrifice.

The pactos, the Mexican corporatist style of price control, are now a thing of the past. There is considerable agitation today to eliminate the minimum wage itself out of concern that it sets a ceiling--one minimum wage, two minimum wages or whatever--rather than a floor. There are plenty of power centers today from which complaints can be registered, from the independent labor unions to the middle class.

Democracy means that the PRI must take these new power centers into account in its calculations. There is little future in a policy that systematically suppresses the real income of a majority of the population. The solution cannot be to raise wages willy-nilly when worker productivity does not justify an increase, because this would stoke inflation and not real income. But the division of the benefits of economic growth, and the sacrifices necessary when adjustment is called for, require some rethinking in Mexico. This is the best time in decades for this rethinking to take place.