The Wages of Ambrosio

Luis Rubio

It’s no news to anyone that the minimum wage (MW) is extremely low. Those who champion an increase decreed by the authority follow a logic that seems impeccable: there’s a wage hike, people consume more, which causes a growth in production that in turn translates into a greater demand for jobs.  That is, a virtuous circle.

The idea is attractive because it allows us to imagine the solution to, in the flourish of a signature, a substantial number of ills. Nearly all of the proposals for raising the minimum wage suggest a relatively modest increase. I ask myself: Why not think big and raise the present 67-peso daily wage to 250? Or, now that we’re on this topic, Why not to raise it to $1000? Were it so easy to solve the problems of the economy this would have been done a long time ago (in fact, some in the 70’s tried and produced nearly catastrophic results).

Let’s start with the numbers: 52 million persons make up the economically active population (EAP).  Of these, 12.5% (6.6 million) receive a minimum wage. A total of 23.2% (11.9 million) receive between 1 and 2 MW. That means that 35.6% of the EAP (18.5 million) receive at most 2 MW (The National Occupation and Employment Survey, ENOE). For its part, the daily average wage of those registered at the Mexican Institute of Social Security (IMSS) is: $282.60 pesos. That implies a salary of $8,478 pesos a month, or four times the minimum wage.

In the primary sector, 26% receive a MW, while only 8% of those working in the industrial sector are found in this condition and 12% in services. In total, 25% of primary-sector employees receive between 1 and 2 MW, 24% in the secondary sector and 24% in the tertiary sector. In the government 13% receive a maximum of two MW. The most important number, because it reflects the basic problem, is that of the relative concentration of employees who earn minimum wages: in micro businesses, 51% earn less than two MW. Given that micro or small businesses represent 66% of all persons employed in the manufacturing sector, it is clear that the salary reflects the productivity of the business. As demonstrated by the study of McKinsey*, Mexico’s problem is one of productivity and the low wages are nothing other than a mere symptom of this.

Low productivity lies at the heart of the economic problem, much of this concentrated –and perpetuated- in the informal economy. The Mexican economy has been divided into two large groups: one that contributes in accelerated fashion to the creation of wealth, is integrally connected to the global economy, pays high salaries and contributes a 6.5% growth of productivity annually; and the other made up of businesses typically small in size that pays low wages, compete precariously with imports and that barely survive, supplying a negative productivity of 5.8%.

The numbers tells us two things: first, persons who earn less than 2 MW are overwhelmingly concentrated in small and medium businesses; and second, productivity tends to be much less (on occasion negative) in small businesses. Expressed in other terms, the intention of those advocating that an increase be decreed by the government is for the main employers of the country –small and micro businesses, that is, those with the least capacity for confronting an increase in their costs -to raise wages.

In order to survive with paying higher wages, those businesses would have to raise the prices of their goods and services, which would reduce their sales, which then would lead to dismissals.  The only way to avoid falling into this vicious circle would be to raise productivity which is, in the final analysis, the cause of problem. Increasing the MW without resolving the causes of the low productivity displayed by the economy would thus lead to higher levels of unemployment, thus curtailing its supposed benefits.

The latter does not deny that wages may be very low. In the last decades many absurdities have been established with regard to MW: these range from converting the MW into an anchor against inflation (the Pact of the eighties) to utilizing them as an index for all sorts of fines, penalties, and the like. It is clear that what is required is to free the MW from this dead-weight and to subject them to a market mechanism that makes it possible to arrive at what economists denominate the “optimal” price.  What would be a disaster is to raise them through by decree with political criteria. Wages, like all prices, ought to be set by supply and demand, a mechanism that would possess the virtue of compensating more and better those with higher education, thus providing an additional incentive to dealing with the problem of education –crucial in the information economy- and its unions.

Pretending that an increase in salaries would solve the problem of the Mexican economy brings to mind the tale of the carbine of Ambrosio, a XIX Century highwayman from Seville whose ill-equipped carbine rifle had no gunpowder. However, in contrast with that legend, decreeing a wage increase indeed entertains momentous consequences, bringing about the previously mentioned perverse cycle of unemployment (and, potentially, inflation).

In the long term, salaries will rise as productivity grows and today this is impeded by red tape, bureaucracy, privileges, regulations, and political interests. The correct response to the challenge of productivity is to create conditions for the proliferation of new enterprises and entrepreneurs, all these within the world of a simplified formality. Worldwide, what produce the growth of productivity are small businesses that grow fast. The discussion on the MW brings home how far we are from coming to grips with the real problems of the country’s development.