United States: The Importance Of Mexico's Minimum Wages In NAFTA Negotiations

Leslie Palma is a Consulting Counsel in Holland & Knight's Mexico City office

Carlos Vejar is a Senior Counsel in Holland & Knight's Mexico City office

HIGHLIGHTS:

  • The improvement of the minimum wages in Mexico is, for some, a fundamental topic in achieving a new North American Free Trade Agreement (NAFTA). Some U.S. Democrats have noted this as a requirement for approval.
  • Within the NAFTA negotiations, the central question will be whether Mexico is repressing its minimum wages in an artificial way, causing unfair competition.
  • The difference in minimum wages between Mexico and the United States is one of the most notorious wage differentials between countries that share a border. However, this does not necessarily mean unfair competition on the part of Mexico, and to increase wages without an adequate comprehensive economic analysis could mean the loss of a "comparative advantage" that developing countries, such as Mexico, have over developed countries such as Canada and the United States in regard to commercial exchanges.

The improvement of the minimum wages in Mexico is, for some, a fundamental topic in achieving a new North American Free Trade Agreement (NAFTA). Some U.S. Democrats have noted this as a requirement for approval. As pointed out by Reps. Bill Pascrell (D-N.J.) and Sandy Levin (D-Mich.), "Labor rights in Mexico is not an issue that can be sidestepped. It is the central issue that must be addressed in any rewrite of NAFTA. Failure by Mexico to stop suppressing its workers' wages will not only be an obstacle for a new NAFTA, it will be a death knell for any deal passing Congress."1 Although this is not the only crucial issue in the negotiations, it is undoubtedly the one that has generated the greatest concern regarding increased labor standards in Mexico.

The difference in minimum wages between Mexico and the United States is one of the most notorious wage differentials between countries that share a border.2 However, this does not necessarily mean unfair competition on the part of Mexico, and to increase wages without an adequate comprehensive economic analysis could mean the loss of a "comparative advantage" that developing countries, such as Mexico, have over developed countries such as Canada and the United States in regard to commercial exchanges. To address these issues within NAFTA is equivalent to reopening Pandora's box of international trade and rethinking the theoretical foundations of free trade.

The discussion on the relationship between trade and labor has not made progress in the World Trade Organization (WTO), precisely because many developing countries consider that it is "actually a bid by industrial nations to undermine the comparative advantage of lower wage trading partners... . These nations argue that efforts to bring [labor] standards into the arena of multilateral trade negotiations are little more than a smokescreen for protectionism."3 Nevertheless, the discussion has made significant progress within free trade agreements, as can be seen in the labor section of the newly adopted Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), in which it establishes express obligations in respect of minimum wages with its own reference without referring exclusively to international commitments under the International Labor Organization (ILO): "Each Party shall adopt and maintain statutes and regulations, and practices thereunder, governing acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health."4

Within the NAFTA negotiations, the central question will be whether Mexico is repressing the minimum wages in an artificial way, causing unfair competition. (In which case, it should also be asked if this would result in a violation of the minimum wages standard of CPTPP.)

To answer this question, it would be necessary to determine under what criteria it could be specified whether Mexico is in compliance with acceptable minimum wages or under what parameters Mexico is artificially depressing wages. Examples would be using national criteria, benchmarks with the U.S. and Canada, adopting various methodologies as those recognized by the ILO, or taking into consideration other economic factors that lead to a relationship of free trade in different commercial sectors.5 The latter has apparently been proposed for the automotive industry, which would be required to analyze wage growth within that sector exclusively.

Mexico Minimum Wage Background

In the case of national approaches by Mexico to increase the minimum wages in force (MWiF) without requiring a comparative analysis or being under the scrutiny of international minimum wage commitments of the ILO, the MWiF rates are determined by the Council of Representatives of the National Minimum Wage Commission, or Consejo de Representantes de la Comisión Nacional de los Salarios Mínimos(CONASAMI).6 The Counsel of Representatives set the last increment to the MWiF in Mexico at the end of 2017 to 88.36 pesos daily (approximately $4.25 as of June 15, 2018), which represents the minimum amount expected by a work day of up to eight hours.7

This amount should have been reviewed during the first quarter of 2018, according to a Dec. 1, 2017, commitment by the Council of Representatives. However, in late April 2018, the Council of Representatives unanimously resolved not to continue with the review process after assessing the risk of negatively impacting several positive economic and labor indicators, including:

  • the growth expectations of the Mexican economy, which the World Bank estimated would grow 2.3 percent this year, an increase higher than its previous estimate of 1.9 percent
  • a positive growth in employment, which has recorded historic highs
  • a continued decline in inflation, with the Bank of Mexico (Banco de México) estimating that inflation will converge to values close to the goal of 3 percent in the first months of 2019

As background to understand the concept of the minimum wage the Federal Labor Law (Ley Federal del Trabajo) stipulates in Article 90 that is the lesser amount that a worker should receive in cash for services rendered in a working day, and must be sufficient to satisfy the normal needs of the head of a family in their material, social and cultural development, and to provide for the compulsory education of children.

With the changes imposed by the Council of Representatives, when setting the minimum wages that entered into force on Jan. 1, 2017, a novel instrument for fixing the general minimum wage was introduced: the Recovery Independent Amount (RIA), or Monto Independiente de Recuperación (MIR). The RIA is tied to the gradual and sustained recovery that is expected to lift the general minimum wage and provide a steady increase to the MWiF over the next few years. The purpose of the RIA is to recover the purchasing power of workers earning a general minimum wage and contribute to overcoming limitations that, for almost 30 years, prevented a significant rise in the minimum wage. This led to the wage increase effective as of Jan. 1, 2018, taking into account the economic growth of various national and international sources, in order to achieve the Well-Being Line8 of the National Council on the Evaluation of Social Development Policy (NCESDP), or Consejo Nacional de Evaluación de la Política de Desarrollo Social (CONEVAL).9 However, in the opinion of its General Secretary, under a direct reference to Article 123 of the Mexican Constitution, the minimum wage should be 390 pesos per day (11,700 pesos per month, approximately $563)10, a much higher amount than that obtained with the RIA factor.

On the other hand, even with the increase in the minimum wage in Mexico, the current prices of basic basket (canasta básica) are between 95 and 97 pesos per day, according to studies by various institutions in Mexico11; therefore, minimum wage workers are still missing eight pesos per day on average, to complete their basic food pantries, regardless of the increases to the products from January to May 2018, according to the National Institute of Statistics and Geography (NISG), or Instituto Nacional de Estadística y Geografía (INEGI).

For its part, Article 123 of the Mexican Constitution establishes that "the general minimum wage must be sufficient to satisfy the normal needs of the head of a family, in their material, social and cultural development," so it can be said that the MWiF not only does not cover the basic needs of any minimum wage worker in the country but also potentially violates a constitutional precept. Such a determination obviously would put Mexico at a disadvantage in the NAFTA negotiations, since under its own parameters for the establishment of the MWiF it would have not yet fulfilled its constitutional mandate.

Conclusion and Considerations

Although it is plausible that the NAFTA negotiations could be an opportunity (although not necessarily the appropriate forum) for the U.S. and Canada to question in an objective manner if Mexico, under its own national standards, is containing or depressing wages in an intentional or unintentional manner to generate unfair competition, it is important to recognize that the discussion of the MWiF is so complex that it seems unlikely that an agreement will be reached within the framework of NAFTA.

Despite the progress made in the regulation of the trade and labor relationship in free trade agreements, there are serious doubts whether one of the most complex issues of labor law, as is the fixing of minimum wages, can be isolated in this discussion without reopening the fundamental issues of trade. The comparative technological advantages of Mexico's more developed trading partners as well as the characteristics for the fixing of minimum wages in the U.S. and Canada also must be taken into account. In addition, Mexican negotiators likely would face the additional complication of having to convince its private sector, its workers and the Mexican Congress with regard to a NAFTA agreement, as well as of any changes to national legislation related to the increase to the MWiF.

Holland & Knight's International Trade Group and Labor, Employment and Benefits Group in Mexico and the United States will continue to provide timely follow-ups to alert clients about potential consequences arising from the NAFTA negotiations.

Footnotes

1 Reps. Pascrell and Levin Emphasize Labor Reform in Mexico Central to NAFTA Rewrite

2 In the U.S., the federal minimum wage is USD $7.25 per hour, but the minimum wage can go up to more than $10 per hour in some states. In Mexico, the states do not have the authority to fix minimum wages.

3 Labor Standards: Consensus, Coherence and Controversy, WTO.

4 Article 19.3.2: Labor Rights.

5 Representatives of Mexicans employers before the ILO have pointed out that the only items to be taken into account in determining the level of minimum wages are "... national conditions, the needs of workers and their families, linked to economic factors, including productivity. If it does not take into account the economic situation of the country, it will generate inflation, which leads to serious problems in the economy and reducing the purchasing power of the workers."

6 The National Minimum Wage Commission is composed of workers, employers and government representatives, which may rely on special commissions of an advisory nature that it considers essential for the proper performance of its functions.

7 Article 123 of the Mexican Constitution establishes minimum rights to which workers are entitled, inter alia, and sets that the maximum work day will be eight hours.

8 See Resolution of the Council of Representatives of the National Minimum Wage Commission that reviewed general and occupational minimum wages in force from Jan. 1, 2017, and set increases that came into effect on Dec. 1, 2017, published in the Federal Official Gazette (Diario Oficial de la Federación) on Nov. 24, 2017. The Minimum Well-Being Line of the NCESDP "equals the price of the food basket per person, per month" and the Well-Being Line "equals the total price of the food basket and the non-food basket per person, per month."

9 NCESDP is a "decentralized public organism of the Federal Public Administration, with autonomy and technical capacity to generate objective information on the situation of social policy and the measurement of poverty in Mexico."

10 See interview with Gonzalo Hernández Licona, Nov. 23, 2017.

11 See Coparmex demands government raise minimum wage to 98.15 pesos per day.

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