Mexico to increase minimum wage by 20%

Experts said a large hike could make it challenging for Mexico’s central bank to keep core inflation under control

Mexico to increase minimum wage by 20%
This is the second consecutive major increase – Photo: Yadin Xolalpa/EL UNIVERSAL
English 17/12/2019 13:57 Reuters Mexico City Abraham González, Stefanie Eschenbacher, Sharay Angulo, Stefanie Eschenbacher, Christopher Cushing, Sandra Maler, Anthony Esposito, Julia Love & Chizu Nomiyama/REUTERS Actualizada 14:44
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On Monday, the Mexican government agreed to raise the daily minimum wage by 20%, the second consecutive major increase, but experts said a large hike could make it challenging for Banxico, Mexico’s central bank, to keep core inflation under control.

“We continue to gradually recover the value that the minimum salary has lost over time without creating instability, without creating inflation,” Mexico’s President Andrés Manuel López Obrador said. “This is an important increase.”

The daily minimum wage will be MXN $123.22 in 2020; in the northern border region, where it was raised by 5%, it will be MXN $185.56. Nearly 11 million Mexican workers earn the equivalent of a minimum wage.

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López Obrador, a leftist who took office in December 2018, has vowed to close the wage gap in a country where almost half of the population lives in poverty.

Mexico increased the minimum wage by 16% this year, during which inflation eased to 2.97% in November, just below the central bank’s target of 3%. But, core inflation, which strips out some volatile elements, was higher last month at 3.65%.

“In the past, real wage growth had been generally aligned with productivity,” economists at JPMorgan wrote in a note issued ahead of the decision. “The new wage policy has opened a significant wedge between the two, which eventually will likely create economic imbalances.”

Banxico did not immediately respond to a request for comment. In its most recent minutes, some Banxico members raised uncertainty around changes to the minimum wage.

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However, experts said a significant change to the minimum wage could put the breaks on the central bank’s trend of cutting interest rates, which were cut from 8.25% at the end of last year to 7.50%.

Banxico will likely cut interest rates again on Thursday, to 7.25%, according to a Reuters poll of 16 analysts. At the end of 2020, the rate could be at 6.50%.

Experts also said that a significant increase of the minimum wage would put pressure on salaries in the formal economy, a dynamic called a “lighthouse effect” that is difficult to calculate but usually drives up inflation.

“There’s no consensus on what effects this will have on other wages or how it will affect core inflation,” said Benito Berber, chief economist for Latin America at Natixis.

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For his part, Mexico’s Finance Minister Arturo Herrera said on Twitter that a proposed daily minimum wage hike of 20% is part of a strategy to strengthen workers’ purchasing power without fanning inflation or hitting jobs.

“This is a historic increase, the biggest in 44 years,” Herrera said in a string of posts on Twitter that was later deleted.

The President of Mexico’s Business Coordinating Council (CCE) Carlos Salazar Lomelín said that from now one, there will be weekly and monthly meetings so as to surpass the individual welfare line marked by Coneval to a line of common welfare in which Mexican families have, at least, a monthly income of MXN $6,500.

Carlos Aceves del Olmo, general secretary of the Mexican Workers Confederation hope that this increase becomes a referent in which assessments of collective contracts have better results.

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