The debate about increasing the minimum wages has gained momentum across the globe in recent years. In emerging economies like Chile and Brazil as an example high levels of inequality and low levels of living prompted wage policies to recover and wage recovery policies, while several states of the rich United States recently raised the minimum wage in certain cases, to $15 an hour.

Did the influence of the best-selling economist Thomas Picketty’s work The Capital of the 21st Century result in this? Perhaps it’s the result of international immigration and the polarisation of politics. In any case, the idea that the workers should receive an “living wage” is now widely accepted.

Mexico is no exception. In 2016, the nation’s minimum wage raised by 4.2 percent and was 73 pesos per day (less than $4). However, it’s not enough to purchase what economists refer to as “the basic basket of goods” for a single person, like tortillas, beans eggs, and a little of meat, much less to provide for even a small family.

The debate on public policy in Mexico is at a high level, with social organizations as well as academics, business leaders as well as political groups advocating that the incredibly low minimum wage binds workers to a life of poverty.

‘Honest Pleasures’

Mexico was among the first nations to implement the concept of a minimum wage in the national level due to the Mexican Revolution and the previous hyperinflation.

Our 1917 Constitution (article 123), dictates:

The minimum wage workers should earn must be enough, taking into consideration the local conditions that will meet the basic requirements of life for a worker along with his education and genuine enjoyments, as the head of the family.

From the time of its introduction until 2000, in which it was the time that the ruling PRI party was unable to regain the presidency Palace for the first time after the past 70 years The minimum wage was employed as a policy tool. In the 1930s and during the 1950s, Mexico established a minimal the minimum wage, which was 24 pesos (US$2 per day in terms of 1969) to keep labor costs low and attract investors. In the period, however, wages grew faster than inflation, and transferring some of the company’s productivity gains to worker wages (as as opposed to only increasing in the form of profits).

In the 1970s and 80s, however the minimum wage was used as a means to limit excessive inflation. This is because by establishing an extremely low minimum wage which had the spin-off result of keeping wages at a low in addition and allowing the government to reduce costs and therefore reduce inflation. But this policy also decreased the purchasing ability of all wages, including those in the lowest brackets, as inflation increased faster than nominal wages.

In the last decade and with an Mexican economy having stabilized and the minimum wage has kept pace with the low inflation. In this way, it has been used to indicate changes in the labour market: an increase of the minimum wage could set the stage for other wages to rise. We have not seen any transfers of productivity gains similar to those in the 1950s and 1960s.

The result is a low minimum wage in the official system that has lost 75 percent in purchasing power over the last 30 years as shown by the graph below.

Minimum Wage For A Market VS Official Wage

In reality, only a small percentage of Mexicans actually make more than minimum wages. The official statistics show that about 8 million Mexicans (more than ten percent of labor workforce) make between one and two times the minimum wage.

This is because there are tax and fiscal incentives to declare that employees make less than they earn. Social security contributions paid by employers are calculated very gradually and companies are prone to under-declare earnings and pay their employees their cash compensation for any difference.

It means that labor marketplace’s daily minimum wage for workers is considerably higher than the government’s minimum wage, despite regional differences, working conditions and other particulars aside.

It’s difficult to determine the actual, though unofficial minimum wage. However, based on the reality that the construction worker makes more than 150 pesos per day (US$8) which is more than twice the minimum wage, we can draw some deductions.

The “Lighthouse Effect”

In light of this, a lot of firms and banks wonder: what is the point of worrying about Mexico’s minimum wage?

The Mexican Central Bank, which wants to keep inflation at a minimum and is not in favor of raising its minimum wages. Additionally, some within the business world believe that, like other countries that a increased minimum wage will increase salaries across the board which could increase inflation. This is referred to as “the lighthouse effect” and no one wants that.

A depressed minimum wage also creates an “reverse lighthouse effect”, which means that companies tend to offer low wages due to their reliance on the official minimum wage. In other words, employers believe that since their wages far above the official standard minimum, that they should be enough for workers’ life. But this isn’t always the case when the comparability points aren’t enough for tortillas.

Furthermore, Mexican economy is an oligopolistic economy and doesn’t provide enough competition for us to ensure excessive profits. Also, we have a weak labor market that has large transaction costs and a huge availability of labour. While official unemployment is just 4.9 percent about 65percent of workers are employed in an informal workforce.

With this abundance of labor, there’s plenty of room for employers to pay comparatively low wages, and not be faced with labor shortages. Therefore, a low minimum wage in the official system can push other wages down.

“No Money For Vacations Or An Automobile”

It is the Consejo Nacional de Evaluacion de la Politica Social that measures poverty using an approach that is multidimensional, calculates that in order to have a daily basket to allow two people to survive the minimum wage needs to increase by 145% to the equivalent of 178 pesos (US$8.75).

If a family has one person who earns a living and a dependent, this sum would be enough to pay for the cost of renting a small apartment; three meals per day, commuting costs, and a few medical services. Naturally, there is no funds for holidays or purchasing and maintaining a vehicle.

Evidently, the magnitude of an increase in a single shot is not possible in a nation where the currency has just dropped by 20 percent. The employers would surely resist in the event of a drop like that.

However, a massive and fast increase could also affect the other income brackets and companies in a general way and, consequently, putting jobs at risk. From a business standpoint it is clear that a new minimum wage that is suddenly raised above market rates is unfavorable.

In the meantime, Mexico should establish a policy of raising the minimum wage slowly over time. This could help reduce inflationary pressures, and also allow companies to modify and control their wage structure.

Chile, Brazil and the US have already implemented this, but with no major effects on employment or inflation. Also, in Mexico when the Mexican government increased the minimum wage across the two areas, the effect was not significant. seen.

The effect of an increase in the minimum wage on inequality are difficult to determine. Countries like Brazil, Mexico and Argentina have seen improvements in equality in recent years However, not all of them have increased the minimum wages they pay. The majority of them have utilized cash transfers with conditions to lift people from the poverty. Therefore, even in the event that Mexico could raise its minimum wage in a reasonable manner over time and time, it is possible that the Gini coefficient that is a measure of inequality, could be unchanged.

However, the lives of Mexico’s poorest earners will certainly improve. It’s not just a matter of basic justice, it could also have the potential to boost Mexico’s economy, boost social cohesion, and possibly reduce unwelcome immigration to United States. In light of the rapid shift in Mexico’s regional setting this is, at the very least, should be a priority in the policy process at this point.