NAFTA-USMCA and wages in Mexico
The North American Free Trade Agreement (NAFTA) represented a vital step in direction of the mixing of the three economies of that area. Launched in 1994, it outmoded a earlier settlement between Canada and the U.S., so the substantive change was the incorporation of Mexico, a nation with a comparatively decrease common per capita earnings. NAFTA made vital advances in commerce and overseas funding laws however excluded any binding provisions on immigration or the free motion of labor (aside from commitments to implement pre-existing laws). Indeed, the expectation was that commerce in items would partially substitute for commerce in elements, significantly labor, in order that the settlement would chop wage variations between Mexico and its two northern companions.1
Assessing the impression of NAFTA on wages in Mexico is complicated as a result of they reply to many circumstances, not all associated to commerce. Ideally, one wish to carry out a “counterfactual exercise” to determine what wages would have been with out NAFTA retaining fixed all different elements.2 This train just isn’t tried right here. Rather, this be aware focuses on some options of Mexico’s labor market that, in our view, have been insufficiently thought of in earlier analyses.
In our evaluation we discover that:
- Despite NAFTA, common wages in Mexico didn’t enhance from their pre-NAFTA ranges, though in its absence they might have been marginally decrease.
- So lengthy as Mexico’s present home laws stay — significantly these pertaining to labor and social insurance coverage — it’s unlikely that the U.S.-Mexico-Canada Agreement (USMCA), the commerce pact that outmoded NAFTA in 2019, will result in greater common wages.
- If the USMCA will increase labor prices considerably within the USMCA-related phase of the economy, mixture productiveness in Mexico might undergo.
The black line in Graph 19 exhibits the common actual city hourly wage between 1990 and 2019.3 In this and the following graph (Graph 20), the primary dashed vertical line marks the start of NAFTA, the second the 1994-1995 monetary disaster, and the third the change in employment survey from Encuesta Nacional de Empleo Urbano (ENEU) to the Encuesta Nacional de Ocupación y Empleo (ENOE).
![](https://www.brookings.edu/wp-content/uploads/2022/02/BROOKINGS_USMCA1_GRAPH_20.jpg)
After an preliminary upward pattern beginning in 1990, there’s a sharp drop in 1995 related to the monetary disaster. This is adopted by a gradual restoration, with the online end result that in 2019, the true common city wage is virtually the identical as in 1990. This is a puzzling end result for 2 causes: Mexico recovered macroeconomic stability rapidly after the 1995 disaster and common years of education elevated by 47 p.c from 1990 to 2019 (from 6.6 to 9.7 years). Since staff with more education earn greater wages, one would anticipate that as common years of education enhance, so would the common wage, more so in a context of macroeconomic stability and elevated commerce and funding flows with Canada and the U.S.
The purpose this didn’t happen is displayed within the coloured strains in the identical graph, separating staff into 4 education classes.4 Wages for staff with faculty training have fallen in absolute phrases, and have remained fixed for these with fewer or no years of education. Wages of staff with more education fell as a result of their provide outpaced their demand and this, along with the truth that their share in whole employment will increase over time, pulls the common down. This is partly compensated by the truth that the share of employment by staff with little or no education moved in the wrong way, leading to a stagnant common.5
Graph 20 makes use of the identical information as Graph 19 however exhibits median relatively than common wages, displaying that the wage distribution just isn’t symmetric. The common imply wage is greater than the common median wage (additionally in black), indicating that a few high-income staff pull the common imply wage over the common median wage. Over time fluctuations are more nuanced than these proven in Graph 19, however the fundamental end result stands: For the interval captured within the graphs, the common median wage was fixed, with a downward pattern for these with faculty training.
Impact of NAFTA on wages in Mexico
How are Graphs 19 and 20 associated to NAFTA? Unfortunately, the employment surveys include little info relating to the corporations the place staff are employed. Table 2 cures this, combining info on staff from the ENOE with info on corporations from the 2018 Economic Census, the final one accessible.6 The first two columns present measures of employment and education from the ENOE, for localities of the identical dimension as these thought of within the Census no matter whether or not financial exercise happens in a fastened premise or not. As a end result, it gives a more full description of Mexico’s city labor market than the Census which, regardless of its title, excludes a part of city financial exercise.
![](https://www.brookings.edu/wp-content/uploads/2022/02/BROOKINGS_USMCA1_TABLE_2.jpg)
The subsequent 4 columns present measures of employment and education from the Census and different variables not collected within the ENOE. The first refers back to the complete Census and the final three to various measures of financial exercise related to NAFTA: All corporations in manufacturing (M1); all corporations that export (M2); and all corporations with a overseas nexus (M3). The first measure assumes that every one corporations in manufacturing export to Canada or the U.S. or compete with imports from these nations within the home market. The second measure captures exports to all nations however is a good proxy of these going to Canada and the U.S., since round 85 p.c of them have that vacation spot. The third captures agency publicity to the remainder of the world. More exactly, it measures whether or not the agency “participates in integrated processes through contracts or economic collaboration programs with firms located in other countries” (Census questionnaire, our translation). It additionally overestimates the significance of NAFTA for the reason that query refers to all nations, and though on this case there’s little info to evaluate by how a lot, it’s secure to imagine that almost all hyperlinks happen with Mexico’s two northern neighbors.
None of those measures are absolutely passable. M2 and M3 are in all probability too slim since they exclude corporations that produce inputs for exporting corporations or focus solely on corporations with contractual preparations with overseas ones. On the opposite hand, M1 might be too broad because it assumes that every one manufacturing corporations compete with Canadian or U.S. corporations. Considered collectively, nevertheless, they’re a affordable first-order approximation to the relative significance of financial exercise related to NAFTA.
Consider the primary block in Table 2. Line 1 exhibits that there have been 42.1 million city staff in 2018. However, the Census solely captures 27.1 million, or 64 p.c (72 p.c excluding public sector staff). The distinction is defined by the truth that 10.7 million city staff perform their actions within the streets and are due to this fact not included within the Census. Note that by any of the three measures used, NAFTA-related employment just isn’t giant: 15 p.c of all city employment within the case of M1, 8 p.c for M2, and 4 p.c for M3.
While NAFTA has had a small optimistic impact on city wages in Mexico, it has not been sufficiently highly effective to offset different forces that preserve labor earnings low.
Line 2 gives info on education. Workers with 12 or more years of education symbolize 50 p.c of the entire city labor pressure (47 p.c excluding public sector staff) however 55 p.c of that captured within the Census. This share is decrease for M1, 43 p.c, however very related for the 2 different measures of NAFTA-related actions, 51 p.c for M2 and 50 p.c for M3. Note that the share of staff with 16 or more years of training is decrease in all three measures in comparison with the entire city labor pressure, with or with out public sector staff. These figures recommend that every one in all, NAFTA-related actions aren’t more intensive in educated staff than all different city actions.
On the opposite hand, line 3 exhibits that the composition of employment varies considerably between the ENOE, the entire Census, and NAFTA-related actions. In the ENOE, excluding public sector employment, salaried staff — who’re paid salaries and wages — account for lower than half of the labor pressure, 47 p.c. The second largest share, 27 p.c, is accounted for by staff who run their very own enterprise or work for a household enterprise and are remunerated by means of profit-sharing or different preparations.7 These shares replicate the essential position performed by self-employment and small household corporations in Mexico. The distinction with the composition of employment captured within the Census is giant. The share of salaried employment will increase to 60 p.c for the entire Census, and to between 70 to 77 p.c relying on the measure used of NAFTA-related employment. In parallel, the share of proprietor/household agency employment falls, and is sort of negligible for M2 and M3.
Consider now the second block: Lines 4 and 5 present that whatever the measure used, NAFTA-related employment happens in more capital-intensive corporations and has greater labor productiveness, as measured by worth added per employee. Note that the variations are significantly giant once we use M2 and M3. Differences in agency dimension are additionally fairly sharp.
Finally, line 8 within the third block compares the common wage between the entire Census and NAFTA-related actions. The measure could be very tough however is the one one that may be constructed with the Census information.8 The variations are notable: 19 p.c greater for M1, 40 p.c for M2 and 35 p.c for M3, and that, prima facie, they can’t be attributed to variations in education. That mentioned, it ought to be famous that sadly the data on staff’ traits within the Census could be very tough and solely refers to years of education. As a end result, one can not discern the extent to which the distinction in common wages displays variations in different dimension of human capital not captured within the Census (e.g., expertise, on-the-job studying) or the truth that corporations in NAFTA-related actions seize rents, which they shared with their staff within the type of greater wages. What is obvious is that wages in NAFTA-related actions are greater than in the remainder of city financial actions and due to this fact elevate the common city wage.
Altogether, the image that emerges from Table 2 is that NAFTA-related actions, significantly when measured by M2 or M3, are markedly totally different from these captured within the ENOE and even the entire Census. While they aren’t more intensive in staff with more years of education, they happen in considerably bigger and more capital-intensive corporations, with a totally different salaried/non-salaried employment composition and with greater common wages for salaried staff. That mentioned, solely a tiny share of all corporations is immediately engaged in NAFTA-related actions, 0.003 p.c within the case of M2 and 0.002 p.c within the case of M3, and despite the fact that these corporations are 37 to 51 occasions bigger, they nonetheless immediately make use of a small share of city staff (8 p.c in M2 and 4 p.c in M3). These conclusions maintain beneath the more beneficiant M1 measure of NAFTA-related actions, though the variations aren’t as sharp, together with in common wages.
We don’t try right here to estimate wages within the no-NAFTA state of affairs, though the dialogue means that outcomes could be more disappointing than these proven in Graphs 19 and 20.9 We conclude that whereas NAFTA has had a small optimistic impact on city wages in Mexico, it has not been sufficiently highly effective to offset different forces that preserve labor earnings low. In explicit, the forces which have extra time depressed the earnings of staff with more years of education; NAFTA has helped however clearly removed from sufficient.10
A number of remarks on labor laws in Mexico
Mexican labor establishments are very totally different from Canada and the U.S. First, labor and social safety legal guidelines in Mexico make a essential distinction between salaried and non-salaried staff. The former have a relationship of dependency and subordination with respect to a boss/agency in alternate for a wage. The latter work for themselves or for corporations however aren’t paid wages as a result of they’re engaged beneath contractual preparations that don’t suggest subordinated labor. Second, solely salaried staff are lined by minimal wage laws, can kind unions, and have the proper to strike for higher advantages and working circumstances. Third, solely corporations and salaried staff are obligated to contribute to social safety applications which, versus Canada and the U.S., embody numerous varieties of pensions, medical health insurance, housing, and daycare providers. Finally, salaried staff would not have unemployment insurance coverage; relatively, they’re shielded from the lack of employment by stringent job stability laws. These concerns matter enormously since a lot of the labor provisions in NAFTA and now USMCA, apply solely to salaried labor.
The functioning of the related establishments can be totally different. For many causes, salaried staff in Mexico undervalue the advantages of social safety applications, so that there’s an implicit tax on salaried employment. In parallel, non-salaried staff have entry to some social advantages that, whereas not precisely equal to these for salaried ones, are free (Levy, 2008, 2019). The implicit tax on salaried employment, mixed with stringent job stability laws, on one hand, and the implicit subsidy to non-salaried employment, on the opposite, have two results. First, they induce corporations hiring salaried staff to evade labor and social insurance coverage laws, a scenario that’s facilitated by their imperfect enforcement. Second, they induce corporations to elude these laws by means of non-salaried contractual preparations and promote self-employment. The result’s that the labor market is segmented into two teams of staff: Salaried ones employed by corporations that adjust to the related labor and social insurance coverage laws, henceforth referred to as “formal.” The relaxation are categorized as “informal,” a heterogenous group made up of salaried staff employed by corporations that don’t adjust to the related laws, self-employed and home staff and, very importantly, staff related to corporations with out salaried contractual agreements.
The segmentation of the labor market is mirrored within the construction of Mexico’s corporations, which additionally divide into formal and casual relying on whether or not they rent salaried staff and adjust to labor and social insurances legal guidelines or not. Importantly, corporations could be casual with out breaking these legal guidelines in the event that they have interaction with staff with out salaried contractual preparations. These distinctions matter enormously. In 2018, 90 p.c of all corporations captured within the Economic Census had been casual, 65 p.c legally so. Informal corporations, authorized and unlawful, are considerably smaller than formal ones (as measured by the variety of staff), much less capital intensive, controlling for dimension demand comparatively fewer staff with more years of education, and on common have decrease productiveness than formal ones (Levy, 2018).
The formal-informal dichotomy, a central function of Mexico’s economy and a essential determinant of labor market outcomes, has been resilient to will increase within the years of education of the labor pressure and to structural adjustments in output markets, as exemplified by NAFTA. In 2005, the primary yr of the ENOE, the city labor informality price was 58 p.c, not that totally different from the one noticed on the finish of 2019, 56 p.c. In the identical interval, the agency informality price elevated from 84 p.c in 1998 to 90 p.c in 2018.11 The dichotomy must be seen as a deeply engrained structural function of Mexico — a function that’s onerous to rationalize with arguments about inadequate investments in human capital or lack of integration into the world economy. After a quarter of a century since NAFTA, there are two related classes for the USMCA:
- It is troublesome to alter the labor market by means of reforms to output markets, significantly when many different laws that bear on the labor market are inclined to deepen the formal-informal dichotomy (Levy, 2018).
- So lengthy as this dichotomy persists, will probably be troublesome for wages to extend, as a result of it’s related to low productiveness and a depressed demand for staff with more years of education (Levy, 2018; Levy and López-Calva; 2020, Bobba, Flabbi and Levy, 2021).
A number of remarks on the potential impression of USMCA on wages in Mexico
As against NAFTA, the USMCA did suggest reforms to Mexico’s labor regulation. These reforms, carried out in 2019, strengthened the mechanisms permitting salaried staff to resolve on the unions that symbolize them and improved enforcement of pre-existing laws (De Buen and Leycegui, 2021). Importantly, the USMCA included the proper by Canadian or U.S. corporations to request investigation of non-compliance by Mexico and when acceptable, the imposition of trade-related cures. However, it didn’t change the underlying labor and social insurance coverage structure; particularly, the asymmetry within the therapy of salaried and non-salaried staff with respect to social insurance coverage, nor job stability laws for salaried staff. It additionally didn’t change the scope of social insurance coverage or the functioning of the related establishments.
By growing new mechanisms to train the rights of salaried staff and enhancing the credibility of sanctions in circumstances of non-compliance, the USMCA strengthened their bargaining energy — significantly of these employed by USMCA-related corporations. In precept, it will possible elevate the labor prices of Mexican corporations exporting to Canada and the U.S. or competing within the home market with imports from these nations. It is troublesome to quantify the magnitude of this impact because it is determined by the extent of pre-USMCA violations of salaried labor laws and the effectiveness of the inspection-cum-sanction provisions. However, the path is obvious: All else equal, manufacturing in Mexico for the North American market can be much less engaging as a result of labor prices can be greater. Differently put, Mexico will lose a few of its competitiveness vis-à-vis Canada and the U.S.12
Will the USMCA enhance the common wage in Mexico? We think about two situations. But earlier than discussing them, we level out that each ignore any adjustments on the planet economy that independently of the USMCA, may enhance Mexico’s comparative benefits (e.g., re-design of regional sourcing patterns triggered by competitors between China and the U.S.). The first state of affairs assumes that the labor provisions of the USMCA are enforced totally on USMCA-related corporations in Mexico and that these corporations take pleasure in rents, in order that they will soak up greater labor prices with out altering their demand for labor. In this case, the common wage will enhance since it’s the weighted common of wages within the USMCA-related phase of the economy and the remaining (the place the weights are the share of employment in every), and since by assumption the composition of employment doesn’t change (implying no change in wages or labor earnings within the non USMCA-related phase of the economy). That mentioned, recall from Table 2 that the share of employment within the USMCA-related phase is small in order that the rise within the common wage is sure to be small.
Paradoxically, the “success” of the USMCA labor provisions — assuming that is interpreted as a rise in labor prices to USMCA-related corporations in Mexico — might find yourself reducing mixture productiveness in Mexico, making it more troublesome to maintain a greater common economy-wide wage.
The second state of affairs permits for adjustments within the composition of employment. If wages or labor prices in USMCA-related corporations enhance considerably, agency rents can be exhausted, and these corporations will alter employment ranges. This can even happen if investments in Mexico change into much less worthwhile vis-a-vis Canada and the U.S. as a result of manufacturing prices in Mexico enhance in response to different provisions within the USMCA like these associated to guidelines of origin.13 The result’s that USMCA-related employment falls and, concomitantly, the provision of labor to the non-USMCA phase of the economy will increase. Ignoring outward migration or open unemployment, the change within the common wage is now ambiguous, as the rise within the USMCA-related phase is offset by a wage lower in the remainder of the economy and by the decrease share of employment within the USMCA-related phase. But even when the change is optimistic, its magnitude can be smaller than within the first state of affairs, which already urged that any wage enhance could be pretty small.
Critically, the labor provisions of the USMCA don’t change the underlying productiveness of corporations or staff in Mexico. In the primary state of affairs, they solely redistribute rents from corporations to staff within the USMCA-related phase of the economy with out impacting useful resource allocation. However, within the second state of affairs these provisions do change useful resource allocation, and they achieve this within the path of accelerating sources to the non-USMCA-related phase of the economy — the phase which, as proven in Table 2, has decrease productiveness. Differently put, from the standpoint of productiveness, on this state of affairs the labor provisions of the USMCA are doing precisely the other of what’s wanted.
Critically as effectively, be aware that the probability of the second state of affairs is proportional to the impression of the USMCA labor provisions on labor prices in USMCA-related corporations: The better it’s, the better the shift in useful resource allocation. Paradoxically, the “success” of the USMCA labor provisions — assuming that is interpreted as a rise in labor prices to USMCA-related corporations in Mexico — might find yourself reducing mixture productiveness in Mexico, making it more troublesome to maintain a greater common economy-wide wage.
This brings us to the crux of the matter. The common price of progress of whole issue productiveness in Mexico between 1990 and 2017 — a interval spanning NAFTA — was (-) 0.43 p.c (Fernández-Arias, 2021). Over this era the productiveness hole between Mexico and the U.S. widened regardless of NAFTA. Or to place it in another way, NAFTA didn’t end in productiveness convergence between Mexico and its northern neighbors.14
The common wage in Mexico will enhance when the productiveness of all of Mexico’s economy will increase, not solely that of its comparatively small USMCA-related phase. The common wage will enhance when, throughout the economy, low productiveness corporations exit the market, excessive productiveness corporations develop, and coming into corporations are more productive than incumbents — one thing that, at the least by means of 2013, had not occurred (Levy, 2018). The common wage will enhance when greater productiveness formal corporations which can be more intensive in staff with more years of education aren’t undercut by decrease productiveness casual corporations. NAFTA was unable to enhance general agency dynamics in Mexico, not due to deficiencies within the settlement itself, however as a result of the forces offsetting it had been more highly effective. Graphs 19 and 20 illustrate this unlucky reality. Unless these forces change in Mexico, it’s troublesome to foresee that the USMCA will produce a totally different consequence. Labor provisions within the USMCA might assist tighten the enforcement of laws pertaining to salaried labor in a subset of corporations in Mexico and redistribute some rents from corporations to staff. However, these points are far faraway from the roots of Mexico’s productiveness downside.
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We thank Manuel Ramos Francia for very helpful feedback and options.