The entrenched system works to the detriment of the overall economy.
Chronic low salaries in Mexico have become a big bone of contention in the ongoing renegotiation of the North American Free Trade Agreement (NAFTA). In a talk at the University of Chicago last week, Canadian premier Justin Trudeau reiterated that if the labor standards of NAFTA were improved, companies would have fewer incentives to move factories to Mexico for cheap labor while Mexican workers would get a better deal. But that’s the last thing the Mexican government and global manufacturers with operations in Mexico seem to want.
Moody’s offered a bleak prognosis for Mexico’s low-cost regime. “Mexico has not attained the stellar growth rates that were anticipated from liberalizing its economy, and wage and productivity gaps with the US have widened rather than shrunk,” it said in a report last August. “NAFTA has not remedied Mexico’s low growth, low productivity and low wages,” it said:
If Mexico’s productivity continues to stagnate, the income gap with the US will widen over time, instead of converging. Mexico’s low productivity, low wages and low growth over the last three decades, even outside periods of economic crisis or recession, are not being remedied by the current export-focused growth model reliant on access to the US market through NAFTA. Mexico has maintained its comparative advantage through negative real wage growth, at the expense of income levels. As a result, instead of converging through trade, wage and productivity gaps with the US have widened.
Mexican assembly line workers only receive about one-eighth of what workers doing the same job north of the border earn. This is a feature, not a bug, of Mexico’s export-driven economy…