Tripartite agreement was recently reached to increase the minimum wage by 22% by 2022. There was not much discussion about it. The Business Coordinating Council simply endorsed its solidarity and commitment to improve formal labor income with this increase.
The minimum wage (SM) has been a policy subject to constant controversy. In this regard, see the excellent work of Raymundo Campos, a researcher at the Colegio de México. The debate revolves around whether the SM is a tool of social public policy or just an adjustment of a labor market price. The technical literature recognizes that an impact of a change in the MS is mainly divided between the effects on income, employment, and prices. The impact on employment is not conclusive as it depends on the initial situation of being below or above the level of wage equilibrium in the labor market. Additionally, the evidence is indeterminate if the change in the minimum wage increases or decreases informality.
But perhaps the biggest debate has been whether changes in the SM are inflationary. In this regard, there is ample international empirical evidence that shows an effect on prices. One of the greatest risks of increases in SM is the so-called “lighthouse effect”. This consists of the transfer that increases to the minimum wage have on the rest of the wage distribution, especially on the structure of contractual wages in the various sectors of the economy and those that are classified as minimum professional wages.
The generally accepted rule is that a wage increase must equal expected inflation plus a productivity component. The recent 22% increase is clearly well above the expected inflation for 2022 (4.1%). So, to preserve equilibrium conditions, such an increase in the minimum wage should be matched by an increase of at least four times that percentage in productivity. Or perhaps a smaller proportion if companies are willing to absorb a good part of the increase in SM in their costs. But are companies committed to spending more on technology and job training to increase productivity?
This 22% increase in the SM in a high inflation environment carries the risk that such adjustment will contribute to a significant “lighthouse effect” and the formation of higher price expectations leading to a pernicious generalized inflationary dynamics. Faced with this spiral, higher wage demands could be unleashed (without higher productivity), giving rise to a de facto indexation and a price-wage race, where the latter will always end up losing. We have already experienced that movie repeatedly in Mexico.
In order to improve the salary conditions of many Mexicans, it is acceptable to seek to increase the minimum wage, but more in line with productivity, and to avoid contamination via the “lighthouse effect” that unleashes an inflationary dynamic. In the current context, this 22% increase was unwise and lights one more red flag on our ailing economy by 2022.
Twitter: @frubli
Economist
IMEF Magazine
Economist graduated from ITAM. He has master’s and doctoral studies in monetary theory and policy, and international finance and trade. Columnist for El Economista. He has been an advisor to the Governing Board of Banxico, Director of Institutional Linking, Director of External Relations and Coordinator of the Governor’s Office, Manager of External Relations, Manager of Macro-Financial Analysis, Assistant Manager of Macroeconomic Analysis, Assistant Manager of International Economy and Analyst.
Reference-www.eleconomista.com.mx