Minimum Wage To Increase 20% on January 1

Mexican President Andrés Manuel López Obrador (AMLO) today announced an increase in the minimum wage, the largest that has occurred in 44-years, will increase by 20 percent – going from 102.68 pesos per day to 123.22 pesos (USD $6.50) per day as of January 1, 2020. In the northern border region, where a greater number work in maquiladoras, the minimum wage will become 185.56 pesos (USD $9.79).

Minimum wage increases have accelerated under Lopez Obrador, a leftist who has promised to boost income and well-being for the nation’s poorest who had lost purchasing power due to stagnant salaries amid inflation. The 20% raise announced Monday follows a 16% hike during his first year in power, at the time the biggest jump in two decades.

The increase, while less than the proposal of 29% discussed by the head of the nation’s minimum wage commission, known as Conasami, it’s seven times the current rate of inflation, which slowed to 2.85% in late November. Lopez Obrador is doubling down on redistribution policies at the risk of spurring inflation and limiting the room for interest rate cuts.

“This is going to help the economy of course because it strengthens the internal market,” Lopez Obrador said at an event at the National Palace in the nation’s capital, thanking union leaders and business representatives. “If there’s more revenue, it helps reactivate the economy, there are more sales for merchants.”

The wage increase likely will prevent core inflation from slowing much, even though economic growth is weak, the chief Mexico and Canada economist at Bank of America, Carlos Capistran said. Core inflation aims to track underlying price trends by excluding the most volatile goods, such as food and energy.

Capistran sees policymakers cutting the interest rate by only a half-point more, to 7%, he said in a research report last week. That would still leave Mexico with one of the world’s high real interest rates, or borrowing costs minus inflation.

“We’re starting to see some effect of high minimum wage increases on inflation in the form of higher core inflation, and that will make the central bank more prudent,” said Ernesto Revilla, head of Latin America economics at Citigroup Inc. in New York and former chief economist at Mexico’s Finance Ministry. “It will make Banxico go slowly in the easing cycle.”

About 20% (approximately 11 million) of Mexico’s working population earned the minimum wage or less per day as of the first quarter of this year, according to INEGI, the nation’s statistics institute. But the minimum wage can affect other types of contracts that are indexed to it, making it relevant for other sectors of the economy.

According to experts, the significant rise in the minimum wage might put pressure on the salaries of the remaining 80% of workers in the formal economy (the “lighthouse effect”), that it is difficult to calculate but usually drives up inflation. However, that did not happen with the previous hike in AMLO’s increase of 16-percent in his first year, and AMLO is moving ahead with this double-down.

We can expect that there will be a continuation of movement to the northern border by the poorest where they can expect an increase of $82.88 pesos per day rather than remain in the south and have their salary increase by only $20.54 pesos per day. That will mean an extra $30,251 pesos per year to those making the move. This will be slightly offset as the maquiladoras in the north continue to move further south to take advantage of the lower cost of workers.

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%.

Banking experts have said the large hike could make it challenging for the central bank to keep core inflation under control. The central bank’s board has been split at its last two policy meetings, with the majority voting for quarter-point interest rate reductions while Lopez Obrador supports deeper monetary policy easing, of half a percentage point.

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 strong economic imbalances”