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Delphi Automotive PLC
General Motors Co
Julio Don Juan makes $400 a month working at a noisy, cramped call center in Mexico City that counts major American companies among its clients. The 37-year-old hasn’t had a raise in three years, he says, and was forced to pull his son out of a special-needs school because he could no longer afford the tuition. “Because costs keep rising, I’m actually getting a pay cut each year,” says Don Juan, who lives with his parents. “We’re scraping by.”
The plight of millions of Mexicans stuck in similarly low-paying jobs is a major campaign issue ahead of a July 1 general election. Since 2005, wages in Latin America’s second-biggest economy have risen at an annual pace of just 0.4 percent adjusted for inflation, according to the International Labour Organization. In Brazil, wage growth averaged 3.4 percent over the same period.
On the flip side, Mexico is now on its way to surpassing China as a low-cost supplier of manufactured goods to the U.S. and is drawing foreign direct investment away from Asia. Among companies that have shifted production in recent years are Nissan Motor, Japan’s No. 2 automaker, and Plantronics (PLT), a Santa Cruz (Calif.)-based maker of telephone headsets. Thanks to a combination of low wages, a cheap peso, and surging exports, Mexico’s economy is poised to outperform Brazil’s for the second consecutive year. Government forecasts put growth this year at 3.5 percent.
Enrique Peña Nieto, the Institutional Revolutionary Party’s (PRI) presidential candidate and front-runner in the election will face a policy dilemma should he prevail. “There isn’t enough employment and the jobs that exist don’t pay well,” said Peña Nieto during a May 6 televised debate. Yet there’s a risk that if wages rise too dramatically, foreign-owned factories will decamp for cheaper locales. “The trick isn’t only to pay better salaries, it’s to make raises more sustainable,” says Sergio Luna, chief economist at Banamex, Citigroup’s (C) Mexico unit. “We have to be more productive, but it won’t be easy because it implies changing the status quo.”
A good starting point would be the nation’s schools: Mexico’s education system ranked last in a 2011 study of 34 countries by the Organization for Economic Cooperation and Development in terms of high-school enrollment. With few if any skills, one-third of Mexico’s workers are trapped in the underground economy.
Better-paying jobs would help stem the exodus of Mexicans to the U.S. Twelve million have made the move in the past four decades, according to an April study by the Pew Research Center. While a weak U.S. job market has deterred migrants in recent years, and compelled some to return home, departures northward could resume if the U.S. recovery picks up. Greater opportunities at home might also thin the ranks of out-of-work youths from which the drug cartels draw their recruits. A bloody turf war between rival gangs has claimed more than 47,000 lives since President Felipe Calderón took office in 2006.
If elected, Peña Nieto says he’ll raise salaries gradually by improving productivity. The PRI candidate wants to lure companies into the formal economy, where they can take out loans and make investments. To do that he has promised to pass legislation making it easier for businesses to hire and fire workers. “In no way are we willing to sustain Mexico’s competitiveness through low salaries, nor can we raise salaries artificially through populist measures,” says Luis Videgaray, Peña Nieto’s campaign manager and his finance chief when the candidate was governor of Mexico’s most populous state. “The only way to increase productivity is through reforms.”
Peña Nieto’s rivals say he isn’t capable of bringing about the change he promises. And they warn that returning the PRI to power would reignite the corruption that blossomed during the seven decades it ruled virtually unchallenged until it lost the presidency in 2000.
Some Mexicans criticize President Calderón’s National Action Party, or PAN, for not ensuring that solid economic growth translated into more widespread prosperity during its 12 years of rule. Though Mexico is home to 112 million people, its domestic market is still underdeveloped. Jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants called maquiladoras.
While Mexico’s official statistics have long understated the magnitude of the unemployment problem, the trend in recent years has been clearly negative. Joblessness has been running above 4.5 percent since 2009, up from 2.2 percent in 2000. The PAN candidate, Josefina Vázquez Mota, is running third in the polls, behind Andrés Manuel López Obrador, of the Party of the Democratic Revolution.
Delphi Automotive (DLPH), the former parts unit of General Motors (GM), is banking on wages in Mexico rising slowly no matter whom voters move into Los Pinos, the presidential residence. About half of the Troy (Mich.)-based company’s global workforce of 101,000 is employed in its 46 Mexico plants, compared with less than 30 percent in China. “We are always monitoring this, and we don’t see the possibility of an extreme boom in the next two or three years,” says Enrique Calvillo, the company’s human-resources manager in Mexico.
That’s bad news for Antonio Chavero, who makes less than $1,000 a month as an engineering supervisor with three decades of experience in the car industry. To supplement his income from his work at an auto parts plant in the central state of Querétaro, Chavero does metalwork in his basement. Still, his family doesn’t earn enough to eat meat more than once a week. “I supervise 15 workers,” he says. “I should be making more money.”
The bottom line: Discontent over stagnant wages could help return the Institutional Revolutionary Party to power after a 12-year absence.