Mexico's Labor Paradigm: Scarcity, Regulation, and Stagnant GDP

In recent years, we have witnessed the establishment of a new paradigm for the Mexican labor market as a consequence of structural shifts on both the demand and the supply side of the jobs market. Undoubtedly, this new order will echo through the whole national economic structure.

Firstly, it is evident that overall economic conditions have been anything but favorable for job creation. Gross domestic product (GDP) has been practically stagnant throughout 2025, contracting by 0.3% in the third quarter alone. Uncertainty on both the domestic and external fronts constrained aggregated demand – mainly fixed investment and private consumption – while exports managed to expand.

Naturally, the slowdown in economic activity resulted in diminishing demand for labor. In particular, the number of workers registered at the Mexican Social Security Institute (IMSS) – a proxy for formal employment – grew by only 0.4% year-over-year in the third quarter, even considering the favorable distortions produced by a program to formalize delivery-platform workers in Mexico City. It can be argued that the aforementioned weakness in the formal sector does not necessarily represent the state of the entire labor market, given the worryingly high informality rate (55% as of last September). Alternatively, we can refer to the National Employment Survey (ENOE), which includes both formal and informal workers. Unfortunately, the ENOE results do not tell a different story. During the third quarter of 2025, 59.5 million people reported to be employed, virtually the same as a year before.

The lack of demand for labor is not solely due to the economic cycle; meaningful regulatory changes have also played a significant role. For instance, the minimum wage more than doubled between 2018 and 2025, while the average wage reported by the IMSS increased by approximately 75%. Also, a 2019 reform required larger employer contributions to employees’ retirement funds, and a 2023 reform mandated longer vacations for workers. Alongside higher overall labor costs, labor productivity decreased by 4% to 6% compared to 2018. The decline in productivity could be partly attributed to low investment levels and the institutional framework (a rigid labor market, for example). Naturally, it is less attractive for firms to expand labor as it becomes costlier and less productive.

Despite all these factors, unemployment has remained at historically low levels, largely due to shifts on the supply side. According to the ENOE, the unemployment rate stood at 2.9% in the third quarter, below the 3.0% rate from a year ago. Since this reduction in unemployment is not explained by an increase in available jobs, we must then examine workforce dynamics. The workforce declined both in relative and absolute terms: the number of people employed or actively seeking employment during the third quarter was 61.3 million, down from 61.4 million a year earlier. The participation rate, calculated as a share of the working-age population, went from 60.39 to 59.48%.

Diminishing participation in the workforce may be irreversible in the coming years. Demographics have changed notably: Mexico’s population is aging, and replacement rates are declining. Revering this trend will literally take generations. Furthermore, the ENOE indicates that demographics are not the only factor. The survey showed a significant decrease (1.9 million) in the number of people outside the workforce who declared themselves unavailable and uninterested in working. This could be a direct effect of Mexican government social policies. In particular, direct transfers to population seem to have distorted people’s choices between leisure and work. Again, this might not be reversed in the foreseeable future, as these social programs are constitutionally granted, and the political cost of removing them would be unbearable.

Everything discussed regarding this new labor market paradigm will have profound and lasting effects on the economy. A diminishing labor force negatively impacts potential GDP, unless firms are able to invest more in capital and increase productivity, which, so far, has not been the case in Mexico. Labor scarcity, combined with aggressive minimum wage policies and other regulatory changes, increases production costs for firms. These costs will, to some degree, be passed on to final customers, resulting in higher inflation growth rates. Additionally, public finances will be strained due to a narrower tax base and a higher dependency ratio – the proportion of retirees relative to workers.