What Should Companies Do Amid Slower Economy, Tight Labor Market?

Unlike other markets in Latin America, Mexico’s employment outlook in 2023 is bright, and at FrontierView, we expect that the unemployment rate will remain at an annual average of 3.4% this year. In 2022, unemployment hit its lowest level in 17 years. In Q1, over 4 million formal-sector jobs were created in Mexico, with the unemployment rate declining to 2.8%. Across the country, unemployment remained low, with only the Federal District, the State of Mexico, Tabasco, and Nuevo Leon posting above 4% unemployment. Unlike markets like Chile, however, people have not been exiting the labor force, which means that job creation has outpaced labor supply. In 2022, the labor force grew by 579,682 people between 2021 and 2022. The highest job creation occurred in professional services (235,700), hotels and restaurants (233,900), and other services (150,000), while extractives and agriculture lost 6,100 and 69,400 workers, respectively. While the manufacturing sector created 79,000 new jobs, it is a smaller sector than services, for instance, which accounts for 43.7% of jobs to manufacturing’s 16.5%. We anticipate that in 2023 and 2024 it will be among the highest job creators. Informality slowed slightly as well, falling from 55.7% at the beginning of 2022 to 54.9% in December. 

In 2023 so far, the trend has continued, with the unemployment rate falling to 2.7% in February and informality declining to 55.5%. While a low unemployment rate indicates that the economy is strong, bolstering consumer spending and heightening productivity, output, and profitability, it could also create risks to the Mexican economy. Low unemployment rates, particularly in states where it is under 3%, could cause labor shortages as employers are unable to fill positions, particularly if there is a skills mismatch, where firms are unable to fill specialized jobs in such a tight labor market, eventually slowing growth again. Labor shortages can also reduce productivity; if hiring is challenging for employers, then it could lead to a point where businesses are unable to meet consumer demand, leading to production delays, or even product shortages. Wage inflation is another potential consequence, which could erode Mexico’s competitiveness, a potential long-term impediment to nearshoring growth. Small businesses may suffer the most in this type of environment, as they are the least likely to be able to comfortably raise wages for workers. These types of issues are much more likely in states with the lowest unemployment rates, such as Guerrero (0.8%), Oaxaca (1.3%), Michoacan (1.6%), and Campeche (1.9%).

Mexico’s strong labor market also seems to be beginning to attract foreign talent; many multinational corporations (MNCs) are starting to see Mexico as a potential market that could become a people hub. This is another face of the nearshoring trend. Not only does Mexico have potential as a site of production and assembly, but also as a place to put shared service centers or open new headquarters to serve both the Latin American and the US markets. Both wage growth and increased job opportunities could eventually, if paired with lower insecurity levels, potentially keep the trend of lowering migration to the US.

Although Mexico’s economy will slow in 2023 versus 2022, posting lackluster growth at 1.5%, a strong labor market and rising investment inflows will help sustain consumer spending and buttress economic activity throughout the country. Increased investment flows, particularly in the south of the country, are likely to keep employment levels high. In 2022, for example, foreign direct investment from the US into Nuevo Leon increased by 975.3% YoY, and this was prior to Tesla’s announcement that it will make a US$10 billion investment in the state to build an electric vehicle plant. Unemployment in Nuevo Leon is currently at 3.9%, a perfectly healthy level, but increasing investment is likely to lead to further labor market tightening. Other states where FDI rose significantly include Durango (465.8% YoY), San Luis Potosi (135.9% YoY), Jalisco (198.6% YoY), Yucatan (101.7% YoY), and Chiapas (100.1% YoY).

In 2023, FDI levels into Mexico are likely to increase further as companies continue to reassess their supply chain challenges and seek to restructure parts of the supply chain to ensure that they can remain agile in light of economic volatility. Particularly, firms that are serving the US market seek to improve their time to market as e-commerce demand remains structurally high and consumers prioritize speed. In March 2022, the Mexican government announced a new package of economic incentives for companies that invest in Mexico, including tax breaks, streamlined permits, and other measures aimed at reducing costs and bureaucracy. Despite continued regulatory risk, these incentives, along with Mexico’s economic predictability, proximity to the US, and market size, are likely to attract more foreign investment into the country, further boosting employment levels.

Firms will need to be flexible and adaptive to increase their chances of meeting high sales targets and maintain profitability. If profitability is the priority, then firms will need to look at optimizing their supply chain, reducing overhead expenses, or streamlining operations to free up resources for these types of investments. Although consumers have jobs, wages are declining due to high inflation, so firms could also look at their pricing strategies, either offering discounts or adjusting prices. Additionally, firms may want to figure out how to do more with less in the long run. The tight labor market and potential upward pressure on wages could lead to increased investment into automation, automating routine or repetitive tasks to allow employees space to focus on higher value-added activities, which could help firms expand their product and service offerings. Moreover, firms should invest in attractive compensation packages and offer development opportunities to attract new talent and reduce turnover. Working with educational institutions can also help firms identify and cultivate future talent, particularly for jobs that require specialization.  

While low unemployment will help bolster consumption, it will remain lackluster overall, growing by only 1.7% relative to last year’s 4.8%. Therefore, firms should closely evaluate their strategies to increase sales. They should take a close look at their product lines and marketing strategies, particularly since consumers are likely to be more price sensitive in this type of environment. Offering promotions or creating new product lines aimed at mass market segments could help firms diversify revenue streams. This may require investments in market research or in differentiating their brand image from competitors. Firms can expand the customer base, either by expanding product/service offerings or leveraging new distribution channels, for instance, through social media platforms that reach younger consumers. While reassessing market strategies will be necessary to meet ambitious corporate targets in 2023, firms that are able to be agile and adaptive will remain market outperformers.