Decoding Mexico's Labor Cost Dilemma

Companies in Mexico are contending with escalating costs attributed to recent amendments to the country's labor law, as reported by EY. According to industry leaders at MTF 2024, finding a balance between worker rights and business health hinges on dialogue between policymakers and industry.

“We are going through transformative regulatory changes that companies have to comply with; generating concern about possible reforms to come and those that have changed,” says Álvaro Alejandro García, Director of the Labor Committee, INDEX. 

Of particular significance is the 20% minimum wage increase slated for 2024, marking the sixth consecutive year of double-digit hikes in Mexico. This increase is anticipated to affect approximately one-third of the country's workforce. Consequently, companies have been prompted to reassess their compensation strategies to uphold competitiveness, according to Tetakawi.  According to Gabriel Arturo Aparicio Segovia, Director General, Kelly Services Mexico, the wage hike will have “an economic impact on all formal businesses,” necessitating not only salary adjustments but also pricing and service strategy revisions.

Lorenzo Roel, President of the Labor Commission, Consejo Coordinador Empresarial (CCE), said that “[despite] the progressive nature of these changes, [they] present a challenge for businesses, particularly micro, small and medium-sized enterprises, in planning and adapting to the new obligations.” Additionally, he mentioned that there is an added layer of complexity due to varying wage increases across different regions.

Moreover, the proposition to reduce the workweek to 40 hours could carry substantial implications for businesses, especially those operating in labor-intensive sectors such as manufacturing, agriculture, and logistics, as highlighted by Karen Lellouche Tordjman, Managing Director and Senior Partner at Boston Consulting Group (BCG). Similarly, Ricardo Barbosa, President of COPARMEX's Labor Commission, emphasizes that companies may encounter challenges in maintaining output levels with reduced working hours. This is underscored by the observation that Mexican laborers work, “some of  the longest working hours, approximately 500 hours more than the OECD average, yet it ranks among the top three countries experiencing significant productivity loss."  

To enhance productivity, companies may contemplate upgrading machinery, integrating new technologies, or optimizing processes. However, these initiatives can incur significant costs and may necessitate a considerable implementation period, thereby exerting additional strain on company budgets. Furthermore, reducing the workweek without a commensurate reduction in workload could result in escalated overtime expenses. If companies are required to maintain the same production quotas within a condensed time frame, employees may be compelled to work additional hours beyond the standard 40-hour week, thereby augmenting labor costs, as emphasized by Holland & Knight.

These labor law changes are not just boardroom buzz; they affect industries across the board, with labor-heavy sectors feeling the pinch most. As Mexico aims to balance worker rights and business sustainability, collaboration between policymakers and stakeholders is paramount.