Mexico’s Labor Market Contracts as Costs Rise

Mexico’s labor market contracted in January 2026, with major job losses and a rare decline in formal IMSS payrolls following a weak 2025. Rising labor costs, fewer employer registrations, and enforcement gaps are increasing pressure on SMEs, manufacturing, construction, and export-oriented sectors, complicating formalization and investment dynamics.

Mexico’s labor market began 2026 with a sharp contraction, as 705,427 jobs were eliminated in January compared with December, according to the National Institute of Statistics and Geography (INEGI).

The decline erased two-thirds of the positions created in 2025 and was concentrated in formal employment.

Parallel data from the Mexican Social Security Institute (IMSS), and new findings from the International Labour Organization (ILO) and the Inter-American Development Bank (IDB), point to structural pressures, including rising labor costs, enforcement gaps, and slower employer growth.

Participation Falls as Formal Jobs Contract

According to INEGI’s National Occupation and Employment Survey (ENOE), the employed population fell by 705,427 people in January, marking the second-worst start to a year in the post-pandemic period, behind January 2022. The contraction represents 66.6% of the 1.06 million jobs generated in 2025.

The adjustment extended beyond employment totals. The unemployed population rose by 180,261 individuals, pushing the unemployment rate from 2.4% to 2.7% month over month. At the same time, 687,123 people moved into the Non-Economically Active Population category, primarily classified as “not available” for work.

These shifts lowered the labor force participation rate to 58.5%, its lowest level since January 2022. Although unemployment remains low by historical standards, the decline in participation signals weaker labor absorption.

Formal employment bore the largest share of losses. Of the total jobs eliminated in January, 454,986 were formal positions, equivalent to 64% of the decline. Informal employment fell by 251,135 jobs, yet the informality rate edged up from 54.6% to 54.9%, reflecting compositional effects.

Gabriela Siller, Director of Economic and Financial Analysis, Banco Base, tells El Economista that the setback in formal employment carries broader implications. “The structural regression of formal employment in Mexico compromises worker welfare by anchoring them in low-wage activities, erodes the state’s tax base and puts long-term growth capacity at risk,” she says.

Janneth Quiroz, Director of Economic, Foreign Exchange and Equity Analysis, Monex, notes that while the unemployment rate remains contained, lower participation, and a marginal increase in informality suggest a less favorable environment. Underemployment declined only 0.1 percentage points to 6.1% of the employed population.

IMSS payroll data reinforces the trend. The institute reports a net loss of 8,104 registered formal jobs in January, reducing total insured employment from 22.52 million in December to 22.51 million. This marks the weakest January performance since 2009 and only the second January contraction recorded since 2001.

The result falls short of the 100,000-job monthly benchmark tracked by México ¿Cómo Vamos? under its “economic traffic light” indicator. January losses were concentrated in 17 states, including Campeche, Sonora, and Tabasco, while Mexico City, the State of Mexico, and Hidalgo registered gains.

Sectoral performance was uneven. ENOE data show that services eliminated 753,292 jobs, with commerce accounting for much of the decline, consistent with seasonal adjustments. Agriculture lost 246,697 positions. By contrast, industry added 342,949 jobs, led by manufacturing with 280,022 positions and construction with 70,325.

The only occupational category to expand was self-employment. In January, 448,444 individuals entered independent work, bringing the total to 13.4 million. Subordinated employment declined by 547,793 positions, while the number of employers fell by 484,503.

Rising Labor Costs and Fewer Employers

The slowdown in job creation coincides with a sustained increase in formal labor costs. According to the IDB, Mexico’s minimum cost of salaried labor doubled from 10.7% of GDP per worker in 2013 to 21.4% in 2023. Preliminary estimates suggest the figure could approach 25% by 2025.

Three policy shifts account for most of the increase: successive double-digit minimum wage hikes since 2019; a 2020 pension reform that raises employer retirement contributions from 6.5% to 15% by 2030; and a 2022 reform doubling the statutory minimum vacation entitlement after the first year of employment.

The daily minimum wage rose from MX$88.4 (USS$5.12) in 2018 to MX$315.04 (US$18.25)  in 2026, a real increase of 154%. Authorities have set a target of MX$440 (US$25.49) per day by 2030. Non-wage labor costs represent 46% of base salary, below the regional average of 51.6%, but significantly higher than a decade ago.

At the same time, employer registrations have declined. IMSS data shows that 41,764 employer records disappeared over the past two years, including 24,367 in 2025. Micro and small enterprises accounted for most closures.

Daniel Guzman, CEO and Co-founder, Conecta Soluciones Tecnológicas, says the contraction reflects a structural imbalance. While total employment remains near historic highs, the number of firms generating those jobs is shrinking, he says, adding that rising labor costs and compliance requirements weigh more heavily on smaller businesses.

The Centro de Estudios Económicos del Sector Privado (CEESP) warns that weaker investment, regulatory burdens and higher labor costs may limit hiring capacity. Although average real salaries for registered workers rose 3.1% in 2025 and the real wage bill increased 4.4%, slower employment growth could moderate income gains and consumption.

Forecasts for 2026 formal job creation range between 150,000 and 383,000 positions, depending on investment flows and economic conditions.

Enforcement Gaps and Structural Pressures

Beyond cyclical factors, international observers highlight institutional challenges. In its 2026 report, the ILO’s Committee of Experts on the Application of Conventions and Recommendations identified enforcement gaps in Mexico’s subcontracting reform, union protections, and child labor oversight.

The 2021 subcontracting reform prohibited outsourcing of core business activities and strengthened employer obligations on social security and tax compliance. The ILO notes that authorities have introduced digital cross-checking tools to compare payroll, tax, and social security records. However, it says technology must be accompanied by sufficient inspection capacity and sanctioning mechanisms.

Child labor remains a critical issue. The ILO estimates that about 3.7 million minors are engaged in child labor activities in Mexico and calls for clearer definitions of “light work” to prevent misuse.

These enforcement gaps intersect with labor market dynamics. Mexico is expected to incorporate roughly 2 million young workers annually over the next five years. While the country ranks high within the OECD in technical and STEM graduates, skill mismatches persist and talent concentration remains uneven across regions.

For businesses integrated into global supply chains, compliance certainty is central to investment planning. Digital monitoring of subcontracting practices and expanded coverage of platform workers — more than 200,000 were formally registered in 2025 — indicate that regulatory scrutiny will continue.

Mexico’s labor market enters 2026 facing converging pressures: a sharp January contraction, rising formal labor costs, fewer registered employers, and ongoing enforcement challenges. Although wage recovery has improved worker purchasing power, the sustainability of employment growth will depend on balancing labor protections with investment and productivity dynamics.

February and March data will indicate whether January’s losses reflect seasonal adjustments or the start of a broader deceleration. For now, organizations point to a labor market in transition, where structural reforms and economic conditions are reshaping the trajectory of formal employment.