Strengthening Mexico’s Formal Labor Market
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Strengthening Mexico’s Formal Labor Market

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Cinthya Alaniz Salazar By Cinthya Alaniz Salazar | Journalist & Industry Analyst - Wed, 10/13/2021 - 13:16

Since the Federal Labor Law (LFT) came into effect in 2019 it has been met with both resistance and enthusiastic support from companies in Mexico. But the reform’s intended purpose of creating more formal employment has fallen flat before the COVID-19 pandemic, which cratered the labor market. Two years later, the formal market actually contracted as the informal market grew presumably as unemployed people desperately pivoted to anything recuperative. However, as the economy makes gains and approaches pre-pandemic levels the goal is create more formal employment, said Héctor Marquez Pitol, Human Capital Commission President of Coparmex and President of the Mexican Association of Human Capital Companies (AMECH).

Incentivized by greater support from the federal government, the domestic market has seen as of September 2021, an estimated 2.7 million employees migrate from outsourcing positions to employment with companies that offer benefits and services. This has come despite the unfavorable market conditions, said Marquez who helped draft the legislation and has been helping business comply with its requirements over the past three years. Correspondingly, from November 2020 to September 2021 subcontracting positions contracted by 9,000 due in part to the regulatory change and the pandemic. While this labor sector has contracted this does not mean that former employees are currently inactive, explained Marquez, there’s evidence that this workforce has been absorbed by the informal labor market.  

A comparative of study conducted by the Mexican Institute of Social Security (IMSS) from February 2020 and August 2021 found that informal labor market has grown by 17,684 jobs, supporting this hypothesis. In contrast, the formal employment market has contracted by 1.2 percent, representing a loss of 286,297 jobs, according to 2021’s findings from INEGI. This indicates that the formal sector has taken longer to stabilize after private businesses were left to fend for themselves without any added support by the federal government. As businesses closed their doors indefinitely, they contributed to a labor market contraction to 12.5 million jobs which presumably pushed people into the informal market.

Further analysis from IMSS found, counterintuitively, that even amidst the pandemic businesses have slowly been increasing their minimum wage. In February 2020, wages reported to IMSS averaged at MX$12,087 (US$585) and increased by 2.6 percent in the span of ten months to MX$12,403 (US$601). This trend continued into the new year, albeit at a slower pace, from MX$13,035 (US$631) in January to MX$13,133 (US$636) by September, equivalent to a 0.75 percent increase in nine months. Although this increase may not make sense considering businesses have greater leverage when unemployment is so high, it could be a result of acquired employer empathy and or a deficit of qualified labor in certain sectors that is distorting the national average.

The global pandemic came to intersect with the regulatory change at the exact wrong moment, according to Marquez. Nevertheless, we have entered a “new epoch in the labor market,” evidenced by wage increases, he said. Marquez warns, however, that the observed wage increases should  be examined against growing domestic and global inflation that has increased the price of goods and services across the market. Ultimately, the task from here on will be to create more formal employment as the market recovers, which he anticipates will take at least two more years.

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