Mexico Increase in the minimum wage will improve purchasing power without inflation: BBVA

The increase in the minimum wage in Mexico from 88.36 to 102.68 pesos per day, starting in January 2019, will improve the purchasing power of those who earn less, with a zero effect on inflation, BBVA Research said.

The increase in the minimum wage in Mexico from 88.36 to 102.68 pesos per day , starting in January 2019, will improve the purchasing power of those who earn less, with a zero effect on inflation, BBVA Research said.

The financial institution noted that 25 years after the 1994 crisis, the minimum wage will finally recover its real level that year, and even exceed it by 52% after the increase announced by the new federal administration.

He noted that in recent years, and with greater intensity in recent months, the minimum wage had been positioned as a controversial issue between the political class and economic analysts in Mexico, as a priority issue in the social agenda of the new government.

In an analysis, BBVA Research pointed out that along with the historical lows of the minimum wage, the form of salary distribution has changed since the crisis of the 1990s, focusing more on jobs with lower incomes.

He said that today the proportion of workers earning a minimum wage or less has risen to 16.2%, from a minimum of 11.7% in 2008, while the share of workers with the highest incomes (five or more minimum wages ) has been reduced to less than half, from 11.7% to 4.5% in the same period.

Overall, workers who earn up to two minimum wages represent 44.6%  of the workforce in Mexico, of which 32.7 percentage points are informal, he added.

In recent days, the new administration announced the increase of the minimum wage from 88.36 pesos per day to 102.68 pesos in the whole territory and its duplication in the northern border and Chetumal, he added.

He explained that the first of these changes represents an annual increase of 16.2%, 12.7 percentage points above the inflation of 3.5%  estimated for 2019, and the highest increase observed since registration.

However, one of the fears associated with the increase in the minimum wage is related to its possible inflationary effect, since there is a fear that an increase higher than the gains in productivity will cause a generalized increase in the general level of prices.

BBVA Research affirmed that there will be a zero effect of increases in the minimum wage on inflation, hypotheses that corroborate several documented studies on the subject.

This, given the low level it is in, and considering progressive increases in the following years, the improvements in the minimum wage in the country would not cause an inflationary effect.

The financial institution highlighted that the increase in the minimum wage announced by the new federal administration corrects a prolonged period of deterioration of the purchasing power of workers who earn less.

Considering the low level of departure and the low participation of workers who receive such income in the formal sector, the measure will not have inflationary effects on the economy and it does represent a gain in welfare since it benefits the less favored segment of the population, he said. .