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Oranjestad, April 5, 2013 - It is no secret that the wage gap between Mexico and China has been narrowing in recent years. While labour costs in China were roughly 200 per cent lower than those in Mexico a decade ago, wage inflation in China and wage stagnation in Mexico have combined to close the gap to nearly zero.
But could labour in Mexico now actually be cheaper than in China? Yes, according to Carlos Capistran, an economist at Bank of America Merrill Lynch. Not only are average hourly manufacturing wages in Mexico now lower than those in China in constant dollar terms, they are 20 per cent less.
But is this necessarily a good thing for Mexico?
True, stagnant salaries over the past decade have been credited with reviving Mexico’s manufacturing sector, which was hard hit by China’s entry on to the world stage following membership into the World Trade Organisation in 2001.
A study by Barclays last year reckoned that the rise of China as the “world’s factory floor” chipped about 60 basis points off Mexico’s gross-domestic-product growth every year between 2002 and 2006. Some of the biggest casualties in Mexico’s manufacturing sector were textiles, clothing and shoes.
And now thanks to soaring wages in China, high transportation costs and the steady recovery seen in the US economy, the tide is turning back in Mexico’s favour.
Mexico has been able to regain participation in the US market since the Great Recession and the international financial crisis. Part of the gain has been against China: from 2007 to 2012, China gained 1pp in market share, compared to 7.5pp between 2001 and 2007, while Mexico gained 1.6pp, compared to -0.74pp between 2001 and 2007. A larger share of the US market positions Mexico better to benefit from the US recovery. In our view, an important force behind this trend is Mexico’s hourly wages are 19.6% cheaper than those of China.
Optimism over Mexico’s growth prospects has made the country a darling among international investors. Some $80bn of foreign investment were poured into the country’s stocks and bonds last year, compared with the $16.5bn received by Brazil. Mexico’s stock market hit a record high earlier this year and banks ranging from Spain’s BBVA to the US’s JP Morgan have been busy bulking up their operations there.
Yet what about the human costs of wage stagnation?
Minimum wage in Mexico today is about 60 cents an hour, while average pay in manufacturing is only about $4.50 an hour, according to the US Bureau of Labor Statistics. This compares to the $6.27 paid in Brazil.
Writing in the Miami Herald last month, Andrés Oppenheimer made the observation that “Everybody is upbeat on Mexico – except Mexicans.”
In Brazil, falling unemployment and wage increases have helped millions rise out of poverty and spark a domestic spending boom.
By contrast, in Mexico, wage stagnation, under-employment and inflation have eroded the income level of some 31m Mexicans. As many as 60m people are living below the poverty line. This in a nation of 113m. Wages need to be increased for Mexico to become a true modern country.
For now, banks and investors are happy to just focus on Mexico’s positive macroeconomic numbers. Mexico is expected to keep its competitive edge as a result of its demographic boom – which will see a young, growing labour force keep a lid on wage increases – and productivity gains.
So more good news for investors. But less so perhaps for the Mexican labourer who’s toiling away in a factory somewhere for 60 cents an hour.