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Suppliers are always looking for reasons for price increases.
For those operating in Mexico, labor costs will be a common reason
for price increases in 2019. However not all workers, industries
and regions will be impacted evenly. Given the disparate regional
trends in Mexican labor costs, strategic planners and global supply
chain managers should understand which areas and industries within
Mexico are likely to experience rapidly rising labor costs, and
which regions will be less affected. Understanding the geography of
wage growth will be key to avoiding unwarranted price increases in
2019.
Over the past six months there have been two key policies
explicitly targeting significantly lifting wages in Mexico. The
first was signed as part of the USMCA which included a wage
requirement for the free trade of autos. While on the surface this
provision looks like it would provide significant support to
manufacturing wages in the country, the reality is that
manufacturers are more likely to adjust existing supply chains to
meet the new requirements rather than lift wages. The second policy
was announced by President Andrés Manuel López Obrador (AMLO) in
early December and is already filtering through the supply chain.
On December 1, AMLO announced a 16% increase to the national
minimum wage, and the creation of a new free trade zone on the
Mexico-US border where minimum wages doubled from 88 to 176 pesos
per day.
USMCA Impact on Manufacturing Wages
The labor-value content provision included in the USMCA requires
that 30% of the labor-value content of an auto must originate in
factories that pay at least US$16/hour. In 2018 IHS Markit
estimates the average automotive manufacturing wage in Mexico was
roughly US$4.15 (80 pesos) per hour. On its face, this provision
would require Mexican automotive wages to nearly quadruple.
However, in practice this is more likely to mean that manufacturers
will source high labor-value parts such as engines and
transmissions from the US and Canada to meet the content standard.
Producers may also decide to opt out of the USMCA for cars
altogether given a relatively modest most-favored-nation tariff
rate of 2.5%. Due to these workarounds, it is unlikely that the
USMCA will result in meaningful wage increases in automotive
manufacturing in Mexico.
Minimum Wage Impact on Manufacturing Wages
The announcement of a 16% increase in Mexico's national minimum
wage, combined with a doubling of the minimum wage on the Mexico-US
border will have a direct impact on the average manufacturing wage
in 2019. Border states will experience the strongest wage growth
despite an average wage which is already well-above the minimum
wage. Given the 100% minimum wage increase in these regions, even a
small number of employees affected by the increase can have a big
impact on wage growth. Lower-wage states like Nuevo Leon, Coahuila,
and Tamaulipas are likely to see average wage growth in the double
digits due to having a higher share of workers earning the minimum
wage. Meanwhile Baja has the least exposure to the increase as few
manufacturing workers in Baja earn the minimum wage.
Bottom line: Both external and internal
pressure on Mexico to increase wages will result in an upward shift
to labor costs in 2019. Manufacturing wages in 2019 will see
double-digit growth in some states due to the establishment of a
new free trade zone on Mexico's border, but not all areas will
experience the same rate of growth. Understanding the geography of
labor cost increases will be important to all price negotiations in
2019.
