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.

Learn more about the minimum wage increases.

Posted 19 March 2019 by Emily Crowley, Head of Research, Pricing and Purchasing, S&P Global Market Intelligence