Factores de producción / Mercado laboral : Situación y agenda laboral (Inglés- 2007)

May, 2007

Employment and Competitiveness: Proposals of Public Policy

Today

• Mexican labor market is a broken-down system.

• The market prices (salaries) should send signals:

To the people, about where it is convenient to work

To the companies, about whom to hire and the best way to do it

• The link between salaries and productivity is very weak.

• Productivity is very low nn the Mexican economy.

Today

• Labor market and competitiveness

• Proposal of labor policies

In Mexico it is much more expensive and complicated to hire and fire workers than in other countries

Rigidity indicators of the Mexican labor market

Source: “Doing Business in 2005”. World Bank and IFC.

01020304050607080

Difficulty to hire

Index

0-10

0

Mexico

OECD

Latin America & Caribbean

Source: “Doing Business in 2005”. World Bank and IFC.

0102030405060708090

100

Rigidity indicators of Mexican labor market

Mexico

Latin America & Caribbean OECD

Index

0-10

0

Difficulty to fire

In Mexico it is much more expensive and complicated to hire and fire workers than in other countries

Rigidity indicators of Mexican labor marketInd

ex 0-

100

Source: “Doing Business in 2005”. World Bank and IFC.

In Mexico it is much more expensive and complicated to hire and fire workers than in other countries

Source: “Doing Business in 2005”. World Bank and IFC.

Rigidity indicators of Mexican labor marketW

eeks

of sa

lary

In Mexico it is much more expensive and complicated to hire and fire workers than in other countries

The labor market can not be adjusted through salaries, so it adjusts by the number of jobs that it can generate

Employment Black market (informal

sector) Low creation of good quality

employments Evasion of social security

obligations

Salaries Prices of work factor

The lack of flexibility of the labor market has caused an increase of an informal labor market (which is entirely flexible).

S. Levy (2006).

Informal Sector(about 27 millons workers)

Formal Sector(about 17 millions workers)

Economic and employment growth are negatively correlated

Correlation coefficient of GDP growth with employment and worked hours

More than 70% of the labor force works in sectors with productivity that is less than 25% of the US equivalent activity

Source: IMCO with data from the INEGI (2002), OIT (2001) y OECD (2001)

Employment (Economically Active Population)

USA productivity in

each sector

Mining

FinancialServices

Electricity, Gas and WaterCommunal,

Professional and

Personal services

Manufacture

Construction

Commerce, restaurants and hotels Agriculture

Transport and Communication

0.0%

10.0%20.0%

30.0%

40.0%50.0%

60.0%

70.0%

80.0%90.0%

100.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Productividad relativa de la mano de obraRelative productivity to labor force(Added Value / Economically Active Population of the sector)

Prod

uctiv

ity of

the

secto

rs in

USA

(200

1) =

100

The growth rate of the labor costs have grown with a quicker rate than the economy…

-0.2%

5.5%

2.1%

4.5%

7.9%

4.9%

3.2%2.5%

5.2%

-3.34%

1.73%

2.90%

0.58%1.35%

4.38%

0.55%

1.72%0.80%

2.57%

-22.9%

1995 1996 1997 1998 1999 2000 2001 2002 2003 p/ 2004

Percentage growth of the real average salary perceptionsPercentage growth of the productivity index

Only 25% of the labor force is in activities that can cover capital costs, not exclusively labor costs.

Implicit cost of capital in 12 years (313.84%)

Sales

gro

wth

adju

sted

by s

alarie

s’ gr

owth

, 199

4-20

06

The manufactures have lost dynamism and they have converted into expellers of workers

Source: IMCO, with INEGI data, Encuesta Industrial Mensual (EIM) 1994 a 2006

Universe: 205 industries, 5 excluded because of data, 1.2 millons of workers (approximately 2.8% of the Economically Active Population)

Small sectors with small companiesLarge sectors with large companies

Small companies / industrial sectors have expelled more workers

than the they have absorbed

-100%

-50%

0%

50%

100%

150%

200%

250%

-100 100 300 500

700 900 1100 1300

Thousands of workers

Accu

mulat

ed ra

te of

worke

rs ab

sorp

tion a

nd ex

pellti

on

1994

-20

06

108,502 absorbed Workers (1994/01 al 2006/08)

235,209 expelled workers in thesame period

62 industries that create employment In 12 years

137 industries that expelled workers

Today the service and informal sectors are an immense receptor buffer of workers

Source: INEGI-ENEU

∆r ≈ 6.8%

∆r ≈ -7.5%∆≈2.9%

Common aspects of companies that create employment

• Large Companies / sectors (automobile, bottling, pharmaceutical).

• Capital intensive sectors.

• Low wage costs as a percentage of the total added value.

• Based on abundant natural resources with high international prices (ferrous materials, copper).

• Derived from free trade (sales growth higher than 1000% can only be explained by the previous inexistence of the activity)

Common aspects of industries in difficulties

• The industries with the largest gaps between salaries and productivity are: Non-competitive internationally, technologically

backward, or that do not have a real market for their products any more

Those related to the agricultural / rural sector

Those with a Contrato Ley

The incentives are not aligned for the companies to be the right size.

Each time a manufacturing company in the formal sector doubles the size of its sales…

… it can only hire about 7% more personnel

ILLUSTRATIVE

Sales

+100%

Employees

+7%

In simple words…

• The industrial branches and companies that are successful in the market are those which can generate new employments.

• The restrictions to the companies to lay off workers become restrictions to hire workers.

• The salary rigidity makes workers unable to know in which sectors it is best to work.

• As more restrictions are given to the formal sector, the growth of the informal sector will increase.

Today

• Labor market and competitiveness

• Proposal of labor policies

Proposals of labor public policies

• The functions of the STPS should extend to all economic areas, and not only the formal manufacturing sector.

• No control on salaries and lay-off quotas • Fixed severance payments for workers, matching the

liability with an asset in companies’ balance sheets• Competence in labor unions, changes in the labor

union leader, transparency and responsibility of the labor unions in regard the use of union fees

• Change of vision on subsidies: they produce incentives for workers to stay in sectors of low productivity.

Pensions and labor market

• Separate the social security from the companies payroll changing to a universal and voluntary system.

• Elimination of parallel regimes of social security which should evolve into a system with portability between sectors

The reform to the ISSSTE law is a big step in this direction.

Salaries and labor market

• Alignment of wages and productivity• Hourly wages – more correlated with economic

growth• Temporary hires and lay-offs, to sponsor growth with

additional workers, not additional hours of few workers

• Mandatory corporate profit sharing should evolve into a productivity bonus

Thank you

For more information:

www.imco.org.mx