Mexico is gaining jobs, not wages, part 2

Part 1 is here.

Part 2 is based on a stunning report from Bank of America: nominal dollar wages in Mexico are now lower than in China. (Hat tip: Beyond Brics. But note that we here at TPTM called it first!)

This is a great thing for China, obviously, and it has benefits for Mexico. It means that “nearshoring” will continue, as Mexico gains competitiveness against China. In fact, Mexico became competitive back in 2008, right after the big depreciation in the peso. The below chart shows Alix Partners’ decomposition of the landed costs (i.e., wholesale cost for U.S. sales) for five representative goods. In 2005, China was cheaper than Mexico; by 2008, that was no longer true.

But is it a good thing for Mexico? I am less certain. A boom based on nearshoring and continuing low wages ($2.50 an hour from BofA; $4.53 from the BLS) is a good thing for investors and the resulting employment boom is a good thing for Mexicans, but it does not presage much future growth. (In addition, the gains from the good news are already priced into the markets; ship-sailed if you’re looking for easy returns.)

Mexico is a solid middle-income democracy with a serious (but not existential) organized crime problem. It has made amazing strides in eliminating unnecessary volatility. The country works. But looking over the recent hype it’s attracting (see here and here and here.) I feel a little like Chris Rock. “You’re supposed to have a democracy! You’re supposed to have a middle class! You’re supposed to have factories! What do you want, a cookie?”

In other words, Mexico is performing just as you would expect a stable middle-income country with substantial long-term problems to perform. The expectations of super-returns and blather about Aztec Pumas (or whatever) is just hoping for a cookie.

P.S. Noah Smith expects rising demand for Mexican manufactures to raise wages. (You should all read his blog! It is a very good blog.) His error is simple: the demand for Mexican manufactures is extremely elastic, because Mexico is not the only country in the world.

P.P.S. No, I have not started to follow Twitter feeds. I hate that thing even more than Facebook.

Comments

[AK]

We also know that:

(1) China has cheaper prices.

(2) China has a larger labor participation rate, and their hours worked are higher too.

(3) Mexico has a GDP (PPP) per capita of $15,000.

(4) Now we learn that Chinese dollar wages per hour are 19% higher than Mexican.

Surely taken all together this should mean that China's GDP (PPP) is actually closer to $20,000 or so than the $8,500 estimated by the World Bank and IMF, and that it is in fact in real terms already quite a lot bigger than the US economy?

[Noel Maurer]

AK: nice insight! It bears more thinking about. So, thinking as I go ...

One thing to keep in mind is that China still has huge reserves of underemployed rural labor. (See http://www.stats.gov.cn/english/newsandcomingevents/t20120120_402780233.htm.) As an empirical matter, they are not migrating quickly enough to keep nominal wages down. (The rural labor force was 61% in 2008 --- if the employment-population ratio still holds, that's down to only about 56% today.)

A second thing to keep in mind is that the nominal wages cited in the BofA report apply only to the workers available for foreign private-sector firms. Rigidities dating from the Communist period (the real Communist period, you know what I mean) keep much labor locked up at low wages. That isn't relevant to a foreign firm locating manufacturing production, but it makes extrapolating the wage figures to GDP rather hazardous.

A third thing is that much of the increase in nominal wages is due to an increase in the exchange rate and Chinese inflation. (The GDP deflator went up 53% between 2003 and 2012; the exchange rate rose 34%. Together that comes to a rise in Chinese nominal prices relative to American ones of 104%; about quarter of the wage rise.) Neither will affect GDP as measured at PPP.

A fourth thing is that the labor share of income is higher in China than in Mexico. In 2007, the labor share in China was around 42% of GDP; in Mexico, it was a rather stunning 28%. (Low labor shares have been long features of Latin American economies.)

Add those things up (the third is likely most important) and I think the official estimations of China's GDPC probably have it correct.