Mexico's Labor Reform No Panacea for Denting the Black Market

Juan Ramirez makes up to $42 a week selling candy, newspapers and other items from his street kiosk, but he's not interested in a new Mexican law that aims to bring millions of workers out of the country's informal economy.

"I don't think it is going to benefit companies or workers," said Ramirez, who has scraped together a living on the same street corner for nearly three decades, working 72 hours a week.

Low company salaries and his own lack of academic credentials would keep him there, he said.

The 46-year-old is one of at least 14 million informal workers in Mexico and policymakers hope the new law, which went into effect last weekend, will entice at least some of them into formal positions by creating up to 400,000 jobs a year.

But many companies, workers and lawyers say the law creates scant incentives for employers to boost hiring and offers little to draw workers out of the informal sector, where selling gum, moonshine or water at traffic lights or on the beach can often make more money than working in low-paid formal jobs - and also escapes taxes.

"There simply aren't very notable changes of substance ... It is really more appearance than reality," said Carlos de Buen, a union labor lawyer, who said the benefits of informal employment trump the law's minor fixes.

Some economists put the job gains from the reform, which aims to make it easier for companies to hire and fire workers, as high as 1.2 million per year, eating away at the black economy that costs the country roughly $50 billion in lost revenue each year.

Mexico's biggest labor shake-up in four decades has been cheered by business leaders who had long argued that an overhaul of workforce regulations was needed to make Latin America's second biggest economy more competitive.

The Institutional Revolutionary Party (PRI), which took power on December 1, has strong links to unions and for many years blocked reforms proposed by the former administration.

But the new PRI government was elected promising structural reforms aimed at boosting growth to 6 percent a year, stoking optimism about the outlook and fanning foreign investment.

Although wages in Mexico are low, labor productivity gains lag the Organisation of Economic Co-operation and Development average and Mexico ranks 114th of 142 countries in the World Economic Forum's scorecard of labor market efficiency.

"Mexico has a great opportunity to recover its position," said Pablo Norena, a partner at accountants KPMG in Mexico City. "The purpose of this new law is to make a much more competitive workforce."

The labor law aims to make work contracts more flexible by providing for trial periods for new employees and specifies that productivity, not seniority, should be the main criterion in assessing a worker's suitability for a new position.

It also caps the amount of back-pay workers can receive after winning a lawsuit for wrongful dismissal, taking aim at prized worker protections that many analysts say have weighed on the economy but have been tough to take on politically.

"There has been a clamor for this for 15 years ... but the labor law was never modified out of fear of offending the working class," said Barclays economist Marco Oviedo, who thinks the reform will create 1.2 million jobs a year and could add 1.5 to 2 percentage points to potential growth within 10 years.

HARD TO BEAT

Former International Monetary Fund official Claudio Loser estimates Mexico's large informal sector costs the country about 4.5 percent of GDP annually. It also eats away at the country's tax take, which is already the lowest among OECD countries.

International Labour Organization (ILO) figures show 34.1 percent of Mexican workers labor in the informal sector, against 24.3 percent in Brazil, depriving the government of revenue needed to provide key services, weighing on productivity and leaving workers uninsured and vulnerable.

Many informal business operators avoid taxes by keeping their business small to avoid attracting the attention of authorities. But by sidestepping taxes, they also fail to qualify for credit, keeping them from expanding their business.

"There are about 5 million companies (in Mexico); about 4.5 million are small with a low tax burden. Those are very difficult to monitor," said Manuel Molano, deputy director at the Mexican Institute for Competitiveness. "Normally, they operate in cash. They don't have bank accounts."

Mexico's informal sector is deeply entrenched and will be hard to eradicate. In Mexico City's open-air Tepito bazaar, dating back to Aztec times, cheap black-market goods abound, few pay taxes and political hand-greasing thrives. After a government crackdown on vendors in the 1970s, associations and other groups representing informal workers began to pop up.

Politicians eventually began to use the groups to organize votes in their favor and extract bribes, said Sandra Alarcon, an anthropologist at Ibero-American University who studies the underground. Stall owners pay for their Tepito spots and are also expected to show political allegiance when needed.

"In exchange for space, there are votes, directly at the ballot box," Alarcon said.

Despite the excitement surrounding the historic overhaul, many are less sanguine about its on-the-ground impact.

One section of the new law officially allows employers to hire workers for an hour. But it also stipulates that minimum wage employees be paid no less than a full day's salary - unlikely to encourage companies to put on short-term workers.

Another section of the law authorizes short-term hiring, but workers and analysts agree that many companies already hire workers in this way under the table.

Experts say a better way to bring informal workers into the official fold is to shift more of the tax burden from workers and employers to consumption taxes, making formal hiring cheaper, and perhaps increasing minimum wages.

Mexico's minimum wage stands around 60 pesos ($4.60) per day, which the ILO says is below market levels. Kiosk owner Ramirez says he earns up to 80 pesos a day on the street.

Even if its impact is still unclear, the bipartisan support the labor law received does at least bode well for the deeper reforms that Mexico's new administration will have to negotiate through a divided Congress: opening the state-owned oil sector to more foreign investment and improving the paltry tax take.

"In some ways <the labor reform is> more a political step, that there could be a negotiation and two parties could come together and pass something together," said Shannon O'Neill, a senior fellow at the Council on Foreign Relations. ($1 = 12.8496 Mexican pesos)