Mexico’s 62nd Congress had just been inaugurated on September 1 when legislators heard from President Felipe Calderón, who sent a labor bill to the Chamber of Deputies for consideration. Under a new fast-track authority, the executive branch can submit legislation to the lower chamber of the legislative branch, after which the lower and upper chambers have 60 days to debate and vote on the president’s initiative.
Calderón’s labor bill asked members of Congress to modernize Mexico’s 40-year-old labor code, which was enacted at a time when Mexico’s economy and politics were closed; when dependency on international markets and investment was low; and when the Partido Revolucionario Institucional (Institutional Revolutionary Party—PRI) used unions to marshal grassroots support and to line the pockets of elected leaders and union bosses.
The results are ghastly: Mexico’s current labor code makes hiring easy and firing difficult. Disgruntled employees who sue former employers collect damages plus lost salaries during drawn-out court cases that can reach five years in duration. Subcontracting is also difficult, as is holding the boundary between consulting and full-time employment—the latter of which brings in salary and benefits.
Mexico’s antique labor laws have forced many employers to hire less and rely more on informal employment arrangements. The system also discouraged creativity and encouraged the informal sector to grow. (According to the World Bank, 50 to 60 percent of Mexicans work in the informal sector.) The World Economic Forum has also taken note, saying that Mexico’s ability to compete worldwide is constrained by its inflexible labor market.
The informal sector costs Mexico 2 to 4 percentage points in gross domestic product (GDP) according to the nation’s Instituto Nacional de Estadística y Geografía (National Institute of Statistics and Geography—INEGI). It also deters tax collection: the Organization for Economic Development and Cooperation (OECD) places Mexico last on its members list for tax collection at 17 percent of GDP; OECD countries, on average, collect 34 percent of their GDP in taxes.
Put simply: the country’s market policies neglect globalization, innovation and competition.
June 1: This AQ-Efecto Naím segment looks at sustainable cities in the hemisphere.