Will Mexico’s Labor Reform Reshape Your Manufacturing Operations?

On May 1, 2019, Mexico’s President Andrés Manuel López Obrador enacted the labor reform bill that U.S. legislators have been awaiting prior to their passage of the U.S.-Mexico-Canada Agreement (USMCA). Central to the legislation are stipulations ensuring all workers can vote for union representation and contracts through secret ballots.

The U.S. supports this provision as a way to protect U.S. jobs through more equal pay, but also aligns strongly with President López Obrador’s drive to improve conditions for Mexican workers. But new analysis indicates that an increase in wages may be offset by big boosts in productivity that could help Mexico-based manufacturing operations sell more high-quality goods.

Labor reforms impact on costs

The right to organize is expected to lead to better pay and improved conditions for Mexican workers, but an April 2019 analysis of USMCA published by the U.S. International Trade Commission (ITC) suggests those improvements may also lead to higher productivity and, consequently, larger sales volumes for manufacturers.

Overall, the ITC model forecasts USMCA to have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world—good news for Mexico-based manufacturing operations that export products to the U.S.

Based on historic data, the ITC analysts estimate that over time collective bargaining will increase wages of unionized Mexican workers by more than 10%. However, the report further notes that “improvements to labor standards in some cases lead to increased productivity, possibly resulting in higher consumption.”

Fairer wages, more productive employees

There are reams of data available today supporting the fact that positive working conditions boost worker productivity. A recent Harvard Business Review article explains that paying wages above the market rate can be a motivating force for an employee base. As Ray Fisman, Slater Family Professor in Behavioral Economics at Boston University, and Michael Luca, Lee J. Styslinger III Associate Professor of Business Administration at Harvard Business School, write: “higher wages makes a job more desirable. This leads to a larger applicant pool waiting to take over when openings occur, and makes it easier to replace a slacker employee. It also means that workers have more to lose by slacking off.”

However, much available data indicates that higher wages aren’t necessarily the end game for workers; the biggest goal is greater transparency and fairness around pay.

The Trends in Global Employee Engagement Survey from professional services firm Aon that identified the top five drivers of engagement worldwide found that pay didn’t feature higher than the third position in any region (career opportunities, it turns out, is the highest driver).

The report also highlighted that the rate wasn’t as important as the feeling of fairness and transparency around pay. A survey from PayScale supports that; the compensation software and insight supplier found that employees largely agree that satisfaction is driven more by feeling that pay is fair than how much someone is actually paid. 

President López Obrador understands that. His "2018-2024 Nation Project" work plan proposed a number of measures to improve fairness, including the forward-moving legislation for labor reform and stricter enforcement of labor laws. He also proposed issuing fair employment certificates, to publicly recognize employers who pay reasonable wages to their employees with a distinctive logo so that consumers can become aware of their fair employment practices.

As employees become more satisfied with their pay and working conditions, they become more engaged in their work. And that’s huge for employers. One multi-country Gallup poll found that teams in the top quartile for employee engagement outperformed those in the bottom quartile by 21 percent in productivity and 22 percent in profitability.

So manufacturers expanding into Mexico may have a lot to gain from labor reform laws—eventually. The ITC analysis is quick to add that any impact to manufacturing wages and overall costs is not likely to be seen in the near term, and possibly not at all before the end of the USMCA six-year review period. So today’s Mexico-based manufacturing operations will have time to amp up their wage rates to drive higher product output.

As the ITC analysts note, “Wage increases would likely occur over the long term and may depend on technical assistance from the United States, as the establishment of unions and the education of Mexican workers regarding their collective bargaining rights would not occur quickly.”

Labor reforms impact on operating procedure

That being said, labor reform will bring changes to the business side of manufacturing operations in Mexico. Yet companies with established operations in the United States will find themselves fully prepared to meet reform requirements. After all, USMCA modifies Mexico’s Federal Labor Law to include labor protections that have existed in the United States since the 1930s and 1940s. For U.S.-based companies, this may be business as usual.

Companies already operating in Mexico will want to start today to update their practices. James Stone, office managing principal of the Cleveland, Ohio, location of law firm Jackson Lewis P.C., advises companies to start today to prepare for “a new era of labor relations.” As Stone points out, when Colombia adopted similar reforms, it saw independent unionization triple in a few short years. Now is the time for labor-friendly companies to evaluate their labor relations policies and put plans in place for compliance with new regulations.

Raul Rangel Miguel, attorney with Butzel Long, recently wrote that the reforms are bolstering “workers’ confidence to demand improved labor conditions from their employers.” The results have been strikes and unrest that slow the transport of finished goods. Companies that want to maintain business as usual should prepare today to show up to the negotiation table to talk openly with employees, and their representatives, on pay raises.

Awaiting next steps

Speaker Nancy Pelosi had previously stated that the U.S. House of Representatives will not vote to ratify USMCA until after Mexico passed and implemented these labor law reforms, so the next step to move the USCMA forward will come from U.S. legislators. But these recent steps in provide an air of certainty around business operations that will allow company leaders to better plan for their manufacturing future in Mexico.