Mexico: Labour Reform Is Approved

Mexico: Labour Reform Is Approved

Nader Nazmi - Market Economics
Latam Macro Snapshot | 14 Nov 2012 16:32 |

Late last night the Senate passed a labour reform bill that had already been approved by the Chamber of Deputies. This bill will soon be signed into law by the outgoing President Felipe Calderon, ending years of failed efforts to reform Mexico’s labour market.

* The overhaul makes the labour market more flexible.

The bill reduces the rigidity of labour laws, increases hiring and firing flexibility, allows outsourcing practices, and provides contract flexibility for part-time and seasonal hiring. As we had expected (see, “Mexico: The tough post-election agenda,” June 2012), the approved bill passed by excluding provisions that would have weakened unions by making their finances and elections more transparent.

*The reform helps efficiency and growth.

Onerous labour market regulations have been the main cause of informality, which is associated with lower investment and productivity. The approved bill will increase labour market flexibility and help to reduce Mexico’s large, informal labour market, which is an obstacle to more rapid growth. According to our estimates, if the approved labour reforms succeed in reducing informality by 10pp (bringing it to a level closer to Brazil’s 42.2% from 53.7%), Mexico’s potential growth would increase by 0.3pp (“Mexico: Growth gains from reforms,” in Macro Matters, 18 October 2012).

*The passage of the reform bill opens the door for other reforms.

The willingness of the PRI and the PAN to work together to pass the labour reform bill bodes well for the successful implementation of other reforms, we believe.

The reform agenda of President-elect Enrique Peña Nieto, who takes office on 1 December, includes revamping the fiscal house and overhauling the energy sector. Successful implementation of labour, fiscal and energy reforms could increase potential GDP growth by 1.5pp to the 4.5-5.0% range, by our estimates.

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