Tamale tables, strawberry stands, street food vendors shaded by large umbrellas – it’s all part of a quintessential image of Mexican culture. The problem: most of these small businesses, which make up a large part of Mexico’s informal economy, do not pay taxes. They also do not offer benefits to their workers.
It is a system that deprives workers of basic needs and also inhibits overall economic growth.
But now, five years after key tax and labor policy reforms were put in place, the country’s formal sector – including manufacturing and services – is beginning to grow. During the first half of 2017, a record number of workers joined Mexico’s formal economy and were registered with the Mexican Social Security Institute, according to figures from the institute. The rise of 517,000 workers marks a 17% increase from a year ago, the biggest jump in two decades.
But these jobs don’t come out of nowhere. Many of them are leaving the informal economy as employers offer work contracts with social benefits, experts say. With the increase in formal employment, the informal sector has fallen to 57.3% of the Mexican workforce, from its peak of 60% in 2009, reports Bloomberg.
These numbers show that “there is actually a transition happening where more of the work is done…in the formal sector,” says Christopher Wilson, deputy director of the Mexico Institute at the Wilson Center in Washington, D.C. DC. This recent growth is part of a larger trend. “Since 2014, more than 2 million jobs have been created in the formal sector in Mexico,” says Wilson.
This growth is good news for Mexico, according to Antonio Ortiz-Mena, a Latin American trade and economics expert with the Albright Stonebridge Group in Washington. “[Formalization] is absolutely critical to Mexico’s future,” says Ortiz-Mena, who is also an assistant professor at the Edmund A. Walsh School of Foreign Service at Georgetown University in Washington.
When firms are informal, they ‘get stuck in low productivity levels’, making it ‘very difficult to increase wages in a way that is not inflationary, or to increase overall [gross domestic product],” he explains.
Decades of widespread corruption — and public distrust of government and banks — have fostered the spirit of independence that drives the majority of Mexican parent and pop companies, but economic experts liken it to an economy that around in circles.
Companies with at least 500 employees may only represent 20% of Mexico’s workforce, but these companies were responsible for 44% of Mexico’s productivity in 2009, according to a 2014 report from the McKinsey Global Institute.
On the other hand, firms with 10 or fewer employees accounted for 42% of the Mexican workforce, but only 4% of Mexican productivity. Informality isn’t just inefficient – it’s “a lag behind social progress,” says Ortiz-Mena. “[Workers are] caught in this vicious circle. [They are] … work a lot and earn very little,” he says.
Formalizing jobs means wages go up, jobs are secure and people are more willing to spend money, Wilson says. In recent years, Mexicans have been spending more money in their local economies, with domestic spending rising about 4% in 2017 alone, reports Bloomberg. “Although this is down from last year, it is still double the estimated overall growth of the Mexican economy this year.”
Both Wilson and Ortiz-Mena attribute this progress to successful political reforms.
Labor reforms passed in 2012 provided “more options for setting up short-term contracts,” reducing the risk of hiring new employees and making hiring and firing more flexible, Wilson says.
Tax reform, passed in 2013, helped bring small businesses into the formal economy, reducing tax evasion and increasing tax revenue, Wilson said. Companies that begin to formalize “have immediate access to some of the benefits of formality,” such as being eligible for bank loans and giving pensions to their workers.
Ultimately, Mexico’s formalization could affect US-Mexican labor relations, suggests Ortiz-Mena. If higher wages were to become a broader reality in Mexico, there could be “[fewer] incentives … to risk one’s life crossing the [US] border without documents.