USMCA and the Need for a “Second Story” of Mexican Wages and Household Incomes

The current trade war and tensions with the US pose many challenges for Mexico, but at the same time they provide both an impetus and a strategic opportunity to make progress on the longstanding and interwoven problems of low wages, poverty and slow economic growth. The impetus comes from the clear need to reduce the country’s excessive dependence on exports to the US. Paradoxically, the strategic opportunity arises in the coming 2026 review of the United States-Mexico-Canada Agreement (USMCA).

The failure of Mexican wages to converge upward toward US wages is a strong political irritant and will be a prominent issue on the agenda of US negotiators. Raising Mexican wages may be one of the few issues on which there is a convergence of views based on the self-interest of both countries.

A new working paper by Sandra Polaski explores a range of policies to increase Mexican labor incomes that align with the broad goals of President Claudia Sheinbaum’s economic strategy Plan Mexico, which include the objectives to “create well-paying jobs in manufacturing and service sectors” and “reduce poverty and inequality.” The paper helps fill in the Plan’s lack of detail on how to do so by proposing specific and realistic policies to increase labor and household incomes, expand domestic demand and gradually rebalance the economy away from its excessive reliance on US export demand.

Policy recommendations:

• The Mexican minimum wage does not yet provide an income sufficient to lift a household out of poverty in most parts of the country and a third of Mexico’s population still lives in working poverty. Therefore, Mexico should pursue continued growth in minimum wages.
• Policies are also needed to address the constraints on average wage growth. A promising arena for government action to address the relative stagnation of average wages can be found in the export sectors of the economy, particularly in the manufacturing export sector.
  • Mexico could add to the two current levels of minimum wages (general and northern border region) an additional level of higher minimums applicable to exporting firms in each region.
• Weaknesses in Mexican institutions reinforce the pronounced asymmetry between the bargaining power of employers and workers. This can be addressed through legal reforms and strengthening government labor institutions.
• Plan Mexico’s emphasis on attracting foreign and domestic investment includes generous tax incentives for firms to invest in specific industries and regions. The government should require investors to formally commit to compliance with all terms of the labor law, including freedom of association and good faith collective bargaining, as a condition for receiving the incentives, with ongoing monitoring to ensure compliance.
• The Mexican government can use the USMCA’s labor dispute settlement mechanism, the Rapid Response Labor Mechanism (RRLM), as a backstop while Mexico builds its own state capacity to ensure compliance with labor laws, improve the bargaining power of workers and increase wages.

Ultimately, Mexico’s profound needs for further poverty alleviation, higher wages, more effective labor justice and stronger domestic demand require bold steps. The proposals discussed in this paper, particularly in combination, could make a significant contribution to these goals. The present moment creates both an urgency to make progress and a propitious opportunity to do so.