Can Mexico be more prosperous?

The supply of Mexican labor for the domestic U.S. economy is influenced by forces on both sides of the border, including the strength of the Mexican economy. The Economist recently analyzed the failure of the Mexican economy to perform better: “Between 1995 and 2015 real GDP per person increased by an annual average of 1.2%, less than in any Latin American country except Venezuela. Take into account the swelling labour force, and Mexico looks even worse: GDP per worker expanded by just 0.4% a year.”

This is despite an improvement in formal educational levels among Mexicans. As I posted recently, today a quarter for young people in their teens will end up going to college, three times a percentage of those who did in the early 1990s. The Mexican economy is now the 15th largest in the world and is projected to become the seventh or eighth largest by 2050.

The solution: change laws to make it relatively more attractive to hire salaried employees rather than to pay them as non-salaried self-employed workers.

Per the Economist, workers end up in jobs where they are less productive than they might be. Too many individuals who should be workers become entrepreneurs or are self-employed. Efficient businesses are taxed and penalised, while subsidies help sustain unproductive ones.

Mexico has a huge and disproportionate number of small businesses, and unusually wide variation in the productivity of its companies. More than 90% of the 4.1 million firms in the 2013 census had at most five workers. And 90% of the total were “informal”, absorbing 40% of workers.

Economist Santiago Levy distinguishes between firms that have salaried employees and those that do not. Four-fifths of the “informal” firms are in the second category: their staff are either self-employed or paid piece-rates or profit shares. These firms’ only legal obligation is to pay corporate tax, of just 2% of revenues. Firms with salaried workers, by contrast, must pay social insurance, deduct income tax and grapple with employment law (which doesn’t allow them to fire people if business drops).

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