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Formally and informally, The Wall Street Journal sucks

13 August 2012

That the Wall Street Journal is probably the last place one one would go for an  intelligent analysis of Latin American economics (or of anything else in Latin America, for that matter),  so it shouldn’t be any surprise that WSJ gets even the most basic facts completely wrong.  Two Weeks Notice recently came across a  a WSJ classic last week:  an article that not only mangled the meanings of basic terms, but did so in a way that was blatant in it’s anti-worker spin.

The Journal (subscription required) wrote:

What could trip Mexico, though, is if a new government elected in July doesn’t undertake labor reforms to unify its “formal” and “informal” labor pools, the report said. Formal is defined as organized labor that is expensive, while informal labor is free of associations but is also unskilled.

As Two Weeks noted, this is just plain wrong. “Informal” does not mean “unskilled,” nor does “formal” mean “unionized”.  Nor, should it be added, does “unionized” mean “expensive” (Keith Dannemiller’s comment below gives a more detailed explanation of the legal differences).

Hiring a plumber off the street to fix a bathroom leak is “informal” employment, but the plumber is going to be skilled labor, and if his labor costs are somewhat lower than that of a “formal” worker, it is only in that I am paying him in cash, and there is no tax record of the transaction.  I could hire a “formal” plumber, who might or might not be unionized… or might be an independent contractor .

As it is, unskilled workers in a number of fields are organized… think of the ambulantes (roving vendors of everything from candy to handicrafts) you find in every Mexican city.  They’re certainly an organized bunch, and while their job protection from competitors is usually designed to benefit their employer (aka, the bosses have goons and lookouts along the most popular routes) it is a form of organized labor.

The “reforms” I’ve seen are mostly in the nature of creating a sub -minimum wage for new hires (and making it easier to lay off worker).  In addition, they seek to make it more difficult for workers to form independent associations (and, given the Calderón Administration’s open attacks on independent unions — SME and the miners’ unions — obviously meant to benefit large corporate employers like CFE and the foreign-controlled mining companies), or to pursue claims of labor violations… which is of benefit neither to the “formal” nor the “informal” worker.

Admittedly, it is expensive (and time consuming) to put employees on the payroll, and small employers often see a huge advantage in hiring “informal” workers.  But that would be better resolved through bureaucratic reform, which means more state intervention (if only in the benign sense of redesigning the klutzy social security payment procedure and making it easier for small and changing the tax code to make hiring and retaining employees less burdensome.  And a better unemployment insurance system so that employees CAN take jobs with the more marginal employers.

All these of course, are anathema to the WSJ which is not particularly capitalist anyway.   I don’t expect the Wall Street Journlists to embrace Marx’s labor theory of value (though, of course, Marx was just borrowing Adam Smith and David Ricardo’s concepts for that), but I would expect them to stop trying to peddle nostrums for other nations that are of benefit to no one simply because they reflect some U.S. ideas from the world’s most absurd economic theorist (Ayn Rand and Milton Friedman) that haven’t worked out exactly to the benefit of anyone except the already overly developed anywhere.

Of course, as I’ve pointed out before, one of the best guides to what will not happen in Latin America is to see what the WSJ is pimping. It’s not associated labor that’s hurting Mexico, it’s low wages. While something more in the sort of response to the problem that I’d expect from the United States, I don’t see this particular proposal coming from PRI as at all bad.

MEXICO CITY – Institutional Revolutionary Party (PRI) Deputy Miguel Ángel García Granados proposed a zero income tax (ISR) rate for workers making less than 14,169 pesos a month on Sunday. The proposed tax reform would modify the current Income Tax Law, and compensates for losses in worker’s purchasing power.

During the explanatory memorandum for the bill, the PRI deputy stated that current tax breaks for workers earning less than 7,382 pesos per month benefit more than 10.9 million people.

García Granados said, “Expanding tax breaks will not negatively impact public finances … on the contrary, tax breaks create more financial liquidity, ultimately generating economic growth.”

In the last five years, real wages have gone down 42 percent, according to findings from the National Autonomous University of Mexico’s (UNAM) Center of Multidisciplinary Analysis. García Granados added that the center reported that the loss in worker’s purchasing power is due to low wage growth in comparison to price increases for basic goods.

The PRI deputy said that between December 2006 and February 2012, the daily minimum wage increased from 45.5 to 62.3 pesos, while the cost of the daily basic food basket increased from 80.8 to 197.9 pesos.

At the beginning of the current administration, a minimum wage could buy 4.8 kilos of beans; today, he said, the same amount buys 2.7 kilos of beans, not including milk, tortillas, eggs, oil and bread, which have also increased considerably in price.

(Víctor Mayén, The [Mexico City] News)

Of course, while the immediate benefit is only unskilled formal workers (which the WSJ seems to think don’t exist)  it puts more money in people’s pockets means more spending and more “development”.  I know the present administration has been leery of inflation, but holding down wages has done nothing to stop inflation in the most critical areas, so you’d think something like this would be a no-brainer.  But then, we were talking about the Wall Street Journal and their coverage of Latin America, based on disassociation from the real world.

One Comment leave one →
  1. 13 August 2012 8:36 am

    Richard:
    The difference between the formal and informal sectors in Mexico is really quite simple and well-defined. The National Statistics Institute (INEGI) counts a worker in the formal sector as one who is registered by his/her employer in the IMSS system. (ISSTE for state workers). Such a worker receives social security in the form of health care, retirement benefits, etc. and pays into the system through payroll deductions as does the employer. An informal worker is not registered in the IMSS or ISSTE systems and does not pay taxes, does not participate in the social security system and has no benefits. Hence, if you want to find out if someone belongs to the formal or informal sector, ask them one question: “Tiene usted prestaciones?”
    More and more people are turning to the informal sector as a means of survival. Between the first and second trimesters of this year there was an increase of 514,389 workers in the informal sector. http://www.eluniversal.com.mx/notas/863687.html
    Comparisons like ‘skilled vs. unskilled’, ‘well paid vs. poorly paid’ only apply to the formal/informal dialogue in a very secondary, tangential way.

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