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NAFTA means wage stagnation….

4 November 2014

Fascinating!  From , “TRADE: The Nafta Paradox,”,  Berkeley Review of Latin American Studies, Spring 2014.


Two interesting points.  First, that the Mexican left was  correct in 2006, when they (meaning AMLO) identified expanding the internal market as essential to improving economic conditions within Mexico, and second, that U.S. workers are right in “blaming Mexico” for stagnant wages… but only because Mexican wages have been stagnant, “thanks” to anti-union provisions within the NAFTA agreement.

..sharply expanded trade has brought benefits to Mexico, although it has hardly been the “undeniable success story” that some herald. Mexico has gained much-needed jobs, access to advanced production technology, and new ways of organizing work. However, only 3 percent of border plant exports are sourced domestically, and a mere 0.4 percent of gross domestic product (GDP) is invested in research and development. Moreover, low wages diminish purchasing power, limit the domestic market, and slow Mexico’s potential growth. Carol Wise points out that Mexico’s per capita income remains mired at “about one-third that of the wealthier countries in the OECD [Organization for Economic Cooperation and Development].”

The United Nations Development Program concluded in a 2007 report that, “Nafta has produced disappointing results in terms of growth and development.” Economists Gerardo Fujii Gambero and Rosario Cervantes Martínez writing in the April 2013 issue of the UN Economic Commission for Latin America and the Caribbean Review found that “the gap between exports and GDP [in Mexico] has been widening, which indicates that the export sector is underperforming as a driver of economic growth.” They argued that “the ability of exports to galvanize the economy will be heightened if export activity leads to an expansion of the domestic market.”

Rising Productivity and Declining Wages 

While very different economies, the United States and Mexico share similar problems: sharp income inequality, slow growth, high unemployment, and persistent underemployment. These problems are exacerbated by a troubling paradox: rising productivity combined with falling real wages. As a result, much of the economic gain has flowed to the top as workers and communities have faced downward pressure on wages and working conditions. While this productivity/wage disconnect emerged as a key issue during the Nafta debate, it now feeds into a growing concern in many countries throughout the world, including the United States, about the corrosive effects of economic inequality, which President Obama has called the defining issue of our time.

Mexican Productivity and Compensation, 1994-2011

Mexican Productivity and Compensation, 1994-2011  Labor Productivity & Median Real Hourly Compensation for Workers in Manufacturing (1994=100) Sources:Encuesta Industrial Mensual (CMAP). Banco de Información Económica (BIE), Instituto Nacional de Estadística y Geografía (INEGI).
Labor Productivity & Median Real Hourly Compensation for Workers in Manufacturing (1994=100)
Sources:Encuesta Industrial Mensual (CMAP). Banco de Información Económica (BIE), Instituto Nacional de Estadística y Geografía (INEGI).

Consider the dimensions of this disconnect in Mexico. Mexican manufacturing productivity rose by almost 80 percent under Nafta between 1994 and 2010, while real hourly compensation — wages and benefits — slid by nearly 20 percent. In fact, this data understates the productivity/wage disconnect. Wages in 1994, the base year, were already 30 percent below their 1980 level despite significant increases in productivity during this period. Although they are producing more, millions of Mexican workers are earning less than they did three decades ago. 

Economists often maintain that if wages are low, their level simply reflects low productivity. In the Mexican case, however, low wages exist in spite of strong gains in manufacturing productivity. These low wages reflect a number of factors, from government policy to globalization, but a central issue is the lack of labor rights in the export sector. As a result, it is difficult to form independent unions that can exert pressure to restore a more robust link between productivity and wages. If workers are unable to share in the gains, high-productivity poverty becomes a danger. The damage affects more than Mexican workers. The gap between productivity and wages results in low purchasing power, which depresses consumer demand and slows economic growth. 

This gap in Mexico also puts downward pressure on wages in the United States, contributing to a U.S. wage/productivity gap that began opening up in the mid-1970s. Between 1947 and the early 1970s, strong unions forged a link between rising productivity and higher wages, and the entire economy benefitted. As union strength waned, the U.S. wage/productivity gap opened and wages stagnated. What does this have to do with Nafta? A key question during the Nafta debates in 1993 was whether Mexican and U.S. wages would harmonize upwards or be pulled downwards by the agreement. Proponents argued that expanding trade alone would lift all boats, while critics maintained that effective labor standards were essential to insure that everyone would benefit.

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