Interesting statistic in the local paper, courtesy of the “Harper's Index.”
6:1 average manufacturing wage in the U.S. to that in Mexico before NAFTA took effect in 1994
8:1 ratio today
I thought the conventional wisdom at the time was that NAFTA would depress U.S. manufacturing wages, that U.S. and Mexican wages would move closer together as the result of free trade (ours going down, theirs going up). The average U.S. manufacturing wage is now EIGHT times higher than Mexico, instead of SIX times. I'm not an economist and I'm sure the reasons behind that ratio are many, but I was still surprised to see this difference.
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The numbers don’t surprise me. Free trade agreements generally outsource the lower end manufacturing jobs, while retaining more of the higher skilled jobs. I imagine any increase in average US manufacturing wages has been mostly the result of losing 3 million + US manufacturing jobs at the low end of the pay scale.
At the same time, Mexican wages have not risen much. As soon as the average wage in Mexico started to increase, Mexico began losing jobs to China and elsewhere. Mexico is finding out the hard way that when their manufacturing base is built on exporting low wages, the standard of living can never increase much. They should be more like China where they are building their own manufacturing base for their own markets faster than the low wage seekers can bail out and move from China to Viet Nam.
A couple of comments since I live on the border and have spent the last twenty-two years working in Mexico:
1) According to the U.S. Federal Reserve in 2005 a loaded labor hour in California was $20.84, in Mexico it was $2.96, and in China it was $.72. In 2000 the U.S cost was $21.00, Mexico was $3.41, and China was $.50. The cost in China has gone up dramatically in the last eighteen months according to what I have been told by people working there, but I haven’t seen any government numbers to support that. The leadership of President Fox has kept the Peso stable to the Dollar for the last six years, although it has slipped to about 11.5 pesos to the dollar in recent weeks. That is a 10% reduction of the peso value in dollar terms.
As you no doubt realize looking at the numbers those are not the average wages in the named countries. Those are the labor wages of manufacturing workers and include the benefits and taxes that the employer pays the government. In Mexico there are four minimum wages and the highest is paid to the manufacturing workers in Maquila operations.
2) The older plants in Mexico were built with very small parking lots. I started with Allen-Bradley and they had less than 100 parking spaces for a work force of almost 2,000 people. The newer plants have parking lots that are about the same size as you would see at a U. S. plant. Many more people are driving to work instead of taking the buses. That is not to say that buses aren’t still used. One of the major requirements for plants in Mexico is that they provide transportation to and from work. It is essential if you employ a large work force, but many workers now drive to work as a sign of their financial independence. There are a large number of vans, SUV’s, pickup trucks, and Ford Mustangs.
There was some movement from Mexico to China in 2002 and 2003. That has slowed as companies have started to realize that they will not get the service levels they want by moving to China. In Ciudad Juarez, across from El Paso, the number of plants dropped from about 400 to 360 in those two years, but they have grown again and should be close to 480 by the end of this year.
One thing that has happened is that twenty-two years ago all of the management and much of the supervision was American. Today, there are many plants and divisions that are all Mexican management. The same holds true with engineering and quality. There has been a substantial rise in the middle class, which really didn’t exist thirty years ago.
Recently we celebrated (?) the anniversary of the Tienamen Square uprising in China. All of the television and news photos from China at that time showed people riding bicycles. Today those people are riding in very small cars.
Due to Mexico proximity, it seems to me USA manufacturing, expecially that in Arizona, Texas, or California should more closely partner with Mexico and build a win-win situation. It is much easier now than it was a few years ago to build and operate a plant in Mexico as a US company.
Ed
Edward R. Anderson
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Mexico is finding out the hard way that when their manufacturing base is built on exporting low wages, the standard of living can never increase much.