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Analysis: Mexico bets on reforms to boost wages, but no quick fix

Mexican President Enrique Pena Nieto listens to an attendee at the annual Allen and Co. conference at the Sun Valley, Idaho Resort July 11,
Mexican President Enrique Pena Nieto listens to an attendee at the annual Allen and Co. conference at the Sun Valley, Idaho Resort July 11,

By Alexandra Alper and Pablo Garibian

MEXICO CITY (Reuters) - Mexicans hoping their president will make good on a campaign promise to boost wages may be in for a long wait, as the country aims to dodge Brazil's mistakes by betting on economic reforms that will take years to translate into labor gains.

President Enrique Pena Nieto came to office in December promising to boost productivity and raise low wages in Latin America's No. 2 economy, which have changed little in over a decade, averaging $21 a day in the formal sector.

A boost in wages would help consumption, which has been flagging since the money that Mexicans living abroad send home tapered, government spending slowed and U.S. demand for Mexican exports grew shaky.

The boom-and-bust situation in regional rival Brazil, where rising wages and easy credit have given way to weak growth and high inflation, serves as a cautionary tale.

So Pena Nieto is betting a host of ambitious economic reforms will translate into productivity gains that eventually boost salaries - just not right away.

"It would be at least three to five years, before you would begin to notice an impact," said Claudio Loser, a former IMF economist, who added that Brazil's consumption-fed model was bound to lead to overheating.

"Boosting consumption gives a short-term push, but it's not like an oil lamp, it's like a match," he said.

While many economists agree boosting productivity through reforms is key to sustainable wage rises, Mexicans may not be content to wait, as remittances so far this year hit a three-year-low.

"I don't have even one extra peso," said Ana Martinez, an 18-year-old office cleaner in Mexico City who earns 3,000 pesos ($230) a month for 12-hour work days.

"I would like to buy myself one of those cell phones with Internet, but just think, given what I earn," she said.

CHEAPER THAN CHINA

Mexico's low wages, a drag on consumption, are helping Mexican exports regain market share in the United States and luring firms like German carmaker Volkswagen to open plants.

At under $2.50 an hour, manufacturing wages are nearly 20 percent cheaper than in China, according to a recent Bank of America study.

The average tax-paying worker earns 271.58 pesos ($21.26) a day, up just over a dollar from the average wage adjusted for inflation a decade ago, according to IMSS, Mexico's social security institute.

"It's a very comfortable situation for the government and businessmen, and for companies, it's very profitable," said Alfredo Coutino, Latin America director for Moody's Analytics.

But it is weighing on consumption, which has lost steam over the past year.

Bulk sales - which predict the rhythm of retail sales - fell 5.5 percent from January to May, and consumer confidence in June hit its lowest level in nine months.

"It's a constraint of the Mexican model because if you have an export model, it's all based on cost," said Enrique Alvarez, an analyst at IDEAglobal in New York. "Unfortunately, those costs have to stay low, so you never really have a great deal of expansion in the consumer class."

The drag has been more worrying as a slowdown in the United States, Mexico's biggest trading partner, has hit industry and reduced remittance flows, which totaled $10.7 billion in the first half of the year, down nearly 10 percent from 2012.

Factory exports eased slightly in June, while the HSBC PMI data showed factory activity contracted in July for the first time since the series began over two years ago.

The government is now expecting the economy to grow 3.1 percent this year, down from 3.9 percent in 2012. Analysts polled by the central bank are more pessimistic, and have cut their 2013 growth forecast to 2.65 percent.

Economists say Mexican wages face headwinds from a slack labor market and low productivity.

In Mexico, an estimated 1 million new job seekers compete for half as many jobs each year, putting little pressure on employers to boost wages.

Mexican employee productivity grew only 16 percent from 1992 to 2012, while Brazilian, Chilean and Peruvian workers became 30, 57 and 113 percent more productive respectively, according to the Conference Board Total Economy Database.

Pena Nieto has said he wants to tackle the problem.

"This is the final goal ... that our economic policies are pushing for: That families can earn more, have better incomes, by being more productive," he said in May.

He signed a pact with opposition parties when he took office to spearhead reforms including bids to boost the country's paltry tax take and production at ailing state oil giant Pemex, to raise growth to 6 percent per year.

The reforms, including an already approved overhaul of the school system and a measure to buoy competition in the telecoms sector, are designed to boost worker productivity by improving education and making companies more efficient.

But Pena Nieto's labor reform, which took effect in December, has yet to translate into a promised boost in hiring.

Since he took office, Mexico has created 62,485 jobs, just a quarter of those created in the same period a year earlier.

The average minimum wage adjusted for inflation continued its fall over the past decade to 58.10 pesos ($4.55) a day in 2013 from 60.06 pesos, according to Mexico's minimum wage commission.

KEEP OFF THE STEROIDS

But slow change is better than overheating, economists say, pointing to Brazil.

There, a tight labor market, wages indexed to growth and easy credit pumped up a consumption-fueled boom that helped growth average nearly 4 percent a year over the past decade, and allowed millions of Brazilians to join the middle class.

That boom is fading as default rates have hit record highs over the past two years, and high inflation is curbing Brazilian spending. Growth last year notched a paltry 0.9 percent.

"You cannot make the economy grow on steroids," said Alberto Ramos, an economist with Goldman Sachs.

Average monthly wages of Brazilian workers rose by nearly a third in real terms over the past decade, and Mexicans may yet see a nudge.

"Mexico is going in the right direction, but it's going to take time," said Coutino.

($1 = 12.7752 Mexican pesos)

(With additional reporting by Alonso Soto in Brasilia; Editing by Simon Gardner and Peter Cooney)

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