Mexico: Labor Reform, One Last Attempt?

On March 18th, President Calderon’s National Action Party presented a long delayed initiative of labor reform. The initiative came after repeated attempts to introduce changes to labor legislation which never materialized due to political considerations—despite labor reform being one of Calderon’s central campaign promises.

Bad Timing

Arguably, the timing of the initiative couldn’t have been worse. With only a few weeks left before the end of the Spring session in Congress (April 30th) and frictions between the PAN and the PRI around the upcoming state and local elections, the initiative does not have a chance to be discussed within this Congressional period and as such it will automatically go to the next session.

Interestingly, the initiative was not even accompanied by a televised message on behalf of the Executive, which in turn suggests it has a low priority or Calderon fears the reform could backlash in the electoral arena, as it will be discussed below.

Background: the Need for a Labor Reform

Mexico’s current labor laws have not undergone any substantial modifications since 1970. The current labor framework responds to the country’s inward-looking policies that permeated much of the economic policy in Latin America back in the day of Structuralism. As such, labor laws were not targeted toward competitiveness, efficiency, and productivity—the factors that define international competition today. In the 1970s, the main objective was the defense of workers’ rights and labor laws were a fundamental part of the corporativist state model in which the umbrella unions held strong ties with the monolithic party in power (PRI).

Since the late 1980s, successive administrations began to liberalize key aspects of the Mexican economy, including the signing of the NAFTA and a number of other FTAs, which in turn required the economy to become more flexible. Nevertheless, outdated labor laws have remained a key obstacle to making the Mexican economy more competitive via increased flexibility and a more efficient allocation of resources. The rigidity of current labor laws has been the main reason behind the low levels of job creation, resulting in a great expansion of the informal economy and the high levels of migration.

In the last two decades, there have been numerous proposals to reform key aspects of Mexico’s Federal Labor Law (Ley Federal del Trabajo), but vested interests have successfully blocked any possibilities of reform. Notably, during the Fox administration, there were several attempts to introduce changes to the law, but these were largely unsuccessful despite a broad consensus within key sectors of the political class (including a number of state governors). The main opposition has come from Mexico’s state unions, who have been very critical of any proposals to change the law, often referring to the latter as attempts to undermine the rights of workers and unions.

Although we believe this initiative for labor reform could have been introduced earlier during the Sexenio when Calderon enjoyed a higher political capital, the Executive did not introduce anything fearing polarization in Congress and reprisals from labor unions in the electoral arena.

Highlights

The labor reform initiative can be divided into two broad objectives. First, to make the labor market more flexible and less discriminatory through the creation of new forms of hiring which do not exist in current labor laws. Secondly, to reduce the power of unions and their leaders via increased transparency and regulations for having strikes. The table below provides an overview of the most important aspects in the initiative:

schtulmann_table_4710_512.jpg

One component that deserves attention (not featured in the table) refers to the elimination of the Unionization Exclusion Clause through which any worker who is part of a collective contract is obliged to belong to a specific trade union. Historically, this clause has been an instrument of control which gave trade union leaders unlimited influence over workers to charge entry fees, etc. Hence, the elimination of this clause would give workers the freedom to choose whether they want to belong to a union; and if so, it would extend their right of association to the union of their choice. As of now, the clause leaves employers without complete freedom to choose the workers they want to hire.

Finally, other important aspects of the initiative include regulating the functions of arbitration commissions (juntas de arbitraje) and increased sanctions against child labor, sexual harassment, and discrimination.

Reactions

Even before the submission of the initiative, leaders from different opposition parties had already criticized the reform on different grounds. The PRI stated it will oppose any reform that negatively affects the rights of workers via the weakening of unions, collective contracting, or the right to strike. Similarly, the PRD stated these proposals do not provide certainty nor stability to workers, and hence these will be a regression in labor relations.

The most adamant opposition, however, has come from labor unions and their corrupt leaders who are wary of any changes that might alter their benefits.

Despite the limited scope of the upcoming initiative, the private sector’s leading organizations have expressed support for the regulation given the sector’s longtime demand for labor contracts to be more flexible.

Surprisingly, the initiative in question did not galvanize the media’s attention. This can be explained by the fact that its submission occurred in the aftermath of the killings of personnel from the US Consulate in Juarez. An alternative explanation is that the media does not consider the initiative to be significant or have real chances in Congress, given its timing.

Views

In academic circles, criticism is concerned with the fact the initiative is unilateral in its current objectives, i.e. it basically consists of reducing workers rights to increase productivity and employment, but it does nothing to promote meaningful changes in labor relations.

But seen from another perspective, the initiative is very limited in scope and it doesn’t tackle some of the most important rigidities of the labor market. Notably absent in the initiative are those elements related to the difficulty of terminating employees. This represents one of the biggest disincentives to create new jobs and is often a determinant to physical investments going to other countries.

By law, the average worker that is fired in Mexico receives 75 weeks’ worth of compensation—a far greater amount than an employer would pay even with unemployment insurance premiums. The absence of a government-sponsored unemployment insurance places the burden on employers and leads to higher overall costs than what might otherwise be paid.

Political Considerations

The Executive needs the support of the PRI in order to have this reform or any other passed in Congress, but the frictions around the PAN’s electoral alliance with the PRD have complicated the possibility of the PAN and the PRI allying in Congress to pass this reform.

PRI leader Beatriz Paredes has stated her party will review the reform in coordination with the Confederacion de Trabajadores de Mexico or CTM—one of the most backward and paternalistic umbrella unions with which the party has historically strong ties.  It remains to be seen if the party’s cold reception is just rhetoric stemming from electoral politics, as it is also known that sectors within the party support a reform in this area. To recall, back in October the PRI stayed on the sidelines in regards to the closing of Luz y Fuerza del Centro (LFC), implicitly complying with the government’s decision; while the PRD and the PT still continue to challenge the government’s decision.

It would be in favor of the PRI to support this reform, particularly because the bulk of the political cost would be transferred to the PAN, but also because advancing the reform agenda would leave less of a challenging situation for the PRI (considering it has a very good possibility of recovering the Presidency in 2012). However, this logic has not permeated the party’s decisions in the past.

In the end, it will all come down to the party’s internal debate and political calculus regarding the convenience of passing a labor reform. One factor at play refers to pressure from the private sector to have a reform in this area, which is likely to intensify and should fall particularly on the PRI.

Finally, it remains to be seen if the PRD will support at least some components of such a reform, especially since the party has announced it will try to extend their electoral alliance with the PAN into the legislative realm. However, this is a highly risky strategy because even if the PAN could guarantee the support of the PRD for some aspects of the initiative, there will be certain factions that will oppose it (i.e. Lopez Obrador loyalists).

Outlook

The country’s political situation suggests a pessimistic outlook for a labor reform. It is difficult to believe that the PRI and the PAN could cooperate constructively in Congress in the midst of an electoral battle that has already resulted in a conflict in the Lower House, which seems poised to extend beyond the upcoming state and local elections.

Although it is unclear why the initiative was introduced at this particular time, it will not be addressed during the current Congressional session and its true possibilities will not be defined until after the upcoming elections. Implicit in this statement is the recognition that the initiative will not be approved as it is now; rather it will be trimmed down and complemented with other mini-initiatives. Ideally, such revisions will take place in the Fall session in Congress, but this is still uncertain.


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