By: Joseph Abbud and Steven Imholt

Last month, the Mexican government made an agreement with business groups to raise the minimum wage by 22%, which went into effect on January 1, 2022. Understandably, the news has left many business leaders wondering whether the increase—and corresponding potential for a higher fixed cost of labor—would negatively impact their bottom lines. Likewise, for those considering nearshoring operations from Asia to North America, the question remains whether the hike in wages will alter overall footprint and or supply chain strategy.

To answer this question, it is important to understand the true impact of the minimum wage increase, which may not be apparent in the headlines.

Minimum Wage Increases are Routine

Annual upticks in Mexico’s minimum wage are routine to offset inflation and the increased cost of living—and while this year’s increase is larger than those of years’ past, the actual impact to manufacturing will not be outsized.  

Most Mexican laborers working in Maquiladoras¹ are currently being paid above the minimum wage, so the 22% increase will not translate into a direct increment in the total cost of labor. Rather, leaders should plan to factor in around a 10% increase in labor cost for non-salaried employees, and also consider the potential for the wage hike to inspire growth in the labor force. Notably, the overall impact on actual wage increases, as well as labor availability, will differ slightly between unionized border towns like Matamoros and Reynosa, and non-unionized towns like Juarez and Tijuana.

Nearshoring is Still a Viable Option

Despite the minimum wage hike, the cost of labor in Mexico remains significantly lower than the cost of labor in the U.S., and only marginally higher than it is in Asian manufacturing hubs. This continues to make Mexico an attractive option, especially when considering geographic proximity and significantly reduced logistics costs and complexity.

Key Takeaway: Mexico remains an attractive option for nearshoring to North America, as labor rates remain relatively low while improvements have been made to manufacturing capabilities.

As companies continue to navigate the supply chain snarls that have shaken up businesses sourcing from Asia over the past few years, they will continue to see an advantage in sourcing from Mexico. Not only will businesses be able to bypass congested ports, but they can also avoid the costs and time associated with ocean shipping. Closer proximity to other facilities and customers in your network also offers management more opportunities for supervision, allowing for increased transparency to ensure operations are running smoothly and safely.

Addressing Increased Labor Cost

To address and offset the increased cost of labor, leaders can look to create efficiencies elsewhere within the business to preserve value. Even in Mexico, increasing standardization and automation should continue to be top priority for all businesses to counteract the rising cost of labor, reduce waste, and improve overall business performance. Companies should also prioritize continuous improvement in their facilities to find efficiencies.  

The benefits from operating out of Mexico or sourcing from the region still likely outweigh the costs incurred from the minimum wage increases—and if businesses can find ways to offset the increased cost of labor by finding value elsewhere, that’s even better.

¹Maquiladoras – Manufacturing plants in Mexico that are operated by U.S. or other foreign companies and export all goods back to the country of the parent company. The legal standing allows the facility to remain primarily duty and tariff free.