Unemployment in Mexico Revisited

The Center for Hemispheric Policy received financial support for this publication from the Bureau of Educational and Cultural Affairs of the United States Department of State.

 “Unemployment in Mexico Revisited”

 by

Jonathan Heath

Visiting Professor

Universidad Autónoma Metropolitana

Mexico City, Mexico

March 26, 2014

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 The unemployment rate has always been one of the more important macroeconomic indicators in most countries. For complex reasons, however, it has never gained much acceptance in Mexico. Even the Central Bank ignores it, as it is hardly mentioned in its quarterly reports, and is absent from its monetary-policy announcements. A general perception exists that the numbers are not very reliable, are constructed with doubtful methodologies and are even manipulated by the government in order to hide a much more painful reality.

Difficulties started with the first efforts to measure unemployment in 1972 with the Encuesta Nacional en Hogares (ENH), which was quickly replaced, together with different coverage and methodological changes, by the Encuesta Contínua de Mano de Obra (ECMO).This was followed by the Encuesta Continua sobre Ocupación (ECSO) and, in 1983, by the Encuesta Nacional de Empleo Urbano (ENEU). Finally, in 2005, the National Statistics Institute (INEGI) introduced still another survey, the Encuesta Nacional de Ocupación y Empleo (ENOE). All of these surveys are incompatible with each other, therefore, no long-term data series exist. The end result is that after more than 40 years of trying to measure the unemployment rate, Mexico can only offer a comparable data series for the last nine years, but even this effort is mostly ignored.

The biggest problem, however, is that the average unemployment rate from these studies was one of the lowest in the world, something that intuitively does not correspond to the level of development nor with the very low rate of economic growth that Mexico has experienced over the past three decades. This fact received much attention outside of Mexico, causing multiple inquiries and studies aimed at finding out whether it was a result of structural peculiarities of the Mexican labor market, an inadequate use of international standards and recommendations, or measurement problems.

One of the more well-known studies was conducted by Susan Fleck and Constance Sorrentino of the Bureau of Labor Statistics in 1994. This study found a list of minor differences with U.S. surveys regarding the phrasing of questions and the analysis of certain circumstances. For example, workers’ temporary absences, as well as people about to start work, were classified as employed in Mexico and as unemployed in the United States. The study found, however, that if all the differences were corrected in the Mexican surveys, the country’s average unemployment rate would increase by almost 150 basis points or 1.5%, which would still place the Mexican unemployment rate far below that of most OECD countries and many emerging economies.

In general, Mexico has tried to follow international standards and recommendations, although not always with the desired speed. For example, when the ENOE was introduced in 2005, INEGI eliminated almost all of the differences pointed out by Fleck and Sorrentino and incorporated many recommendations made by the OECD and the International Labor Organization (ILO). As predicted, the urban unemployment rate increased on average by almost 1.5%.

Unfortunately, INEGI decided to include rural communities (which mostly are composed of self-sufficient families that do not really participate in labor markets) in the survey in order to have a “national” unemployment rate instead of just an urban one. The result was that the new national rate averaged about the same as the old urban rate and very few people were aware of the changes. In spite of all the concerted efforts to improve the survey and publish a much more believable unemployment rate, it continues to be ignored by most analysts.

The other disappointment was that although the new survey incorporated all pertinent questions in order to report the new “labor informality rate,” as was recommended by the 17th International Conference of Labor Statisticians in 2003, INEGI waited almost ten years before disclosing that rate to the public. In theory, INEGI was granted autonomy from the government in 2008 in order to avoid political manipulation and to gain more credibility and confidence in its statistics. However, it became obvious that the previous administration, (which left office on November 30, 2012) had been blocking the publication of this embarrassing statistic (which reveals that about 60% of all occupations in Mexico are considered informal). This figure was made public just days after the current administration took power on December 1, 2012.

Nevertheless, most serious studies actually show that the main reason why Mexico’s unemployment rate is so low is due more to structural characteristics of the labor market rather than to methodological differences or survey flaws. For example, while in the United States there is a clear negative correlation between education and unemployment (the higher the educational level, the lower the unemployment rate), in Mexico the correlation is actually positive. The population segment with the lowest unemployment rate is the one that has “no primary education” and is associated with the poorest sectors of the economy. The two main reasons for this phenomenon are: 1) a large part of this segment lives in rural communities and is self-sufficient and therefore is not considered unemployed; and, 2) the poorest part of the population cannot “afford” to be unemployed and therefore will accept any type of work, no matter how little it pays. The higher the level of education, the more aspirational a person becomes, meaning that he or she is willing to spend more time unemployed while looking for a job regarded as more fitting of his or her status in society. Also, higher educational levels are correlated with higher wealth levels, which provide better opportunities for a prolonged job search. This means that unemployment among Mexico’s more educated job seekers is determined more by the supply-side than the demand-side of the equation.

This same structural characteristic appears in other ways when looking at the data. For example, the lowest levels of unemployment are found in the poorer states that have larger rural communities, are far less industrialized and have much higher informality rates. The same goes for city size: the larger the city, the higher the unemployment rate. In general, states with larger cities, larger manufacturing bases and higher educational levels are associated with higher unemployment levels. In all cases, the correlation rates are very significant.

Two additional characteristics help us to understand the relatively lower unemployment levels in Mexico. There are no unemployment-insurance mechanisms or safety nets that provide income for those seeking a job. This implies a strong incentive to lower the search time and accept any type of job, even if it pays less than the person looking for a job expected. In general, studies show that insurance mechanisms provide a perverse incentive for lengthening unemployment since the money received while unemployed reduces the urgency of finding employment quickly.

While the previous factors explain differences between advanced and emerging economies, they do not provide much explanation of why unemployment in Mexico is lower than in other Latin American countries. Until recently, net migration flows to the United States have been very high, averaging somewhere around half-a-million people per year. This provides an important escape valve from unemployment within the country, transferring labor pressure from the inside to the outside of Mexico. Mexico’s proximity to the United States and its high out-migration flows, however, clearly differentiate Mexico from its southern neighbors.

The most important international forum for formulating definitions, recommendations and standards relating to labor is the International Conferences of Labor Statisticians (ICLS), organized by the International Labor Organization (ILO) and held every five years. Some of these conferences have been truly historic in establishing major definitions, setting important benchmarks and providing consensus guidelines. For example, in 1982, the thirteenth ICLS established the international standard definition of unemployment still used today, in terms of priority rules, such as the one-hour criterion for delimiting unemployment from employment and the criterion of active job searching. In 1993, the fifteenth ICLS formulated the definition of the informal sector, and in 2003, the seventeenth ICLS created the method for determining the labor-informality rate.

In 2008, the ICLS decided to revisit the relevance and conceptual basis of labor statistics. This led to the resolutions taken at the nineteenth ICLS, held in October 2013. These two meetings are now seen as the most relevant and historically-significant in terms of recommendations made over the past 30 years and the changes that were initiated. Some of the suggested changes are especially relevant for Mexico. If implemented, the Mexican open-unemployment rate will probably increase by an average of at least 100 or 120 (1 or 1.2%) basis points. The resolutions include clearer and more distinct subsets of labor activities, referred to as forms of work, related classifications of the population in terms of labor-force status and main forms of work, and measures of labor underutilization.

Specifically, the most important change will be to exclude subsistence production (own-use production work) from employment numbers. Therefore, individuals who work in their own economic units to produce goods intended solely to be consumed by their household or family will not be considered in employment statistics. This means that most of Mexico’s rural population will no longer be considered part of the labor force. This will bring significant upward revisions in unemployment rates in the poorer states (like Chiapas, Guerrero and Oaxaca), while producing very little change in more modern states (like Nuevo Leon and Baja California). The end result should be a much more accurate unemployment rate.

Another important change, which should affect most countries, is the introduction of the concept of the “potential work force.” This term will not only include unemployed people who are actively looking for work, but will also include discouraged people who have left the traditional work force, but are willing to work. In other words, persons who have given up searching for a job will be part of the “potential work force” group, unlike the current situation, where they are classified as having dropped out of the labor force and therefore are not counted as “unemployed.”  The expanded “potential work-force” category therefore opens the door to new and broader unemployment definitions, which should also help governments shape better public policies.

What remains to be done in Mexico to get an accurate view of the nature and size of the labor force? First, INEGI must act relatively quickly to introduce the newly-adopted recommendations without allowing political pressures to delay them. This would help improve confidence in INEGI’s capabilities and independence.  Second, the changes must not cause lack of continuity in existing labor-time series, which would make it impossible to compare data across different studies, a recurring problem that INEGI has not learned to deal with effectively. Third, the average traditional, open-unemployment rate must increase by a substantial amount (at least a full percentage point) in order to achieve the much-needed credibility in Mexico’s unemployment rate. Fourth, the media must learn quickly how to understand and report the new labor statistics correctly, something that has been seriously lacking until now. This requires an all-out effort by INEGI and other relevant institutions (including academia) to increase economic and statistical skills among the general population. Finally, institutions (especially the Central Bank) should start using the unemployment rate as a serious economic and social indicator, instead of concentrating on less-inclusive indicators (such as social security employment registration) in assessing Mexico’s economic health and state of development.

 

Jonathan Heath is an economist with 30 years experience analyzing the Mexican economy for  global financial institutions and think tanks.  He has taught at Universidad Panamericana, Tecnológico de Monterrey, Universidad Anáhuac, Universidad de las Américas and Universidad Iberoamericana. Mr. Heath has had more than one thousand articles published in over 60 newspapers and magazines in Mexico and abroad.  He is the author of five books,