Mexico: Labor Reform Failing to Create Efficient Market, Practitioners Say

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By Ivan Castano

Aug. 24—Mexico’s once highly touted labor reform is failing to live up to expectations, attorneys tell Bloomberg BNA, and has not created an efficient labor market. In fact, reform has introduced “barriers” resulting in rising unemployment and weak economic growth.

Passed in September 2012 to create an efficient jobs market and boost productivity and economic growth, the modifications to the Federal Labor Law were intended to inject flexibility into the market by allowing companies to cut severance payments and compensation and more easily dismiss underperforming workers. These reforms were expected to generate 400,000 jobs annually and help lift GDP in Latin America’s second-largest economy. Three years into the overhaul, however, these benefits have not materialized.

“The president [Pena Nieto] tried to create a more efficient labor market but in practice that hasn’t happened,” said Jose Rodriguez, a partner with Dumont Bergman Bider & Co. in Mexico City. The reform has not met job-creation targets, and “the economy is not doing well and the future doesn’t look promising. Companies are unable to pay higher taxes and are having trouble paying salaries.”

Rodriguez expects unemployment to increase this year and dismissals to rise, a view borne out by a recent survey conducted by HR firm Manpower that found that job expectations fell 6 percent for the second quarter, showing a downward trend for the year due to low oil prices, exchange volatility and lower public spending.

Mexico's GDP is expected to increase 3.5 percent in 2015, although that forecast should be regarded somewhat skeptically since GDP was also expected to grow robustly in 2014 and ended up with a mere 2.1 percent gain.

'Fictional' Promises?

Felipe Landero of Landero Asociados agreed that the overhaul of the labor law “is not working.”

“Instead of streamlining procedures, [the reforms] have introduced barriers or new types of contracts with locks [conditions],” Landero told Bloomberg BNA April 19, adding that the government's promises, including efforts to tackle a huge informal market, now look “fictional.”

Companies have not been able to pare fired workers’ severance compensation and rechannel it into hiring more qualified staff, Rodriguez said, adding that while the option is there on paper, it is not available in practice. In addition, proving that a temporary employee underperformed during the test period so the employer will not have to pay benefits “is very difficult.”

The labor law revisions allow employers to hire workers for a three-month training period, although this too is not working out as planned.

“To be able to fire the worker [for underperformance during the trial period], you have to have a mixed [management/employee] commission to prove they did not perform,” Landero said. “Most companies under 50 people don’t have these commissions,” so most of the country’s small and midsize enterprises can’t benefit.

The government had hoped that changes to the regulations governing employment agreements would encourage firms to issue fixed instead of the widely used temporary contracts, but according to Landero they have had just the opposite effect, making temporary contracts even more popular.

The labor ministry did not return calls seeking comment on this article, but in a March 13 presentation about the reform’s results, Minister Alfonso Navarrete rejected claims that it has hurt employment, noting that employment rose 4.3 percent in 2014 and 2.9 percent in 2013, outpacing GDP growth of 2.1 percent and 1.4 percent, respectively. Similarly, Jose Francisco Maciel, secretary general of the Conciliation and Labor Arbitration Board, said labor law suits have declined since 2013.

The new contract types “have not generated a significant number of disputes,” Navarrete told Bloomberg BNA April 20, and Maciel said that the number of general labor suits fell 16.8 percent in March 2015 year-on-year. According to Ricardo Rosales of Rosales y Santos Abogados, the reform updated labor court software to expedite often slow labor proceedings and added specialized tribunals conducting oral hearings that help hasten settlements.

To contact the reporter on this story: Ivan Castano in Mexico City at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For more information on Mexican HR law and regulation, see the Mexico primer.