Mexico’s wage repression scheme creates Nirvana for global automakers.

A system of wage repression in auto manufacturing that has long undermined the Mexican labor market, has dragged on the local economy, and has spread downward wage pressures to US autoworkers has been revealed by an AP story in the Detroit News.

And this is for factories that manufacture expensive products, even luxury products, in demand in the US and elsewhere. This isn’t about manufacturing T-shirts. But that system of wage repression has been working wonders for global automakers setting up shop in Mexico.

Most of the workers at the new Audi factory in the state of Puebla, inaugurated in 2016 and assembling the Audi Q4 SUV, which carries a sticker price in the US of over $40,000 for base versions, make $2.25 an hour, according to the Union.

Volkswagen, which owns Audi, started building Beetles in Puebla in 1967 and has since created a vast manufacturing empire in Mexico, with vehicles built for consumers in Mexico, the US, Canada, and Latin American markets.

Volkswagen, Ford, GM, or any of the global automakers, which can manufacture just about anywhere in the world, always search for cheap labor to maximize the bottom line.

So here is how this $2.25-an-hour wage came about. Government records cited by the AP show that in January 2014, when the factory was being discussed, and nearly three years before it would be inaugurated, Volkswagen signed a union contract that specified that wages would range from $1.40 per hour to $4 per hour.

The key, in Mexico’s auto industry, may be the so-called “protection” contracts signed long before plants open. Very few of the current Audi workers ever voted for their union leader, and they won’t get any chance to vote for years.

These “protection” contracts that lock in low wages in advance are part of the condition for investing large amounts of money and building a new plant, and throwing money in various directions except to the future workers at the plant.

The auto industry in Mexico has been booming since NAFTA connected factories efficiently to what was then the largest auto market in the world. Automakers from the US, Germany, Japan, and Korea invested heavily in Mexico to take advantage of the cheap labor obtained in part via these “protection” contracts.

The promise of NAFTA was that it would increase wages in Mexico and would bring them eventually closer to US wage levels and would relieve downward pressure on US wages. NAFTA went into effect on January 1, 1994. And this is where Mexican wages are on the global auto manufacturing scale (based on 2015 data, gathered by the WSJ in Sep 2016):

Labor unrest has been cropping up in Mexico for years, but manufactures have resisted significant wage increases, and even if wages rise by 10%, they do so off a very low base and rise only 22 cents or 30 cents or 35 cents an hour.

The auto industry has managed to create a low-wage Nirvana for itself in Mexico. The AP describes the workforce this way:

[A] class of workers who are barely getting by, crammed into tiny 500-square-foot apartments in government-subsidized projects that they pay for over decades. Many can’t afford even a used car, taking home as little as $50 per week after deductions for mortgages and cafeteria meals.

These persistently low wages, and the shenanigans used to keep them low, have attracted global automakers, especially since wages have surged in another “cheap-labor” country, China, whose current labor costs in the auto sector far exceed those of 2015 in the chart above.

Automakers see it this way, as Thomas Karig, VP of corporate affairs for Volkswagen in Mexico, told the WSJ a year ago: “There are enough people willing and eager to work.”

One of the country’s largest car manufacturers, Volkswagen will begin production this year of its luxury Audi brand in San José Chiapa, a rural town an hour’s drive from the company’s main plant in the city of Puebla. Audi said 230,000 people have applied for the project’s 4,200 jobs, although whether they have the appropriate skills is hard to gauge.

This type of wage repression by automakers in connivance with local political and union entities is ultimately a drag on the Mexican economy. Higher wages would perform miracles for Mexico’s overall economy. Higher wages would allow consumers to spend more and stimulate the economy more than anything else would. And they would allow Mexicans to buy more goods imported from the US (exports from the US to Mexico amounted to $230 billion in 2016, against $294 billion in imports from Mexico, according to the US Bureau of Economic Analysis).

Most importantly, sharply rising Mexican wages would lower the downward pressure on US wages. Now there’s a topic for NAFTA negotiators to sink their teeth into — for the benefit of all three countries, even if global automakers would have to give up some of their profits.

The hottest segment in US auto sales – the segment on which all hopes have rested – is cooling. Read… GM Cuts Entire Shift at SUV Factory, Laments “Moderating” Sales, Layoffs not Temporary

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