Will Mexico’s Labor Reform Put the Country on a Pro-Business Fast Track?

By Tarun George In the biggest reform of labor laws in several decades, Mexico’s senate recently approved a new law that radically alters the rules governing its job …

A new age for Nieto: Mexico’s president sees positive impacts

By Tarun George

In the biggest reform of labor laws in several decades, Mexico’s senate recently approved a new law that radically alters the rules governing its job market. The new pro-business legislation is a strong step forward to boost domestic entrepreneurship as well as foreign investment. But will it work? And how will it impact Mexico’s IT sourcing and call center industries? Read on to find out.

“Many of the things the world thinks it knows about Mexico are no longer true,” said a recent special report by The Economist. “Latin America’s perennial underachiever grew faster than Brazil last year, and will repeat the trick this year… By the end of this decade, Mexico will probably be among the world’s ten biggest economies; a few bullish forecasters think it might even become the largest in Latin America.”

Job creation as a fuel for that growth was the core rationale for the recent labor reform. The government, which approved the bill by 99 votes to 28, forecasts 400,000 jobs added every year. A quick breakdown of some measures contained in the new bill shows why:

1.  More flexible work contracts, including trial periods for workers and initial training contracts.

2. A limit on compensation paid to workers in court-arbitrated labor disputes.

3. Firms can now hire workers by the hour.

4. Firms can both hire and fire workers easier, and shorten labor disputes.

Weighted clearly toward employers rather than employees, the goal is to give business an advantage and boost Mexico’s economic expansion. In fact, “the reform could raise potential GDP growth by 1.5 to 2 percentage points for the coming decade,” wrote Marco Oviedo, head Mexican economist at Barclays Research.

Big News For Outsourcers

How does all this impact Mexico’s IT and call center industry? “All the entrepreneurs we’ve spoken to are quite excited about the news,” said Eugenia Garcia, Director General of the Institute of Mexican Teleservices (IMT), one of the main contact center associations in the country. “The reform allows companies to hire workers for a couple of months, while providing them social security. So if you’re a call center, you can easily scale up and down during seasonal campaigns or busy times of the year. It will be a very positive impact on our industry.”

So Mexico’s domestic employers benefit. But is the reform attracting any outside attention? There is no evidence yet that foreign clients or vendors are responding, apart from having their interests piqued. It is still very early for this job market shakeup that promises to revive Mexico’s economy. For its part, IMT aims to help by hosting two conferences in January to show companies how best to take advantage of the new labor laws. “We’ll be inviting about 80 sourcing companies who operate in Mexico to breakfast, and two hours of a lawyer explaining the impact on the industry,” said Garcia. IMT is particularly eager to accommodate US firms, but according to Garcia, many of them have hired their own legal teams to better investigate the new reform.

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Reaction From Unions

The legislation was of course a blow to Mexico’s influential labor unions. There were protests outside the senate, and the expected outcry from left wing politicians. But here’s the point that many observers miss – the bill would have limited the power of the unions even further, and made their operations more transparent, if those clauses were not removed before it was signed into law. As Financial Times’ Mexican correspondent Adam Thomson says, “The final law no longer forces unions to carry out secret ballots, as the initiative had proposed at one point. Nor does it uncover union [financial] accounts, which remain far beyond public scrutiny.”

The fact that workers could be exploited by employers under the reforms is a very valid point. But according to Garcia, most contact centers have their own labor unions, and a large number of them agree with the new legislation. “There are actually just a few unions causing the main resistance,” she said. “We encourage firms to take relationships with unions seriously. As they learn to do better, there will be less opposition to this kind of reform.”

New President Brings New Hope

The outgoing president Felipe Calderon has been trying to push labor reform for about two years now. But according to Garcia, only in the past six months have senators become open to it. For new president Enrique Peña Nieto who took power on December 1st, the new laws are very useful because of the optimistic business climate they have created. His goal is to increase GDP growth to 6% before the end of his term.

The success of this labor reform will determine how strongly Peña Nieto will drive other much needed reforms in the country, such as energy and the tax system.  All of this might just create the kind of explosive growth that Mexico needs.

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