Episode 4: Overview of Labor Costs in Mexico
In this episode, Ricardo Rascon welcomes back David McQueen, to discuss the costs of manufacturing in Mexico and what information companies need to know about labor costs before starting projects there.
First, David discusses how the cost to manufacture in Mexico is closely tied to manpower. In Mexico, the labor law system is federal and you have to pay wages to employees in the form of pesos per day, not dollars per hour. The employer pays a rate per day that must equal or exceed the minimum wage, which could be around 172.87 pesos per day to 260.37 pesos per day on the border. Employees must work a certain percentage of days per week and the hours employees work are in control of the employer. Another difference between the Mexico workforce is that employees work 48 hours per week, but they can’t overlap the night shift by more than 3 hours, otherwise it is double pay. Employees can only work a maximum of 9 hours overtime per week and if overtime hours exceed that, then triple time applies. In addition, there is no temporary layoff in Mexico, but you have to terminate or retain employees. There is also no probation period for full time employees, but contracts are restricted to a maximum of 6 months.
In addition, any termination of an employee in Mexico requires severance pay, which is excluded for violence and intoxication on the job. David uses the phrase “hire slowly, fire quickly” when discussing terminations in Mexico. He advises to do your due diligence before you hire them, verify their suitability for the job and to hire a contract first if you can so you don’t have to pay severance. Ricardo and David also discuss how most employers in Mexico are unionized and how the government encourages unions in Mexico. David states that there are business versus conflict oriented unions in Mexico, but that the goal of most unions in Mexico is to negotiate wages and benefits. David also discusses how skilled trades in Mexico are a little harder to classify, and to determine wages and skills for. He suggests validating qualifications and then paying accordingly. He estimates that unskilled workers are paid around $2.65-5.25 per hour, semi-skilled workers are compensated between $3.00-6.00 per hour and skilled trade is higher.
In conclusion, David states that in order to accurately estimate the salary of employees in Mexico, you first need to develop a staffing plan and a brief job description. Then, you will need to choose a location and consider the neighborhood and the kind of workers you will have (skilled or unskilled), and then get reliable help to have someone accurately estimate the cost of wages. He advises to explore all factors, and to not just make decisions based on wages.
Thank you for joining us on Manufacturing in Mexico!
Read this blog post about wages in Mexico to learn more.
Speaker 1: Welcome to Tetakawi's Manufacturing in Mexico podcast, where we talk to internal and external experts to provide you with news, insights and best practices about doing business in Mexico. Whether you're thinking about expanding into Mexico or already there, this podcast will provide you with the information and advice you need to launch, operate, and thrive.
Ricardo: Hello, and welcome to another episode of our Manufacturing in Mexico podcast. How you doing today, Dave?
Dave: I'm doing pretty well. Thanks Ricardo.
Ricardo: Glad to hear that. Well, for those of you that listened to our previous podcast, we've covered a lot of topics. We've talked about the advantages of manufacturing in Mexico. We've talked about gateways to entry and we even talked about how to choose the best location for your company. And if you've listened to them, I'm sure you've found them to be helpful, but I'm pretty positive you're wondering, okay, well, how much is it going to cost to manufacture in Mexico? That's typically the million dollar question that either kills decisions or accelerates them. It's a very complex question to answer, and there's a lot of factors that go into determining what it costs and certainly too much information to cover in one podcast. But, Dave, if we wanted to kind of dissect this and go one by one, what kind of cost factor would we start with?
Dave: Well, I think we should start with manpower. Salaries and wages are a pretty big share of total cost for manufacturing. And it is an area where Mexico has some significant advantages over other USMCA countries and China.
Ricardo: That makes sense. So let's start there. I expect that most of our listeners are unfamiliar with Mexican labor law. And of course, that has a big impact on how you staff operate and pay for employees. Do you mind kind of giving us a background on some of the rules employers have to follow in Mexico?
Dave: Sure. Well, the first thing everybody needs to know is that labor law is federal in Mexico. So the same law applies everywhere. You operate with very few differences. That law sets the hours of work, the minimum wages, the standard benefits required under the law and severance entitlements among some other things. One of the things that you need to understand is that the whole legal system for employment in Mexico is based on a concept of paying wages in pesos per day, rather than an hourly rate or salary.
Ricardo: Interesting. So pesos per day, that's pretty different to what we're used to here in the us. Can you explain how that works?
Dave: Yeah. The employer pays a rate per day and that rate must be equal to, or it has to exceed the minimum wage, which is currently 141.7 pesos per day in most of the country. And 213.39 pesos per day in the border. Now, once you exceed that, then your daily rate is paid for 365 days of the year. So that means that that employee's wage is calculated by taking the number times 365. And then the law requires the employee to work a specific number of hours per week, based on their start and finish times. Then they also of course get some holidays and vacation entitlement. And most of the other things about federal law are also based on this way of calculating pay. So things like severance and so on, there's no separation for salary and hourly. It's the same for everybody.
Ricardo: Interesting. And can you explain how the hours per week are determined?
Dave: Yeah. It's in the control of the employer to set the regular work days and the start finish times. And then those start finish times in turn determine the number of hours per week that the employee owes the employer. You can schedule any day, except Sunday, in the week and whatever hours in the day and start finish times you choose as an employer. But the government specifies are the standard hours that are based on the start finish times choose. So if an employee starts after six in the morning and finishes before six at night, then they're on the day shift and they have to work 48 hours per week in return for the wage that they receive unless, of course, any vacations and holidays.
If you start after 6:00 PM and finish your shift before 6:00 AM, then you're on what's known as the night shift and you must work 42 hours per week. Now, if the shift overlaps both days and nights, there is a limit by the way, that it cannot overlap the night shift by more than three hours. But if it's an overlapping shift, it's called mix shift and we would call it afternoons. And in that case, the employee works 45 hours per week.
Ricardo: And of course there's overtime pay that applies for hours worked outside of these standard areas. Can you kind of explain some of the overtime rules in Mexico?
Dave: Yeah. First of all, the daily rate is converted to an hourly rate by taking that weekly pay. So pay per day times seven days, and then divide by the standard hours for that particular employee 45, 42 or 48. Double time applies for the first three hours worked beyond the regular schedule in any one day. So whatever your hours are scheduled, if the employee works up to three hours overtime in that day, then it's double time. But there's also a limit of maximum of nine hours in any one week of double time. So after that, triple time applies. Triple time also applies to Sundays and holidays. And then in the case of fringes and benefits, many of them are going to also multiply double or triple. So typically you're looking at doubling or tripling the fully fringe wage for overtime, relatively expensive.
Ricardo: Yeah. So I'd assume most companies try to avoid overtime as much as possible because of how it increased costs. Is that correct?
Dave: Well, yes, but as we will see, there are some other rules that make it useful to at least plan for some portion of overtime in your overall strategy.
Ricardo: Can you elaborate a little more on that?
Dave: First of all, there's no temporary layoff. So unlike most other jurisdictions where if a volumes change, you can lay employees off for some temporary period of time, you can't do that in Mexico. You have to terminate them or retain them. Secondly, there's no probation period for full-time employees. Now you can contract employees and in that case, you don't have to worry about severance provisions, but contracting is restricted to a maximum of six months. And there's in fact in Mexico, also a limited market for part-time work. Most people at the lower end of the pay scale need full-time work. So the alternative of having part-time employees is relatively limited. Now there's no unemployment insurance in Mexico, but as I've mentioned a couple of times, there is a severance provision and it applies to all terminations that are without cause for all full-time employees.
Ricardo: So before we get into some kind of manpower and staffing strategies, can we just take a brief pause and maybe just explain how severance in Mexico works?
Dave: Yeah. First thing to understand is that any termination of a full-time employee, unless the employee resigns themselves or unless it's for cause is going to generate a severance requirement. Now, cause is very limited. It's specified in the legislation. There are specific numerated causes that you're allowed to not pay severance for. It does not include performance and it does not include quality of work. It does include things like violence in the workplace or intoxication, that kind of thing. So in many cases you are going to pay severance if you terminate an employee. Now severance starts at 90 days at the employee's most recent wage, plus 12 days per year of service at their most recent wage, but capped at twice the minimum wage, plus another 20 days per year of service at their most recent wage without a cap. So it can mount up quickly.
Ricardo: Yeah, yeah. That does not seem like a small number there. So how does this all relate to staffing and manpower strategies?
Dave: The first thing is that because of this and because there is no temporary layoff, you have to follow some different scheduling strategies from what you would do in other jurisdictions. Secondly, you're going to try and hire on contract first, if you can. And typically with unskilled employees, you can hire on contract first and that gives you somewhere up to six months to evaluate the employee and if need be, terminate them without paying severance. If you're talking about more senior employees, you may not be able to do that because you may be trying to attract them from another employer, in which case they're not going to give up their job security unless you offer them a permanent position.
Another important point is to do your due diligence before you hire. You have to make sure the employee is qualified and Mexico is fairly liberal in terms of the types of due diligence the employer is permitted to do. There are many things you can do there in terms of checking out an employee and verifying their suitability, that you're not permitted to do in another jurisdiction. So you want to do all those things.
You want to act very quickly on terminations. If you're unhappy with an employee, whether they're a contract employee or a full-time employee, get rid of them immediately. So there's an adage in Mexico, hire slowly, fire quickly. That's the practice you want to follow because if you delay, it's just going to get worse. You obviously want to level load where possible, but then comes the point we were talking about earlier. You want to use some overtime as a buffer because overtime doesn't generate any additional severance requirement. And it's a flexible means of adjusting your manpower. So a combination of your scheduling strategies, balancing your manpower and your turnover with respect to those strategies and allowing yourself a little overtime buffer as well as being very careful about your hiring and very diligent in your terminations is how people manage it in Mexico.
Ricardo: And are there any other federal laws that affect staffing levels or cost in Mexico?
Dave: Well, aside from the hours of work, which will, since there more than most other jurisdictions, they're going to reduce your total head count, but you also need to allow for the fact that there are seven statutory holidays, except in presidential inauguration years when there are eight. And in addition to minimum vacation entitlement for time off, there are mandatory bonuses for both vacation and Christmas, but most companies exceed the government minimums for both the Christmas and vacation bonuses. Now these are financial bonuses in addition to the paid time off. And it's a typical strategy as part of the benefit package to provide more of a bonus than the law requires, which you must pay the minimum. And perhaps the most unique thing to be aware of in terms of employment costs in Mexico is that profit sharing os mandatory. It's 10% of pretax, profit, taxable income. Most employees are included virtually all, and half of the distribution is based on the day's work, the other half is based on the pay level.
Ricardo: Interesting. So when you add all this together, mandatory benefits, bonuses, employer payroll taxes, what can I expect to pay above the basic pay? What would be my fully fringe cost for all that in Mexico?
Dave: You can expect government fringes and the cost of vacations and holidays to be about 30 to 35% of the total wage costs for hours worked. Now that may sound like a lot, but the pay rates are low. So in dollar terms, it's typically between a dollar and a dollar and a half per hour for unskilled workers. Several benefits are cap based on income. So for higher paid employees, professional employees and [inaudible 00:11:23] that share is going to drop. It's going to be less.
Ricardo: Interesting. So kind of moving along to the company benefits, how important are benefits to the overall compensation package?
Dave: In terms of being an attractive employer and retaining employees in the market that you're located in, it's very important. Most manufacturing employers will have some kind of benefits package and employees will put a priority on certain benefits within that package and will change employment in order to improve those benefits. So it's very important. In most markets, it makes sense to budget something like 15% to 20% of the total pay package for company benefits. Again, I'm talking unskilled, these numbers would be smaller for professional people because the base wage is larger, but in some regions like the borders zone, that might not be enough. It might be more than 20% in order to be competitive.
Ricardo: So at the end of the day, if I'm estimating, I could probably double the basic daily wage to get the total hourly cost for an unskilled employee once benefits and taxes are included, correct?
Dave: It's probably going to be a little bit less than that, but that's not a bad rule of thumb. In the border zone, you probably need a little bit more, maybe 5% to 10% more than that.
Ricardo: Okay. And what can you tell us about unions, Dave? How do unions come into the picture with respect to compensation and manpower planning?
Dave: Well, most employers are going to be unionized. In Mexico, more than 20 employees are allowed to organize a union and there's government encouragement to do so. So, and unionization is widespread. So you're probably going to be unionized. It's typically only the unskilled staff, skilled workers often do not choose to be part of the union. There's two kinds, there are business oriented unions and there are what I would call conflict oriented unions. So it's important to have the right type of union. Negotiating wages and benefits is the primary role of the unions. They will, unlike in other jurisdictions where they're going to be heavily involved in say, work rules and rights to particular types of work, that's not a common thing in Mexico. It's really a focus on wages and benefits and the business oriented unions can be very helpful in working through a package that is satisfactory to the employees and satisfactory to the employer.
I would recommend not being worried about unions in Mexico. The business oriented unions are generally speaking, reliable, good to work with and can be useful in terms of helping you to become an employer of choice and helping you to find and retain good employees.
Ricardo: Perfect. And throughout most of this conversation here, we've mostly talked about unskilled direct labor employees. What are the differences an employer can expect when it comes to professional staff or more skilled employees?
Dave: Well, some of the things we haven't mentioned about professional and skilled staff are that skilled trades in Mexico can be harder to classify. There isn't a ticketing system or an apprenticeship system similar to what you have in many other countries. So it can be harder to determine the compensation level and the actual qualifications of an employee like let's say, an electrician. They're often not unionized. And so you may have a lot of latitude to negotiate individual rights, but the employer needs to validate the qualifications of skilled trades and match the compensation accordingly.
Professional wages tend to approach global compensation levels. So as qualifications and experience and responsibility increase, the employees become more mobile globally. And consequently end up getting paid more in line with a global pay level. So, general managers and senior accounting people and senior engineering people, their compensation package is not going to be too far off what it would be in say the United States or, or Europe or some other country that has access to these people.
The benefits package for professionals usually differs in part because the priorities of the people differ. So the unskilled workers or the people at the lower end of the economic spectrum are very concerned about benefits, which help them immediately in terms of improving their cash flow or improving their lot in some way immediately. Whereas more senior people have longer term concerns. Something like life insurance is of interest to professional employees. It's of very limited interest or no interest to unskilled people. Whereas transportation to work is of a very high level of interest to unskilled people and probably have no interest to professional people.
Ricardo: Right. So we've talked about a little bit of everything here. We covered some employment rules, compensation, considerations, and manpower planning strategies, but let's get to where the rubber really hits the road. And the question that everyone wants to know, what am I going to pay for typical manufacturing positions in Mexico?
Dave: Well, a fully fringed hourly rate in US dollars, which includes the cost of government fringes and vacations, holidays, company benefits for unskilled workers, in most industrial areas, it's going to range from about $2.65 cents an hour worked to perhaps as much as $5.25 cents. And that's going to vary depending on skill level, as well as location. If the employee is semi-skilled or require some specific proficiency, like for example, operating a forklift or welding, then the range will increase to maybe $3 to $6 per hour, more if you require a skilled trade. These ranges are pretty broad, but they can be narrowed down considerably once you know, what your location is and the actual job description.
Ricardo: Okay. And what about for professional employees or skilled trades?
Dave: Engineers start around 2,200 per month. US, again, this is all in with vacations and benefits and holidays and so on. They increase with both experience and responsibility of course, like they do elsewhere. An experienced plant manager, probably anywhere from $7,500 per month to as much as $14,000 per month. English speaking, clerical staff, which are by the way readily available and do receive a premium for being able to speak English, a premium is not a given to professional staff for English language skills, but for clerical staff that they have English skills probably run between $8 an hour to maybe as much as $16 per hour, depending on the responsibility, the experience and the duties that are required to do. And again, these are all fully fringed rates, not basic pay rates.
Ricardo: So these ranges seem pretty wide. So what should a company do if they really want to roll up their sleeves and say, okay, I want to get a pretty accurate estimation of my manpower cost in Mexico?
Dave: I think the first thing you need to do is you need to develop a staffing plan. So you need to figure out based on the hours of work and the fact that'll affect your head counts, what your staffing's going to look like and have some kind of a brief job description that you can share with people. And the next thing you need to do is you need to choose a location and that location in larger cities, you even need to think about the neighborhood because with unskilled workers, the wages can vary from neighborhood to neighborhood. So narrowing your location down is going to help. And then you need to get some reliable help from somebody to estimate those costs. But with that information, there are people that can help you shelter providers, recruiting agencies, they're going to be able to narrow that down and going to be able to advise you on what the local benefit package is going to look like and what it costs.
Ricardo: Perfect. Thanks a lot, Dave. I appreciate that overview there. And I think this gives our listeners a good kind of understanding of what they need to consider to estimate their manpower costs. But, obviously that's just one kind of piece of the puzzle. There's a lot of factors that companies need to consider when they're thinking about manufacturing in Mexico and it's critical that they explore those factors and not just make a decision based on wages. So in our next podcast, Dave will be joining us again, and we'll be talking about the real estate cost in Mexico. Be sure to listen to that and slowly but surely we'll kind of piece together a good costing strategy for your company. Thank you.
Speaker 1: We appreciate you joining us for this session of the manufacturing in Mexico podcast. For more information and resources about how to succeed in Mexico, be sure to visit our website, tetakawi.com.