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Mexico Labor Costs Continue to Attract US Companies

Mexico Labor Costs Continue to Attract US Companies

Mexico Labor Costs Continue to Attract US Companies

The current administration in Washington is seeking solutions for the continued exodus of American manufacturing jobs moving to Mexico, yet lower Mexico labor costs continue to draw US companies looking to protect their global competitive position. In spite of several highly publicized, cancelled Mexican investments, many US companies find the wage disparity between the two North American countries too much to ignore.

US Companies Still Investing in Mexico

In recent months, several US companies have cancelled plans to move US operations to Mexico due to pressure from the current US administration. And yet many other US companies are still shifting operations to Mexico or increasing investment there. Some of them include sizeable and notable companies like:

  • Caterpillar: The Illinois-based industrial manufacturer is considering opening a plant in Monterrey, Mexico.
  • Rexnord Corp: In spite of being criticized, the Milwaukee-based firm is moving its factory from Indianapolis to Mexico to save $30 million annually in labor costs.
  • General Motors: While they have committed to investing $1 billion in US plants, GM is also shifting some of their Detroit operations to Mexico.
  • Nucor: This steel producer from North Carolina is moving many of their 20,000 production jobs to Mexico.
  • Ford: While promising to create thousands of new jobs in the US, Ford is also planning on moving some of their Detroit operations to Mexico.
  • Manitowoc Foodservice Inc: This leading food service and cooking equipment supplier has begun shifting much of its operations from Indiana to Mexico.
  • Brake Parts Inc: The Illinois-based manufacturer of brake calipers recently moved their Chowchilla, CA factory to Mexico in an effort to mitigate high labor and state tax costs.

Wage Disparity the Driving Force

Companies leaving the US routinely report lower Mexico labor costs as the deciding factor primarily driving their decision. The wage gap is the real wall between the two countries. While Mexican workers in the US average $1,870 per month, the average wage in Mexico is $291 per month. In the words of Martin Neil Baily, a senior fellow at the Brookings Institution:

You can pay low wages. You’re not too far away. You’ve got a border that because of the free trade area you can bring goods into the United States. So given the substantial wage advantages, for many companies, it’s an attractive proposition.

In the case of Brake Parts, Inc., for example, the city of Chowchilla put together an incentive package amounting to well over $300,000 to prevent the move, but it wasn’t enough to overcome the immense draw of substantially lower Mexico labor costs. City Administrator Brian Haddix commented, “The pay disparity was just so large, so it needed to be some pretty good credits…It was not enough.” Clausen, the company’s HR executive pointed out that all their competitors have already moved to Mexico, adding, “There’s no way that US workers are going to work for $3.50 or $4 an hour, and that’s the reality of the situation.”

For the short term there is no apparent ‘fix’ to this disparity in labor costs.  Even if Mexico doubled its current level of pay to manufacturing workers, resulting in an $8.00 per hour pay vs. $4.00 an hour, the gap between $30 an hour for US manufacturing workers and 8.00 will still provide incentive for US manufacturing companies to move some of their labor intensive functions to Mexico.  For the long term we have found no ‘real’ solutions to this problem and anticipate that trade between the US and Mexico will not only continue but will grow as well.

For information on topics such as this the reader is invited to visit https://www.tecma.com and click on our blog.

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