(Bloomberg) — Economists debating the impact of a minimum wage on inequality, inflation and the jobless rate are about to get a ton of new evidence from Mexico.
The country is boosting its minimum wage 20% next year, an increase seven times faster than inflation, on top of a 16% jump this year.
The leftist government of President Andres Manuel Lopez Obrador is using the wage as a tool to fight poverty and inequality. This is a stark break from Mexico’s recent policies, when increases to the minimum salary barely topped inflation to help exporters to the U.S. keep costs down.
Before Lopez Obrador took office, Mexico’s minimum wage was the second-lowest among more than 30 countries in a study by the Organisation for Economic Co-Operation and Development as a proportion of what an average worker made. Only the U.S. was lower.
Economists are split on whether increases in the minimum wage hurt job creation.
Harvard University’s Gregory Mankiw, who used to chair the U.S. Council of Economic Advisers, has argued that it reduces job opportunities for unskilled workers. Nobel Laureate Paul Krugman says there’s no evidence that raising the minimum wage costs jobs.
The wage increase comes as policy makers are debating how to reduce social disparities amid mass protests in several Latin American countries.
Read More: Mexico Boosts Minimum Wage by Seven Times Rate of Inflation
So how is Mexico’s experiment going?
Despite the warnings of Mexico’s central bank, the 16% increase to the minimum salary this year hasn’t stoked inflation — at least not yet.
The inflation rate has fallen to about 3% from 4.8% a year ago. Core inflation, which aims to track underlying price trends by excluding the most volatile goods such as food and energy, hardly budged during 2019.
Some economists also point to strong consumer demand as a benefit of workers’ higher spending power.
Banxico board member Gerardo Esquivel, an appointee of Lopez Obrador and a dovish member of the famously hawkish central bank, celebrated the additional wage increase which takes effect Jan. 1, saying it was “fair and necessary.”
Some other economists have warned that the cumulative impact of two double-digit increases will affect prices far more in 2020 and will force the central bank to slow its series of interest rate cuts.