NAFTA's Impact on Labor, Environment

US workers actually need have little concern of harm by NAFTA

THE strongest argument made against NAFTA is that low Mexican wages will draw US manufacturing jobs south of the border at the direct expense of American workers. But things are not always as simple as they seem. Indeed, the facts show that Mexico is not an irresistible magnet for US industry, and the competitive balance between US and Mexican labor is not as one-sided as NAFTA's opponents suggest.

Take, for example, productivity. In ideal circumstances, Mexican labor is as productive as any in the world. But poor infrastructure, lack of training, outdated technology and weak support services make Mexican labor only one-fifth as productive as labor in the United States. Absenteeism, worker turnover, and the cost of long-distance management are also concerns. These factors raise the cost of doing business in Mexico, to the point where a number of US companies have recently left Mexico.

It is also important to recall that wages are a decreasingly important component in the cost of industrial production. For many products, particularly in the higher technology sectors that the US wants to promote, labor represents only 15 percent of total cost. Few companies, therefore, base decisions on plant location solely on a comparison of wage rates. Worker skills, efficient transport, access to suppliers and technology, quality control, and management and delivery systems that permit low inventories are no less important.

Despite suggestions to the contrary, since Mexico's economic recovery began in 1988 Mexican wages have been steadily rising. As part of the NAFTA package, Mexico's minimum wage will be indexed to productivity, ensuring further increases. While the minimum wage applies to only a portion of the work force, most Mexican wages are indexed to it. US investment in Mexico has contributed to this rise. By accelerating the shift to higher wages, NAFTA will further shrink the current wage gap. Without NAFTA, however, Mexico would remain a low wage labor pool indefinitely. This can hardly benefit US labor.

There also is the question of actual wage differentials. How can US labor compete with Mexican base wages of $1.50 per hour? The answer is that a comparison of base wages tells only half the story. In Mexico, 40 percent to 60 percent of the cost of labor is accounted for by non-salary benefits, not hourly wages. These include overtime pay, bonus pay, vacation dividends, commodity (food) support, housing fund contributions, savings fund contributions, maternity benefits, child care support, profit sharing, and transportation subsidies - most of which are mandated by law.

While Mexican labor laws, which are far more generous than those in the US, are often unenforced at the small business level, most larger Mexican corporations (with which the US competes) do comply. A recent survey by the US Chamber of Commerce suggests that most US companies operating in Mexico also meet these standards: 92 percent provide paid vacation, 87 percent health insurance, 83 percent profit sharing, 70 percent subsidized groceries, 64 percent disability insurance, 59 percent transportation allowance, 53 percent health care, and 42 percent maternity care.

The consulting firm Hewitt Associates estimates that when these costs are taken into account, average Mexican wages on the border are $3.39 per hour and $5.05 per hour in the more heavily unionized parts of the interior. This is a far cry from the pittance cited by Ross Perot and organized labor.

In other words, US firms do not generally go to Mexico to abuse or exploit cheap Mexican labor, and a simple comparison of base wages in Mexico and the US is not a true measure of the competitiveness of US labor. When productivity and Mexico's hidden labor costs are taken into account, US labor can hold its own.

Many US firms will still find it worthwhile to go to Mexico. They will even without NAFTA, and defeating NAFTA will not prevent that. But where losses do inevitably occur they will be more than offset by new jobs created by expanding exports of goods and services, exports generated by the lowering of Mexican barriers under NAFTA. In some cases - as in the auto sector, where current Mexican law requires companies wanting to sell in Mexico to manufacture there - NAFTA will actually facilitate the movement of jobs back to the US.

In the end, NAFTA is really about economic leadership. If the US retreats within its borders from fear of Mexico, that leadership will be forfeit. Global competition, from Asia and Europe, in particular - will not go away. An alliance with Mexico will strengthen the US position.

If, on the other hand, the US lacks the confidence to compete and fails to shape aggressively the global economic environment to its advantage, the US will eventually lose not only its current job base but the jobs of the future as well. NAFTA is a step into the future that the US must take. The Opinion/Essay Page welcomes manuscripts. Authors of articles will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHELCSPS.COM.

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