How has inequality been reduced in Mexico Opinion

How has inequality been reduced in Mexico? | Opinion

Income inequality has declined during this six-year term. The decline is not small. According to the National Survey of Household Income and Expenditures Adjusted by Accounts (ENIGH-a), the upper classes have gone from concentrating 62% of the country's income to just 58% during this six-year period.

This is a very important decline. The last time the number fell at a similar rate was in the 1950s, at the time of the Mexican Miracle, according to data from the World Inequality Database.

The strange thing is that this time, unlike the Mexican miracle, the reduction in inequality was not accompanied by particularly high economic growth. During this six-year term, average annual growth was only 0.8%, half that of the last six-year term. The question is how inequality was reduced in this way.

I analyzed the ENIGH-a data and its various income components in detail. I believe that there are three aspects that contributed to this important reduction in inequality during the six-year term.

Firstly, labor policy. Due to increases in the minimum wage, improved unionization, and reductions in subcontracting, Mexicans' labor income increased significantly. 80% of Mexican households saw their labor income increase above inflation over the six years.

How has inequality been reduced in Mexico Opinion

In addition, the increases were stronger among the poorest households. Households with a very low socioeconomic level increased their labor income by 19% (deciles I-II) and households with a low level by 5% (deciles III-V). That makes sense. The minimum wage was received primarily by people with low socioeconomic status and its increase therefore had a progressive effect.

Second, inequality was reduced because the business ecosystem changed. Unlike previous six-year periods in which large companies tended to grow faster and generate higher returns, small companies achieved exceptional returns during this six-year period. 90% of households with commercial income from small businesses increased their income over the six-year period.

Similar to labor income, improvements were much greater for low-income households. Households with a very low socioeconomic level increased their small business income by 17% (deciles I-II) and households with a low socioeconomic level increased their small business income by 15% (deciles III-V).

On the contrary: the income that the richest households received from their large companies fell. From 2018 to 2022 the decline was 18%. For example, in 2018, the rich reported receiving an average monthly income of 915,000 pesos from their companies, but now they only receive 750,000 pesos.

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It will be necessary to examine in more detail why this happened, but I think that the increase in social transfers could be behind it. Much of the money that low-income people receive from the government is not spent in large companies, but in small and informal businesses. This flow of resources may be the reason for the unusually positive six-year runtime that small business owners have had.

Finally, a third point that I believe contributed to the reduction in inequality over the six-year period was the decline in rents charged by households in the upper and richer socioeconomic strata. According to ENIGH-a, rich households received an average income of 710,000 pesos per month in 2018. Now they only receive 590,000 pesos. Households with a high socioeconomic level also experienced a decline. They used to get 36,000 pesos in rent per month, but now they get 33,000 pesos.

There are several aspects that could influence this. It is possible that the value of certain leases, particularly large areas of agricultural land, has not increased as much as inflation. Another possibility is that overall income has fallen because many people have returned home during the pandemic. The pandemic also changed work habits. It made it possible to work from home and thus made it easier for many people to no longer have to pay high rents in central locations, but to be able to travel and pay less rent. All of these possibilities need to be examined in more detail.

Thus, inequality was reduced through the combination of three aspects: higher labor income, better performance of small businesses and lower rent payments.

Nevertheless, it is worth noting that inequality could have fallen even more if social policies had been more effective. During the six-year period, money transfers doubled. However, it is not the poor households, but the richest ones, where transfer income has increased the most.

The data is very revealing. Among households with very low socioeconomic status, income from social programs increased by 17%. However, for those at high levels, it increased by 216%. This is because the upper income groups received almost no social transfers in the last half of the year. However, during this six-year term, social policy was universalized and reached many more high-income households that were previously excluded from social programs.

If social programs had reached more households with low socioeconomic status, inequality would have declined even further.

Note: ENIGH-s follows Evalúa CDMX's MMIP methodology. Deciles by total household income to allow comparability with ENIGH tables. All reported changes are real values.

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