Labor Composition & Unemployment in Emerging Markets: Alternative Metrics for Mexico
by Noah Hugenberger & Ting So
In this edition of Orinda Park Insights, we examine the employment structure in Mexico to gain a better understanding of how labor markets in emerging markets can differ from those in developed markets. In Section I, we review Mexico’s economic growth and the composition of its labor market. In Section II, we examine several measures of employment that may better reflect economic growth and the strength of the Mexican Peso.
Key Takeaways:
- Over 50% of the Mexican labor force is employed on a part-time basis vs. 17% in the US
- As a result, the unemployment rate may be less informative for an emerging economy like Mexico due to the definition and composition of the unemployment rate metric
- Alternative metrics pertaining to part-time workers, underemployed workers, and active job seekers may offer more meaningful insight into Mexico’s growth engine vs. the unemployment rate alone
Section I: Mexican Economy & Labor Market
In the past 15 years, Mexico’s GDP has grown by 1.7x from 10 trillion pesos in 2005 to 26 trillion pesos in 2021. The Mexican economy is known internationally for its exports of automobiles & parts, electronics, and crude oil. These sectors collectively account for 8% of Mexico GDP. By comparison, the domestic service sector accounts for 60% of Mexico GDP.
1. Service Sector Accounts for 60% of Mexico’s Economic Growth
According to the National Institute of Statistics and Geography (INEGI), major sector contributions to Mexico’s GDP include services (60%), manufacturing (20%), construction & mining (15%), and agriculture (5%).
Mexico’s service sector is diversified, and large sectors include wholesale and retail trade (33%), real estate service (17%), transportation (9%), financial services (7%), and education (6%).
2. Labor Market Distribution Aligns with Growth
Labor market metrics and definitions vary slightly from country to country. In Mexico, the labor force is defined as those aged 15 and older (In the US, aged 16 is the youngest, while other countries have caps based on retirement age). Since 2005, the Mexican labor force has increased by 35% to nearly 99 million in 2021. The economically-active population is the subset of the labor force who are either currently employed or who sought employment in the prior month. This number totaled 58 million in 2021. Since 2005, the labor market participation rate (economically-active population divided by labor force) has been steady at just under 60%. While definitions vary between countries, this figure is comparable to the current-day labor force participation rate in the US of 62%.
Within the economically-active population, the distribution of the employed population parallels the GDP distribution across sectors (see chart below), with the service sector accounting for 60% each of employment and GDP, followed by manufacturing at 20% of each. This distribution has been generally steady over the past 15 years.
3. Part-time Employment Accounts For Over Half of the Employment
The unemployment rate in Mexico is defined as the percentage of unemployed divided by the total economically-active population. In recent years, the unemployment rate in Mexico has been similar in magnitude to the unemployment rate in the United States. As of this writing, the unemployment rate in Mexico is 3.3% compared to 3.6% in the US.
Although the unemployment rates are similar, the nature of the underlying employment is meaningfully different. The chart below shows the composition of the labor market in Mexico. The employed population (96%, left blue bar) is comprised of salaried workers and irregular part-time workers:
- Salaried workers (60%, middle pink bar) include both full-time (43%, right green bar) and part-time workers (17%, right yellow bar) who get paid by the economic unit for which they work (e.g. a wage, a salary, or a daily wage for their work).
- Irregular part-time workers (36%, middle gray bar) do not receive regular pay commensurate with time worked.
To arrive at total part-time employment in Mexico, one must sum both the irregular and salaried part-time worker categories. This constitutes 53% (17%+36%) of the economically-active population. To understand the breakdown between full-time and part-time employment, we divide full-time (43%) and part-time (53%) by total employed (96%). Full-time employment is approximately 45% of total employment while part-time represents 55% of total employment. This is in contrast to developed markets such as the US, where full-time employment is 83% of total employment and part-time employment is 17%.
For countries where full-time employment accounts for the bulk of the active labor population, the unemployment rate typically exhibits lower volatility and is more predictable due to contractual obligations and layoff benefits. Part-time employment, on the other hand, tends to exhibit faster turnover and offers less stable income. Augmenting analysis of the unemployment rate with more-granular employment metrics may serve to better gauge economic growth, especially in countries where a significant portion of employment is irregular and/or not compensated based on measurable economic units contributed (e.g. number of hours worked).
Section II — Different Employment Metrics for the Mexican Economy
We consider three alternative employment measures in Mexico — the part-time salaried employment rate, the underemployment rate, and the active job seekers rate — to extract better information on the state of the economy.
4. Mexico Labor Market Metrics
a) Part-time Salaried Employment rate represents the employed population who are 1) working less than 35 hours a week for economic reasons (e.g. slack work conditions), 2) those who work more than 35 hours a week with monthly income lower than the minimum salary and 3) those who work more than 48 hours a week earning up to two minimum salaries.
Part-time employment is a more flexible form of employment and its turnover is often higher than full-time employment.
b) Underemployment rate represents the employed population who have the need and willingness to work more than their current job allows.
The underemployed population is highly relevant to the part-time population. Part-time workers, whether salaried or irregular, typically receive lower income and have more free hours in which they are available to work.
c) Active Job Seekers rate represents the employed population who are actively looking for jobs.
Active job seekers are a mix of subsets of full-time employment, part-time employment, and underemployment.
5. More Effective Employment Measures to Capture Mexico Growth Story
Each of the three employment measures above attempts to capture a different aspect of the labor market. While they partially overlap, combining these insights may offer a more complete picture of local labor market conditions. To assess the efficacy of using this information to gauge the state of the economy, we designed a simple binary statistical test.
- First, we select the Mexican Peso as a proxy measure of the state of the economy in the medium term. Higher USDMXN (weaker peso) represents a weaker-growth economy and lower USDMXN (stronger peso) represents a stronger-growth economy.
- Second, we create a simple indicator for each metric to represent the monthly change and its derivative. We digitize the indicator into +1 (stronger growth) and -1 (weaker growth).
- Third, we calculate the hit-rate as a percentage of months the indicators correctly predict a strong (weak) economy as represented by a positive (negative) peso return for any given monthly period delineated by the employment data release dates. A hit-rate above 0.50 represents higher accuracy.
The table below presents results in the form of hit-rates of different periods (odd/even-numbered years and calendar-quarters) to show efficacy and consistency of these indicators. The benchmark measure is simply the headline unemployment rate, which is compared to the other three indicators based on part-time salaried employment, underemployment, and active job seekers.
Looking at the odd/even year hit-rates, the benchmark unemployment indicator is, at best, 50/50; on the other hand, the individual indicators show potential improvement in predicting the direction of USDMXN. Let’s examine the quarterly hit-rates to better understand the consistency of these indicators. First, Q1 hit-rates are generally low across the board. This is due in part to COVID, which impacted one year of data releases in the sample, but also due to a challenging year early in the sample. Second, individual indicators generally have better hit-rates than the benchmark. This outcome serves to confirm that the use of granular employment data specific to Mexico’s labor market might yield a better understanding of its economy.
When these indicators are combined (at the bottom of the table above), the results are materially better than the benchmark unemployment indicator, both higher in value and with more consistency across periods.
Conclusion
Consideration of part-time salaried employment, underemployment and active job seekers offers a more tailored insight into Mexican labor conditions and a more complete picture of the Mexican labor market than headline unemployment alone. Although employment metrics and availability differ across countries, this type of granular analysis is generally applicable to emerging markets where the labor composition is less reliant on full-time employment. Furthermore, there may also be applicability to select developed markets, especially in periods of slack labor conditions.
Although the labor market is an important driver of Mexican economic growth, it is one of many drivers. In 2021, the combined indicator correctly revealed multiple months of lower growth in Mexico even as the headline unemployment rate showed improvement. More recently, in 2022, the indicator has oscillated, with little discernible trend in the Mexican labor market. As of this writing, Mexico’s unemployment rate continues to improve while the Mexican Peso is essentially flat on the year (up 0.5% vs the USD).
What are your thoughts on the Mexican labor market? We welcome your ideas and comments on the topic.
Curious about how we turn analysis like the above into an investment thesis? Please contact us at www.orindapark.com | info@orindapark.com.
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