Inequality, living standards, and growth: two centuries of economic development in Mexico

By Ingrid Bleynat (King’s College London), Amílcar E Challú (Bowling Green State University), Paul Segal (King’s College London and London School of Economics)

The full article from this blogpost has been published in the forthcoming issue of the ‘Economic History Review’, and it is now available as open access at this link.

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It is a truth universally acknowledged that the consequences for human welfare of different rates of economic growth are staggering. But human welfare depends primarily on income growth for people, not for countries, and rising inequality can imply substantial divergence between aggregate growth and the living standards of the majority. We find such a divergence in our research on long-run development in Mexico. Using a new dataset on wages and prices from 1800 to 2015, we find that while average worker productivity rose eight and a half times, real wages little more than doubled (Figure 1). More than two centuries of national independence and capitalist development have translated into remarkably little economic benefit for the majority of Mexicans.

Our data comprise a new subsistence price index over the period, along with two wage series: urban unskilled construction wages in Mexico City, which are measured consistently and for almost all years, and median incomes, which are available more sporadically. Both series suffered relative stagnation: from the nineteenth century to the twenty-first century the real wages of unskilled urban construction workers rose by a factor of 2.2, while real median income rose by a factor of 2.0. The extreme divergence from GDP per worker is robust to alternative GDP estimates and wage sources.

What explains the stagnation of wages relative to productivity? Mexico experienced rapid population growth in the twentieth century. As Arthur Lewis demonstrated, if the expansion of the modern capitalist sector is insufficient to incorporate all available workers, the ‘reserve army’ of subsistence workers will keep wages down across the economy.

Today’s subsistence workers—peasants, street peddlers, domestic workers and others—benefit from modern infrastructure and products and are less deprived than their forebears of two centuries ago. Yet they still work with little capital and technology, and their methods of production have changed little since the nineteenth century.

Our findings stand in contrast to Simon Kuznets’s prediction that workers in the capitalist sector would enjoy the fruits of capitalist growth through higher wages, pulling away from these subsistence workers. But this assumes barriers to worker mobility between sectors that we do not find present in Mexico. Instead, we find ample evidence of the mobility described by Lewis, which allows subsistence workers to compete wages down in the capitalist sector.

The divergence between wages and GDP implies a dramatic increase in inequality over the period. We measure this using what we call the inverse Williamson ratio of per worker GDP to wages, y/w (Figure 2). Given the absence of data over the whole distribution, this measure allows us to use median incomes as our objective function within the standard Dalton-Atkinson social welfare framework. Following the Stiglitz Commission, we interpret median income as representing the ‘typical’ individual or household. The inverse Williamson ratio y/w is therefore a measure of the inefficiency with which GDP produces social welfare: the higher it is, the less GDP contributes to social welfare. On this measure, inequality rises by a factor of more than four from the nineteenth to the twenty-first century.

If the long-run story of Mexican development is radically increasing inequality and remarkably little benefit to the majority, the 1950s to the 1970s stand out as exceptional. This is the only period in Mexican history when GDP and wages rose substantially—a result which contradicts received wisdom, but is consistent across multiple data sources. This period, known as the ‘Mexican miracle’, was one of state-led development, public investment, and an active civil society within a corporatist state. Real wages have never been higher than they were in the 1970s. Given similar recent findings for mid-twentieth century Chile and Uruguay, inclusive growth in this period may be an under-appreciated regional pattern.

The slashing of the real minimum wage, the collapse in real wages, and the rise in inequality that occurred in the 1980s (figures 01 and 02) were due not just to economic crisis, but to an explicit repudiation of the developmental and distributional model of the mid-twentieth century. The transition to democratic elections since 2000 has had no impact on this trend: the fall in real wages has never been recuperated and inequality remains higher than at any point before 1990.

Mexico demonstrates that productivity growth does not translate directly into rising incomes for the majority, even over the long run. Mexico’s history suggests that it will take more concrete action, and a significant shift in labour market institutions and policies, to put Mexican wages and living standards on an upward path.

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To contact the authors:

Ingrid Bleynat, ingrid.bleynat@kcl.ac.uk

Amílcar E Challú, achallu@bgsu.edu, @aechallu

Paul Segal, paul.segal@kcl.ac.uk,  @pdsegal