Low Labor Costs in Mexico: Top 10 Ways Manufacturing Profits [2022]

Last Updated on June 26, 2023

Low labor costs in Mexico provide more benefits than just a reduced bottom line; see how your business can profit from utilizing the trained and cost-effective labor pool in Mexico.

Once recognized as the “world’s factory floor,” labor costs in China have surpassed those of Mexico by a significant margin.  While in 2014, wages in China and Mexico were equivalent, by 2019, manufacturing wages in Mexico were generally 20 percent of those in China.   Today, in Mexico, wages are lower and productivity is higher.  This dynamic has allowed Mexico to expand its manufacturing into labor-intensive production in industries such as automotive and auto parts and electronics manufacturing; this, in turn, has made Mexico a more viable option for the nearshoring and low-cost production needs of US manufacturing companies.

US manufacturing wages, coupled with the cost of health insurance for skilled workers, remain markedly higher than in both China and Mexico, resulting in companies looking to outsource production to help them to bolster their bottom line.  The annual wages in the US is nearly four times that of Mexico; the proximity to the US makes Mexico a very attractive option.

Without the burden of high labor costs, companies can plow the savings from manufacturing in Mexico into innovating and developing new product features for their customers. US auto manufacturers are using the low labor costs in Mexico to add expensive fuel-saving features to meet stricter U.S. government gas mileage requirements without raising car prices in an appreciable way.

Productivity in Mexico is generally higher and more affordable.  The legally prescribed work week in Mexico is 48 hours  (without overtime) –  compared to 40 in the US – and because of the low labor costs in Mexico, companies can depend on increases in outputs without affecting the costs of their manufactured goods.  The labor value in Mexico has an even higher value because of this output.

Thanks in large part to the Maquiladora Program in Mexico, the ability to add large groups of staff is not the expensive or politically charged problem it is in the United States.  This is due to the traditionally amicable relationship maquiladoras have with unions. Although the right to unionize is constitutionally guaranteed, unless an area has a strong historical tradition of unionization, employees will typically have little interest in unionizing.

The hiring of the workforce in Mexico allows for stability in the region by keeping the people employed; this allows for companies to have less risk investing in the area.  As of June 22, 2022, the maquiladoras employ 2,895,151 people who would otherwise be unemployed.

Low Employee Turnover allows companies to depend on consistent human capital. Much is related to the work environment, which companies constantly strive to improve to retain workers. According to the Tijuana EDC: “Global companies are having to work harder and to think “outside the box” to increase employee retention programs. Salary is important, but the company’s culture is the key differentiator. “

Savings in the labor pool helps U.S. companies be more competitive in the global marketplace and brings more profitability to company shareholders. It allows them to sell to foreign markets with overseas branches. They keep labor costs low by hiring workers in emerging markets.  Doing so keeps the cost of the goods they ship back to the United States more competitive.

Mexico has also succeeded in training and educating a high-quality workforce.  This is particularly noteworthy in fields such as engineering. Skilled labor availability has created a productivity surge in the country. The Boston Consulting Group estimates that, when productivity is accounted for, "Mexico’s globally competitive wages and worker efficiency mean that China’s labor costs are actually higher.”

Allows for more investment in emerging markets.  According to the Motley Fool: "Like Vietnam, Mexico's capitalizing on China's misfortune through cheap wages. Average wages actually are higher than in China -- 40% higher as of 2011.  Mexico's also thrived in producing higher-quality workers recently, particularly in fields such as engineering. That's created a productivity surge in the country, and the Boston Consulting Group estimates that when productivity is accounted for, Mexico's cheap wages and worker efficiency mean that China's labor costs are actually higher."

Lower bottom line means a cheaper priced product for your customers, allowing you build a better, and faster, consumer base for your goods. Business Insider reports that  goods made in the US are inevitably more expensive than those created in countries where labor is cheaper, such as China, Vietnam, and Mexico. If the production of popular items like iPhones and sneakers were done domestically rather than abroad, their prices would increase considerably.

A lower bottom line means an optimally priced product for your customers, allowing you to build a broader consumer base for your goods. Business Insider reports that goods made in the US are inevitably more expensive than those created in countries where labor is cheaper, such as China, Vietnam, and Mexico. If the production of popular items like iPhones and sneakers were done domestically rather than abroad, their prices would increase considerably and their sales would be diminished.

FAQs about Low Labor Costs in Mexico

Q1: Why are labor costs low in Mexico?
A1: Labor costs in Mexico are comparatively lower due to several factors. These include lower wages compared to many developed countries, a favorable exchange rate, lower cost of living, and a competitive labor market. These factors contribute to reduced operational expenses for businesses that choose to outsource or establish operations in Mexico.

Q2: How can low labor costs in Mexico benefit businesses?
A2: Low labor costs in Mexico can provide significant advantages to businesses. By reducing labor expenses, companies can increase their cost competitiveness and potentially improve profit margins. Lower labor costs also make it feasible to access a skilled and diverse workforce, enabling businesses to expand their operations or explore new markets more affordably.

Q3: Are there any risks associated with choosing low labor costs in Mexico?
A3: While low labor costs in Mexico can be beneficial, it is essential to consider potential risks. Some challenges include language barriers, cultural differences, varying regulatory frameworks, and the need for effective cross-border communication and coordination. However, these challenges can be mitigated by partnering with experienced outsourcing providers or setting up robust local teams.

Q4: How does the quality of work compare with the low labor costs in Mexico?
A4: The quality of work in Mexico is often comparable to or exceeds international standards. Mexican professionals are known for their strong work ethic, dedication, and willingness to learn and adapt. Many companies in Mexico prioritize talent development and provide extensive training programs to ensure high-quality deliverables and customer satisfaction.

Q5: What industries can benefit the most from low labor costs in Mexico?
A5: Multiple industries can benefit from low labor costs in Mexico. Manufacturing, automotive, aerospace, electronics, IT and software development, customer service, and shared services are some sectors that have found success in leveraging Mexico's cost advantages. However, the applicability of low labor costs extends beyond these industries, and it is worth exploring the potential benefits for specific business needs.