Introduction
Governments with a statist philosophy, advocating for government planning of national economic activity, share a common misconception: they believe prices are irrelevant and can be set externally at what they deem “just,” while disregarding incentives. This approach leads to reduced societal well-being.
The Misconception of “Just” Prices
First, there are no such things as “just” prices. The most “just” price for consumers is zero, while producers would consider it infinite. Statists fail to recognize that prices serve two primary functions: reflecting the relative scarcity of production goods and signaling resource allocation, as well as balancing markets by equating demand with supply.
- Prices reflect scarcity and guide resource allocation.
- Prices balance demand and supply, though they never fully meet due to their distinct nature as functions.
Setting prices externally disrupts efficient resource allocation and prevents demand from equaling supply. If set above equilibrium (e.g., wages, price ceilings), it results in excess supply; if set below equilibrium (e.g., price floors), it results in excess demand, both causing a loss of societal well-being.
The Importance of Incentives
Incentives, however, are crucial. Misaligned incentives (perverse incentives) lead to suboptimal or even counterproductive outcomes. If prices are set externally away from equilibrium, the incentives for optimal resource allocation and maximizing societal well-being are absent.
Mexico’s Proposed Working Hour Reduction
The Mexican Congress is considering a constitutional reform to reduce formal workers’ weekly hours from 48 to 40 by 2030, with an annual reduction of two hours starting in 2027. While Mexican workers currently work more annual hours (2,220) than, for example, Americans (1,892), French (1,565), Canadians (1,644), Israelis (1,820), Germans (1,783), and Britons (1,866), the proposal overlooks crucial factors.
- Developed countries have fewer working hours because of higher productivity and development.
- The proposal neglects wages, productivity, and labor market institutional arrangements, especially those related to social security.
Companies consider the total cost of labor and productivity when hiring, balancing wages against the value generated by labor combined with capital and technology. The cost comprises base salary, social security contributions (IMSS, Afore, Infonavit), vacation pay, bonuses, training, potential parental leave, bonus distributions, and union dues.
Labor Market Data
According to the Occupation and Employment Survey, out of a total population of 104.7 million individuals aged 15 or older, 62.5 million are part of the Economically Active Population (PEA). Adding those not economically active but available for employment brings the total to 65.8 million.
- Of those in the PEA, 60.9 million were employed.
- 55.7% (33.9 million) of total employed individuals were in informal situations, lacking access to the social security system.
- 29.6% (18 million) worked in the informal economy, in unregistered businesses with low productivity and hindering growth.
Barriers to market entry and exit, high compliance costs with tax regulations, and the employer-based social security contribution scheme acting as an implicit tax on formal employment contribute to these high informality rates.
Consequences of Reducing Working Hours
Reducing weekly working hours to 40 without boosting productivity or altering the social security system would increase labor costs effectively. The likely outcome is that businesses and workers would migrate to the informal sector, reducing productivity and denying workers access to social security and other benefits.
This misguided measure would create perverse incentives, achieving the opposite of its intended goal and further decreasing economic growth.
Key Questions and Answers
- What are the main issues with setting prices externally? Setting prices away from equilibrium disrupts efficient resource allocation and prevents demand from equaling supply, leading to excess supply or demand and reduced societal well-being.
- Why is productivity crucial when considering reduced working hours? Without increased productivity, reducing working hours would raise labor costs, potentially driving businesses and workers into the informal sector, decreasing overall productivity and denying access to social security benefits.
- What factors contribute to high informality rates in Mexico? Barriers to market entry and exit, high compliance costs with tax regulations, and the employer-based social security contribution scheme acting as an implicit tax on formal employment contribute to these high informality rates.
