Introduction
For decades, Mexico’s primary economic policy objective has been to maintain macroeconomic stability. This achievement, however, came at a cost and coexisted with stagnant wages and a significant loss of purchasing power. Recently, this dynamic has shifted partially due to the increase in the minimum wage and labor reforms like outsourcing elimination. Despite these advancements, substantial challenges remain in Mexico’s economic agenda: productivity and informality, closely linked and largely responsible for the country’s low growth potential.
Productivity Challenges in Mexico
The KLEMS model, which separates economic growth into capital, labor, and other inputs contributions, reveals that Mexico’s total factor productivity (TFP)—the portion of growth explained by innovation, technology, or better capital human use—has been negative for over three decades. Between 1991 and 2023, Mexico’s economy grew at an average of 2.35% annually, while TFP subtracted 0.51 percentage points. Positive TFP contributions were only seen during cyclical recoveries, without establishing a sustained trend.
In contrast, the most significant growth contributor in Mexico has been materials. This implies that the Mexican economy has relied almost exclusively on “putting more inputs” into the system without improving its efficiency.
Comparison with the United States
The US productivity total factors (PTF) contributed an average of 0.61 percentage points to the 2.3% annual growth in value added (1998-2023). How can this difference with Mexico be explained? The primary reason lies in capital and labor composition.
In the US, intangible capital—such as technology, software, R&D, and even original entertainment—generates a significant portion of value added, contributing between 0.5 and 0.7 percentage points annually. In Mexico, the contribution of TIC (Technology and Information) capital is minimal, at just 0.1 percentage points.
Labor Contribution Disparity
The labor side of the equation also shows a clear gap. In the US, highly skilled labor—workers with higher education and abilities—explains 0.6 percentage points of value added growth. In Mexico, the labor factor’s contribution is reduced to around 0.3 percentage points of economic growth, with only 13.8% of workers having high education levels.
While Mexico has grown through more inputs, the US has done so through innovation and qualified human capital.
Addressing the Productivity Challenge
The results indicate that boosting productivity requires more than just accumulating capital and labor. A strategic investment approach promoting innovation and strengthening human capital is necessary. Otherwise, Mexico will continue operating like a functioning machine that falls increasingly behind the global dynamic.
Persistent informality reflects this lag: a lack of quality formal jobs keeps much of the labor force in low-productivity activities, perpetuating a cycle of low growth.
The challenge is to rethink the development strategy: encourage public and private investment, strengthen physical and educational infrastructure, close technological gaps, and leverage artificial intelligence potential. Only then can total factor productivity become a sustainable growth driver.
Key Questions and Answers
- What are the main economic challenges in Mexico? Productivity and informality are significant issues, closely linked and largely responsible for Mexico’s low growth potential.
- How does Mexico’s productivity compare to the United States? Mexico’s total factor productivity (TFP) has been negative for over three decades, while the US TFP contributes positively to its growth.
- What factors contribute to the productivity gap between Mexico and the United States? The primary reasons are differences in capital composition (intangible vs. tangible) and labor skills.
- How can Mexico improve its productivity? A strategic investment approach promoting innovation, strengthening human capital, and addressing informality is essential.
*David Cervantes Arenillas is a senior economist at BBVA Mexico.
