How was inequality reduced in Mexico?

Income inequality has decreased during this six-year term.

The reduction is not minor.

According to data from the National Survey of Household Income and Expenditures adjusted by accounts (ENIGH-a), so far this six-year term, the upper classes stopped concentrating 62% of the country's income and now only concentrate 58%.

This is a very important drop.

The last time the figure fell in a similar way was in the 1950s during the time of the Mexican miracle, according to data from the World Inequality Database.

The strange thing is that, unlike the Mexican miracle, this time the reduction in inequality was not accompanied by especially high economic growth.

Throughout this six-year term, the average annual growth has been only 0.8%, half that of the last six-year term.

The question is how inequality was reduced like this.

I analyzed the ENIGH-a data and its various income components in detail.

I believe that there are three aspects that contributed to this important reduction in inequality during the six-year term.

First, labor policy.

Due to the increases in the minimum wage, the improvement in unionization and the reduction of subcontracting, the labor income of Mexicans increased considerably.

80% of Mexican households saw increases in their labor income during the six-year term, above inflation.

Furthermore, the increases were greater for the poorest households.

Households with a very low socioeconomic level increased their labor income by 19% (deciles I-II) and those with a low level by 5% (deciles III-V).

This makes sense.

The minimum wage was earned, above all, by people of low socioeconomic status and, therefore, its increase had a progressive impact.

Second, inequality was reduced because there was a change in the business ecosystem.

Unlike previous six-year periods, where large companies tended to grow more and have higher returns, in that six-year period small companies had exceptional returns.

90% of households with business income from small businesses increased their income during the six-year term.

Similar to labor income, the improvements were much larger for low-income households.

Households with a very low socioeconomic level increased their small business income by 17% (deciles I-II) and those with a low socioeconomic level by 15% (deciles III-V).

On the contrary, the income that the richest households received from their large companies fell.

From 2018 to 2022, the reduction was 18%.

For example, in 2018 the rich reported receiving an average monthly income of 915,000 pesos from their companies, now they only receive 750,000 pesos.

It will be necessary to study more why this happened, but it seems to me that the increase in social transfers may be behind it.

Much of the money that low-income people receive from the Government is not spent in large companies, but in small and informal businesses.

This flow of resources may be behind the abnormally positive six-year term that small business owners had.

Finally, a third point that I consider contributed to the reduction of inequality during the six-year term were the decreases in rents charged by households in the high and rich socioeconomic stratum.

According to the ENIGH-a, rich households used to receive 710,000 pesos per month in income on average in 2018. Now they only receive 590,000 pesos.

Households with a high socioeconomic level also had a reduction.

They used to receive 36,000 pesos in rent per month, now they receive 33,000 pesos.

There are several aspects that could influence this.

Perhaps the value of certain rents, especially large-scale agricultural land, failed to rise as much as inflation did.

Another possibility is that all income has decreased due to many people returning home during the pandemic.

The pandemic also changed work habits.

It made the

home office

possible and thus made it easier for many people to no longer have to pay high rents in central locations, but rather to be able to travel and pay less rent.

All these possibilities will have to be studied in more detail.

Thus, inequality was reduced due to the combination of three aspects: higher labor income, better performance of small businesses, and reduced rent payments.

Despite the above, it is worth mentioning that inequality could have decreased even more if social policies had been more effective.

During the six-year term, cash transfers have doubled.

However, those who have seen the most increase in their receipt of transfers are not poor households, but rather the richest.

The data is very revealing.

Among households with very low socioeconomic status, income from social programs increased by 17%.

However, among those at a high level it increased by 216%.

This is explained because in the last six-year term the upper income strata almost did not receive social transfers.

However, in this six-year term, social policy was universalized and with it many more high-income households that were previously excluded from social programs were reached.

If social programs had reached more households with low socioeconomic status, inequality would have been reduced even more.

Note: ENIGH-s follows the MMIP methodology of Evalúa CDMX.

Deciles by total household income to have comparability with ENIGH tabulations.

All changes reported are in real terms.

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