UPDATE 1-Mexico hourly wages now lower than China's-study

Thu Apr 4, 2013 4:59pm EDT

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MEXICO CITY, April 4 (Reuters) - Mexico's hourly wages are about a fifth lower than China's, a huge turnaround from just 10 years ago when they were nearly three times higher, according to new research by Bank of America Merrill Lynch.

Stagnant salaries in Mexico, fueled by strong population growth, will give Latin America's second-biggest economy an edge over China in the U.S. market, Bank of America Merrill Lynch economist Carlos Capistran said on Thursday.

Average hourly wages are now 19.6 percent lower in Mexico than China whereas in 2003 they were 188 percent more costly, according to the Bank of America study.

Mexico can maintain that competitive advantage for at least five years, thanks to a growing labor market that puts downward pressure on wages, Capistran said.

The demographic bonus from its young population will help boost Mexican growth to 4 percent this year, he added, and is even more important to juicing the economy than a raft of reforms proposed by centrist President Enrique Pena Nieto, who took office in December.

"Today people are excited about Mexico because of the reforms, et cetera. But when I ask myself 'what is the most important thing that Mexico has today in terms of growth,' it's the demographic bonus," Capistran said.

Pena Nieto's government has already passed major education and labor reforms, while an ambitious plan to boost competitiveness in the phone industry, where tycoon Carlos Slim holds sway, is winding its way through Congress.

According to forecasts by the International Labor Organization, Mexico's economically active population will grow by 20 percent from 2010 to 2020, compared to a 2.9 percent increase in China over the same period.

Lower transportation costs and projected productivity gains in manufacturing will also bolster Mexico's competitiveness, Bank of America said. That, in turn, can help compensate for the currency's rapid rise, which tends to hurt exporters.

Optimism about Mexico's reforms has helped the peso gain more than 4 percent this year, prompting the central bank to cut interest rates to a historic low, in a bid to tame the appeal of the currency and peso-denominated debt.

Mexico's wages as a proportion of economic output are lower than those in Indonesia, the Philippines, Thailand, South Korea, Hungary, Poland and Brazil, where labor costs have risen dramatically.

The wage restraint has allowed Mexico to increase its U.S. market share at a faster pace than China over the past six years.

However, China still had the bigger share at the close of 2012: China accounted for 17.5 percent of U.S. imports that year while Mexico accounted for 12.4 percent over the same period, according to Bank of America.

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