MEXICO CITY,S GOVERNMENT PROPOSES UNEMPLOYMENT

UNCLAS SECTION 01 OF 03 MEXICO 005168

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DEPT FOR DRL/AWH AND ILCSR, WHA/MEX AND WHA/EPSC, USDOL FOR
ILAB

E.O. 12958: N/A
TAGS: ELAB ECON PGOV PINR SOCI MX
SUBJECT: MEXICO CITY,S GOVERNMENT PROPOSES UNEMPLOYMENT
INSURANCE

REF: MEXICO 4150


1. SUMMARY: Mexico City,s Mayor, Marcelo Ebrard, recently
proposed the creation of an unemployment insurance program
for the residents of the Mexican capital. Eligible residents
are limited to those that lost a job in the formal economy
with eligibility retroactive to December 2006. As proposed,
eligible beneficiaries would receive approximately USD 150.00
per month for six months; financed through the saving the
city has obtained from renegotiating its municipal debt.
Beneficiaries would also receive job training and job search
assistance. According to Ebrard, a leading figure in
Mexico,s main opposition party, if approved the proposal
would be the first ever unemployment insurance program in
Mexico. Critics of the proposal denied that Ebrand was
creating an unemployment insurance program but rather a
subsidy that would discourage people from working. GOM
Secretary of Labor, Javier Lozano, took particular issue with

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the claim that the proposal would be Mexico,s first
unemployment insurance program. He also vigorously agreed
with those who called the initiative a politically motivated
subsidy and accused Ebrand of being more interested in trying
to buy votes for future elections than in dealing with
genuine unemployment problems. As currently presented the
proposal is in fact a subsidy and not real unemployment
insurance. However, with some thoughtful modifications, the
proposal could be turned into an unemployment insurance
system that could partially address the problem of laying off
surplus (or unsatisfactory) workers that many employers cite
as a major obstacle to job creation in Mexico. END SUMMARY.


UNEMPLOYMENT INSURANCE FOR MEXICO CITY RESIDENTS
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2. On September 17, Mexico City,s Mayor, Marcelo Ebrard,
gave the first annual address on the activities of his
administration (a sort of State of the Union Address for the
nation,s capital). Although the Greater Mexico City area
has an estimated population of over 20 million people, the
actual number of residents within the jurisdiction of the
Government of Mexico,s Federal District (GDF) is only about
half that figure. Nevertheless, that figure of 9-10 million
residents is larger than the population of any of Mexico,s
31 other states. Consequently, when something happens in
Mexico City the rest of the country takes notice and in the
area of labor related issues, Ebrard,s address contained a
proposal that got the rest of Mexico,s attention.


3. Along with the usual listing of potholes fixed, streets
cleaned and traffic regulation amended, GDF Mayor Ebrard
proposed the creation of an unemployment insurance program
for the residents of Mexico City. Ebrard indicated that his
proposal, which needs to be approved by the GDF Legislative
Assembly (AL),was in response to the problem of unemployment
in Mexico City which is at a rate 6.7 percent while the
national average is only 3.9 percent. While both of these
figures are subject to interpretation and are probably two or
three times higher than the official estimates (REFTEL),the
fact remains that unemployment in Mexico City is higher than
it is in the rest of the country. According to Ebrard, his
proposal, if approved, would be the first unemployment
insurance program in the country.


4. The proposed unemployment insurance program would provide
approximately USD 150.00 for up to six month to Mexico City
residents who lost jobs in the formal economy (as opposed to
the estimated 45 percent of Mexicans nationwide who work in
the informal economy; see REFTEL). The program,s benefits
would be available retroactively to December 2006 for
eligible city residents. In addition to direct cash
payments, eligible beneficiaries would also receive job
training (or retraining) and job search assistance. GDF
Mayor Ebrard stated that the funds needed to pay for this
program would come from the money the city government has
saved by renegotiating down the interests on its municipal
debt.


THE USUAL DEVIL IN THE DETAILS
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5. Although a broad spectrum of observers noted the that GDF
is facing a serious problem because of the city,s high
unemployment rate, even the kindest critics could not help
pointing out Marcelo Ebrard,s proposal was much closer to a
subsidy than to an insurance program. Insurance programs,

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they pointed out, all have a financial reserve created by
payments (or deductions) made from enrollees who, in times of
hardship or emergencies, might need to apply for payee
benefits. The program Ebrard proposed would be financed
through projected interest payment savings in the municipal
budget with no requirement that potential beneficiaries ever
have made any payments into the unemployment insurance funds.


6. Initially, at best the GDF proposal would only be able to
make payments to some 30,000 people. Unfortunately, according
to the GDF,s own figures, there are at least 240,000 who
would be eligible for benefits under the program as proposed
by Marcelo Ebrard. Thus far no details have been released on
what criteria would be used to determine which 30,000 of the
eligible 240,000 would qualify for benefits. Moreover, the
estimated saving from the renegotiation of the municipal debt
was expected to be around 450 million pesos (approximately
USD 41.34 million). No details were provided as to what the
GDF would do when these funds were exhausted. Nor were any
specifics mentioned about the possible cost (in terms of
administration and overhead) of the job training and job
search assistance associated with the unemployment
&insurance8 proposal.




LABOR SECRETARY, AND OTHERS, HARSHLY CRITICIZE PROPOSAL
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7. One of the most outspoken, although certainly not the
only, critic of the GDF Mayor Marcelo Ebrard,s unemployment
&insurance8 proposal was GOM Secretary of Labor, Javier
Lozano. Secretary Lozano went to great lengths to publicly
call the proposal a subsidy. Lozano underscored that a real
insurance program would be a self-sustaining institution
based on contributions from employers, employees and the
government. Continuing on, Lozano declared that the proposed
&subsidy8 also differed from a genuine insurance system
because it lacked transparency, professional administration
and no mechanisms for responding to market realities.


8. Labor Secretary Lozano also vigorously denied the claim
that the GDF proposal was the first of its kind in all of
Mexico. According to Lozano, Mexico has had an unemployment
assistance program since 1984 administered by the Secretariat
of Labor (STPS). The STPS unemployment assistance program,
Lozano stated, provides job training and short-term benefit
payments of anywhere between 1-3 times the minimum wage
(approximately USD 85.00 ) 255.00 per month).


9. Other critics, in addition to calling the GDF proposal a
subsidy, also described it as program that would actively
discourage work. In their view Ebrard,s proposal would be
an incentive to avoid looking for a job because the
beneficiaries would have a guaranteed income whether or not
they actually worked. Furthermore, these critics argued,
Mexico was much better off with the system it currently has
in which employers are required to pay a substantial
severance packaged called &liquidation8 whenever an
employee is let go from their job. (Note: Liquidation
consists of three month wages plus a complicated formula
based on an employee,s years of service. Employers are
legally required to pay liquidation whenever an employee is
dismissed regardless of whether the worker has already
arranged subsequent employment.)


10. Both Secretary Lozano and the other harsher critics of
GDF Mayor Ebrard,s unemployment assistance program indicated
their belief that the real motive for his proposal was
politics rather than a desire to help those who have lost
their jobs. Marcelo Ebrard, they pointed out, is a leading
figure in Mexico,s main opposition party, the Party of the
Democratic Revolution (PRD). Although the date is still far
in the future (2012) Ebrard is considered to be a strong
contender for his party,s nomination for president of Mexico
and the critics expressed their firm opinions that his
unemployment assistance proposal was little more than an
attempt to buy political loyalty and votes.





COMMENT AND ANALYSIS
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11. Given the limited resources available to support it, and
the many unanswered questions surround its possible
implementation, it is hard to view GDF Mayor Marcelo
Ebrard,s proposal as anything other than a subsidy. However,
with some thoughtful modifications, the proposal could become
something approximating a real unemployment insurance system.
The current mechanism in Mexico for dealing with job loss or
layoffs is liquidation. However, according to a study by the
Mexican Institute for Competitiveness (an NGO that works
closely with USAID) liquidating an employee in Mexico is so
expensive that employers often take increased profits during
times of economic growth to pay off employees they believe
might be unnecessary during the next economic turndown. In
other words, instead of hiring new employees as happens in
many countries during times of economic expansion, Mexican
employers look upon times of economic growth as an
opportunity to payoff and then cut their staffs.

Moreover, because of the high cost of liquidation, many
employers do everything they can to avoid hiring new workers
in the first place because of the legally obligated cost of
reducing staffs during times of economic downturns are too
high. If Mexico had a genuine unemployment insurance system,
in place of the current &liquidation8 system, employers
might be more willing to accept the risks of hiring new
workers without the fear that there would be no way to reduce
staff should market downturns and economic requirements
compel them to do so.

The creation of a true unemployment insurance system in
Mexico, again in place of the current liquation system, could
be looked at in a similar fashion as the establishment of the
Social Security system in the United States back in the
1930,s. The very first workers in the U.S. eligible to
receive Social Security benefits were in fact subsidized
because none of them had worked long enough to make the
contributions needed to qualify for extended benefits.
However, the broader social good justified this subsidy. In
the case of creating a genuine unemployment insurance system
in Mexico, the temporary need to subsidize some worker while
others contribute to a reserve fund to pay out fixed term
benefits might well be justified if the ultimate end was the
establishment of a system that added greater flexibility to
the workplace.










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