There are fireworks going off in Mexico, and I am not referring to pretty pops of light in the sky. The explosive issue of labor market reform has caught fire on Mexico’s national stage and will bring in the New Year with a blaze.

As reported by Reuters, earlier this fall, departing President Felipe Calderon introduced a controversial labor market reform bill. The bill’s multiple measures break down into two main categories: provisions easing the hiring and firing process to stimulate new employment, and measures demanding greater accountability from the country’s Goliath-sized labor unions.

This past week, the lower house of Mexico’s Congress passed a version of the bill following a 14-hour debate that steamed along into the small hours of the morning with the bill’s supporters speaking from the spectator’s gallery in order to escape the leftist-stormed house floor.

The rendition of the bill that will return to the Senate for projected swift passage moves away from set monthly wages to hourly wages and reduces mandatory severance pay, efforts to reduce hiring risks in order to encourage companies to take on employees. But many of the new transparency requirements for labor unions didn’t survive the lower house donnybrook.

Economist Mario Villarreal-Diaz Weighs In

I asked economist Mario Villarreal-Diaz for his take on the moral aspects and possible outcomes of the legislation. Mario pointed out that union leaders and union-side lawmakers are fighting to stop the bill using “moral high ground” rhetoric, framing the initiative as an act of greedy business people trying to take advantage of workers. The bill’s opponents claim that it is their moral obligation to protect the vulnerable working population from unemployment.

While at first glance, these arguments sound compelling, Mario explained that unintended consequences of the regulations purported to protect workers actually make it harder to secure steady employment. The moral argument for keeping the current regulations in place sound good in the abstract but turns upside down in the realm of real-world causes and effects. The hard lesson: Good intentions do not always lead to good policy outcomes.

As explained by the Huffington Post’s Rodrigo Aguilera:

What most Mexicans know all too well is they have the worst of all worlds: a labor market too rigid to make businesses operate efficiently but also extremely precarious for the workers themselves.

When business owners know that they will be penalized for firing bad employees, they have a strong incentive not to hire. Mario’s catch phrase, “Hard to fire, hard to hire,” cuts to the heart of the matter.

Many businesses now turn to a new crop of intermediary outsourcing companies that provide temporary workers, a source of low-risk labor. Who loses in this scenario? Skittish businesses can avoid the tribulations of hiring, while outsourcing companies have carved out a new niche. It’s a win-win for businesses and outsourcing companies, but it’s the workers who suffer: Droves of workers, the “beneficiaries” of the regulations, are stuck with temporary work instead of permanent placements that offer stability and benefits that can improve their prospects in the long-term.

Labor Bosses in the Lap of Luxury

The faulty “moral high ground” path doesn’t account for all, or perhaps even the bulk, of the resistance to the reform bill. Union bosses who strongly influence the motives of many lawmakers have their own blatantly self-serving reasons to fight new transparency demands that might undermine their longstanding dominance.

Mario described the perennial power of the union boss class composed of leaders who often maintain posts for more than 20 years and assert control with little to no accountability to the workers whose rights they claim to protect.

Elba Esther Gordillo, the leader of the national teachers union, epitomizes the type. Gordillo’s salary is a mystery but she is “known to carry $5,000 Hermes purses and once gave out Hummers to loyal followers.”

While the new law may begin to cramp the style of the Gordillo contingent, it doesn’t go far enough. While the Senate-bound bill calls for open elections, its provisions demanding external audits of union finances died in the lower house. So for now Gordillo will likely continue to spend most of her time “working for the good of workers” from her lavish San Diego mansion.

A 2013 Showdown: New Legislation vs. Stagflation

Barring an abrupt plot twist, the Senate will sign the bill into law by the end of 2012 with the hope of energizing Mexico’s labor market.

What is Mario’s take? He told me that the labor market saga reminds him of Mancur Olson’s book, “The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities.” According to Olson, democratic societies can make great strides toward prosperity and protecting people’s rights (free speech, the right to representation, etc.), but they can also give rise to territorial groups of people who amass power and block competition and progress in order to maintain their own spheres of power. The union bosses will continue to shut windows and lock doors in order to secure their own power. But the soon-to-pass law might break through the stuffy stagflation by giving businesses room to breathe.

Will the new reforms pave the way for businesses to create the 400,000 new jobs in 2013, as projected by the bill’s sponsors? We will have to wait and see.