By Anthony Harrup

MEXICO CITY -- Mexico's minimum wage will rise almost 10% on Sunday, in a jolt to the system meant to stoke the poorest workers' buying power, which has been eroded by recessions and past bouts of high inflation.

But the prospect of higher earnings is doing little to dent pessimism among consumers, who head into 2017 facing rising fuel costs, higher interest rates and a weakening peso that closed 2016 near record lows against the U.S. dollar.

Labor, government and business leaders on the Minimum Wage Commission agreed to raise the daily minimum wage to 80 Mexican pesos, or about $4, from 73 pesos, a break from a yearslong custom in which annual increases were roughly in line with inflation.

Mexico's discussions on raising the minimum wage coincide with moves in the U.S., where some 4.4 million workers in 20 states are set to receive increases at the beginning of the year. That has also fueled debate on whether it will make U.S. employers reluctant to hire.

The commission split the increase into two parts: Four pesos a day to restore purchasing power and on top of that 3.9%. Authorities hope the 3.9% will be used as the benchmark for other wage negotiations, avoiding the so-called lighthouse effect where minimum-wage increases fuel demands across the board and threaten an inflationary wage spiral.

"Four pesos is ridiculous in my view," said 40-year-old Armando Galicia, who works at a convenience store in Mexico City. With bonuses for sales and punctuality, he manages to take home nearly double his minimum basic wage.

Like others, Mr. Galicia expects higher gasoline prices to eat into the increase in wages. "I don't have a car, but I use public transport. When gasoline goes up, food goes up, everything goes up," he said.

In preparation for the switch to an open market for motor fuels, the government raised gasoline and diesel prices between 14% and 20%, starting Jan. 1, and is eliminating subsidies on fuel. The changes prompted a number of economists to raise their inflation expectations.

Both the wage and fuel increases are inflationary, although overall prices shouldn't go up enough to wipe out the "very generous increase" in the minimum wage, said Alberto Ramos, chief Latin America economist at Goldman Sachs. With inflation likely to be somewhat above 4% in 2017, the lowest wage earners would still see a 4% to 5% pay raise, he added.

The minimum-wage increase followed several years of studies and discussions on the effect it could have on productivity, employment, and inflation.

"I think it took so long because of the history of high inflation in the late 1970s and 1980s, when raising the minimum wage became a taboo. That's why they decided to tread carefully," said Jonathan Heath, an independent economist who participated in some of the discussions.

Past crises left the minimum wage below the poverty line determined by the government agency in charge of evaluating social development policies, and insufficient to cover the basic needs set out in the Mexican constitution.

"Eighty pesos isn't enough for anything," said Luis Angel de León, 25, who makes more than the minimum wage receiving just tips at his job parking cars for boutique and restaurant patrons in Mexico City's upscale Polanco neighborhood. "When you buy tortillas, a kilo costs 12 pesos, plus eggs, ham and all that you've already spent the 80 pesos. Then you have to pay bus fares."

Around 15% of the country's 52 million workers make minimum wage, according to government data. Most of them are employed informally, and a majority contribute less than half of their household income, so many households survive because they have several wage earners.

"It would be a utopia to think that a family lives on 74 pesos [a day], not even one person lives on 74 pesos," Carlos Acevez del Olmo, secretary-general of the Mexican Workers Confederation, said at a news conference.

The umbrella labor group, which represents more than 4 million workers, had sought a minimum wage of 100 pesos before settling for 80 pesos. "We said, 'why not 100?' but then someone else said, 'why not 200?' So this was going to end up a mess," Mr. Aceves del Olmo added.

Mexican wages have been growing moderately in real terms in recent years, thanks in part to record-low inflation in 2015 and most of this year, with the result that private consumption has been spearheading economic growth. Unemployment reached a nine-year low in October at 3.6%, although manyof the jobs created pay less than those lost in the 2008 global crisis, and overall income from labor only recently recovered to precrisis levels.

The move toward higher wages was "reasoned, prudent and responsible," said Juan Pablo Castañón, head of the business coordinating council that represents the private sector. "To continue on that path, we have to talk about productivity, training, technology transfer so that micro- and small enterprises can acquire it. That's where employment is generated the fastest, but where we have the biggest challenges in productivity," he added.

Government officials said the increase brings the minimum wage's gains in real terms to 15% under the current administration, the most in the past four decades. But Labor Minister Alfonso Navarrete was reluctant to say whether additional increases could be coming soon.

"The outlook for 2017 is very complicated. In the country and in the world, there'sgreat uncertainty," he said.

Write to Anthony Harrup at anthony.harrup@wsj.com

(END) Dow Jones Newswires

December 31, 2016 07:14 ET (12:14 GMT)

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