The law is also a test case for the incoming president, Enrique Peña Nieto, who has promised to push ahead with legislation that experts say would modernize the economy and invigorate its modest growth rate.

The labor overhaul, which the Senate passed late Tuesday, streamlines the cumbersome rules that analysts say discourage small businesses from hiring workers and instead push millions of Mexicans into the underground economy.

Mexico’s lower house, the Chamber of Deputies, passed the bill last week, and it will now go to President Felipe Calderón to sign. The bill’s passage was a victory for the president, who has tried repeatedly to pass economic changes only to see them watered down or languish in Congress. Minority left parties voted against the bill, arguing that it would remove protections for workers.

Although Mr. Peña Nieto, who takes office Dec. 1, supported the law, his own party managed to reverse some of the proposals in the original legislation that would have limited the control of Mexico’s union bosses. The country’s large public sector unions are a bulwark of Mr. Peña Nieto’s Institutional Revolutionary Party, known as the PRI.

PRI legislators initially stripped out all the language that would have required more democracy and transparency from union leaders, but in the end, the PRI representatives and legislators from the left formed an unusual alliance, and the PRI was forced to agree to union elections by secret ballot and require a yearly audit of union finances. However, other efforts to improve union transparency, including giving workers the right to vote on their own contract, remained out.

Such moves have raised questions about how far Mr. Peña Nieto will go to stand up to union leaders. He will have to negotiate with the bosses of the teachers’ and oil workers’ unions if he pushes ahead with promises to overhaul the country’s failing schools and open the state-run oil monopoly to private investment.

Although Mexico has recovered the jobs that it lost after the sharp recession of 2009, an increasing number are in the underground economy, where workers have no protection or legal benefits. Mexico’s statistics institute estimates that more than 29 percent of workers are informally employed.

Analysts said that the bill was an important step that could help workers and improve the country’s productivity.

The labor changes will “have a positive impact on the quality of job creation,” wrote Luis Arcentales, an analyst with Morgan Stanley Research, in a report before the bill’s Senate passage.

“By lowering the cost of hiring and firing workers,” Mr. Arcentales wrote, “the labor reform could boost formalization.”

Among the most important changes was a one-year limit on the back wages employers must pay a worker who wins a lawsuit over a wrongful dismissal. Under the old law, the suits dragged on for years and employers were liable for all back pay if they lost.

The law also introduces part-time jobs and temporary training contracts. It regulates some of the murky practices of outsourcing temporary workers without paying them benefits, a measure many employers had used to get around the 42-year-old labor law.

Article source: http://www.nytimes.com/2012/11/15/world/americas/mexican-lawmakers-approve-overhaul-of-labor-law.html?partner=rss&emc=rss