The World Economy

(2007)doi: 10.1111/j.1467-9701.2007.01048.x

© 2007 The AuthorJournal compilation © 2007 Blackwell Publishing Ltd, 9600 Garsington Road,

1378

Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA

Blackwell Publishing LtdOxford, UKTWECWorld Economy0378-5920© 2007 The Author Journal compilation © Blackwell Publishers Ltd. 2007XXXOriginal ArticlesTRADE AND WAGES: Two Puzzles from MexicoRAYMOND ROBERTSON

Trade and Wages:

Two Puzzles from Mexico

Raymond Robertson

Macalester College, St. Paul, USA

Mexico plays an important role in the developing-country trade-liberalisation literature because it liberalised early and extensively. Numerous papers analysed changes in Mexican wage levels and inequality after Mexico joined the GATT in 1986. This paper reviews recent papers that analyse changes in wage levels and inequality since the North American Free Trade Agreement in 1994. Two main puzzles emerge.First, wage growth rates are similar before and after NAFTA. Second, Mexican wage inequality, which received much attention after its post-GATT rise, falls steadily after NAFTA. This paper reviews several possible explanations for these two phenomena.

1. INTRODUCTION: TWO PUZZLES OF THE MEXICAN EXPERIENCE

T

HE wave of liberalisation in the 1990s was especially pronounced indeveloping countries. Developing countries made significant changes designed

to foster globalisation, including lowering tariffs and other trade barriers, reducingbarriers to foreign investment and entering into multi-faceted trade agreements.At least some, and probably much, of the motivation for these changes was thepromise of higher wages, lower inequality and growth. In short, globalisationhas been seen as a possible remedy to some of the endemic problems found indeveloping countries.

One of the earliest liberalising countries, and therefore one of the most studied,was Mexico. Mexico joined the GATT in 1986 and significantly expandedforeign investment liberalisation in the late 1980s and early 1990s. Mexico alsosigned the North American Free Trade Agreement (NAFTA) in 1992 and theagreement went into force on 1 January, 1994.

Although there are many aspects one might focus on when considering theeffects of globalisation on workers, absolute wage levels and wage inequality aretwo of the most important. In Latin America, discontent with globalisation hasbeen credited, at least in part, with the wave of victories for left-leaning govern-ments. Several observers have identified the general perception of a lack of realwage growth following liberalisation as a key element of the popular discontent.Mexico has been no exception, and globalisation has been suggested as one ofthe driving forces behind the strength of PRD candidate Lopez Obredor in the2006 election (López-Córdoba, 2006).

The relative lack of real wage growth following trade liberalisation is puzzling.One possible explanation is that Mexico experienced a very severe recession

For helpful suggestions and comments, the author thanks Isidoro Solaga, Pia Orrenius, Sarah West,Karine Moe, participants at the CIDE-IBERGOP conference and at the Migration, Trade andDevelopment conference of the Federal Reserve Bank of Dallas.

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following the December 1994 peso crisis. Recovery from the crisis, however,was relatively rapid, with many measures (real wages and unemployment)showing recovery starting as early as 1996 or 1997. Even taking into accountthe recession, however, the Mexican wages converged to US wages at verysimilar rates before and after NAFTA. Mexico may potentially offer one ofthe best places to examine this phenomenon because both trade and foreigninvestment increased significantly after NAFTA (even relative to pre-NAFTAtrends) – changes that, prior to liberalisation, were expected to contribute torising wages.

In addition to the lack of expected wage growth, Mexico’s experience withglobalisation attracted much attention because it also experienced rising wageinequality almost immediately after joining the GATT. Papers documentingrising inequality in Mexico were joined by studies from other countries thatfound rising inequality following trade liberalisation in developing countries. Thecoincidence of trade liberalisation and wage inequality was interpreted by manyeconomists as evidence against neoclassical trade theory: the Heckscher-Ohlinmodel in general and the Stolper-Samuelson theorem in particular. Other explana-tions received more favourable attention. Skill-biased technological change,changes in industry-specific wage premiums, foreign investment, quality upgrading,exchange rate movements and demographic changes have all been suggested aspossible explanations, in Mexico and elsewhere, as favoured over the neoclassicalexplanation.

A few papers, however, began to document a discrete change in wage inequalityfollowing NAFTA. These papers, using a variety of datasets, illustrated that, infact, wage inequality began to reverse its rise and move consistently downwardduring the NAFTA period. Given Mexico’s early status as a leading example inthis literature, the reversal of wage inequality is a significant finding. One goalof this paper is to explore possible explanations for the second puzzle of theMexican experience: the rise

and fall

of wage inequality.This paper argues that there has been a fundamental shift in the Mexican

economy following NAFTA that can help us understand both of these phenomena.In short, three main lessons emerge from Mexico’s experience since NAFTA.First, the literature identifies a strong, positive link between trade and absolutewage levels that was confounded by a third factor: migration. Section 2 summar-ises recent research linking trade, foreign investment and migration to Mexicanwage levels. Second, the rise and fall of wage inequality in Mexico creates achallenge for most of the prevailing explanations of wage inequality in develop-ing countries. Section 3 describes the recent changes in wage inequality andconsiders various explanations in light of these changes. In Mexico’s case, thechanges in inequality seem most likely explained by either the change in thesupply of skill or the idea of vertical integration (sometimes linked to out-sourcing) although perhaps not in the way predicted by the literature. Section 4,

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therefore, presents recent evidence suggesting a fundamental shift in Mexicanmanufacturing and relates it to the recent fall in wage inequality. Section 5 offerssome concluding thoughts and directions for future research.

2. ABSOLUTE WAGES

Mexico’s liberalisation measures, and the resulting increase in both the leveland trend in trade and investment, have been well documented.

1

Mexico’sliberalisation was followed by increases in both the trend and level of imports,exports and foreign investment. These forces increased both factor market andproduct market integration between the United States and Mexico, raising thequestion of whether or not increased integration translated into rising wagelevels.

Revenga and Montenegro (1998) match industry-level data between Mexicoand the United States and find that trade liberalisation in Mexico loweredMexican wages relative to their industrial US counterparts between 1984 and1990. Hanson (2004) analyses the Mexican population census in 1990 and 2000and finds little, if any, evidence of wage convergence between the United Statesand Mexico. These results seem inconsistent with the hypothesis that rising andtrade and foreign direct investment would increase Mexican wages.

Although the labour markets can be considered integrated, a substantial wagegap between Mexican and US wages persists. To analyse the gap and conver-gence, Robertson (2005b) matches the Mexican National Survey of UrbanEmployment (Encuesta Nacional de Empleo Urbano, or ENEU) and the similarUS Current Population Surveys (CPS) and applies Deaton’s (1985) pseudo panelapproach. This approach generates wage averages for different groups in thepopulation and tracks the wages of these groups over time. One advantage of thisapproach is that it controls for changes in demographic characteristics that wouldotherwise affect average wages. Workers in each city fall into one of 40 groupsdefined by five education levels and eight age groupings.

2

The quarterly data runfrom 1987 to 2002.

The results suggest that, although interrupted by the peso crisis, the wage gapfalls over time. By 1999 the wage gap is very close to, if not slightly larger than,the 1989 level. Interestingly, however, the rate of convergence is not significantly(if at all) higher during the NAFTA period than before the NAFTA period. Giventhe rise in the trend and level of trade and foreign direct investment, this result

1

Robertson (2005a) provides a general overview of integration in North America.

2

The education levels are divided into the following categories: 0 to 6 years, 7 to 9 years, 10 years,11–12 years, and more than 12 years. The age groups are 5 years apart starting at 15, except forthe last group. The last group includes workers between 50 and 65 in the first year.

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is somewhat surprising. One possible explanation is that trade and FDI do nothave a significant effect on the US-Mexican wage gap. Another possibleexplanation is that a third factor mitigates the otherwise positive effects oftrade and FDI.

For the Mexican case, the most likely candidate of a confounding factor maybe migration. While the effects of migration on wages in the US remains contentious(with Borjas, 2003, a notable recent contribution), there is a growing consensusabout the effects of emigration on Mexican wages. Aydemir and Borjas (2006)and Mishra (2003) find that emigration has a strong and positive effect onMexican wages due to changes in local labour supply. Emigration also haspositive development effects. Unger (2005) and Woodruff and Zeneto (2007)find a positive link between emigration and local development, working throughremittances. Emigration may also affect both labour force participation (Hanson,2005) and education decisions (Hanson and Woodruff, 2003) that could, in turn,affect individual or household earnings.

These results have implications for the effects of border enforcement.Given the result that emigration raises wages in Mexico, it is perhaps notsurprising that effective measures to block immigration push down Mexicanwages. Using US border enforcement data, Hanson et al. (2002) find that, whileUS border enforcement has no detectable effect on US wages, there may be anegative effect of enforcement on Mexican wages. Robertson (2005b) confirmsand extends this result. Figure 1 illustrates this finding using the US-Tijuanawage ratio and US border enforcement in Tijuana. The two series exhibit astrong inverse relationship, suggesting that US border enforcement depressesMexican wages.

Aroca et al. (2005) find that trade and foreign investment act as a substitutefor migration, in the sense that increases in these variables reduce the incentiveto migrate. Since these variables may exert stronger effects along the border,they help us to understand the roles of these factors in integrating labourmarkets.

3

But how do these positive forces compare with the negative effect ofborder enforcement? To answer this question, Robertson (2005b) combinestrade, investment and US border enforcement into a single estimation equation.These results suggest that, over the 1992–2002 period, trade increased theMexican relative real wage by about 3.6 per cent, but the increase in USborder enforcement over the same period reduced the Mexican relative realwage by about 4.4 per cent. In other words, the effects of enforcement wereenough to mitigate the otherwise positive effects of increasing trade onabsolute wages.

3

See Robertson (2000) for evidence of labour market integration between Mexico and the US.

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3. MEXICAN WAGE INEQUALITY

a. Rising and Falling Inequality

The effects of globalisation on relative wages in developing countries havebeen the topic of much debate. In particular, Mexico was one of the first coun-tries to have a documented rise in wage inequality following trade liberalisation.Since then, several other papers have gone on to show that a similar phenomenonoccurred in other developing countries as well (see Wood, 1997, and the recentexcellent survey by Goldberg and Pavcnik, 2007).

What has received much less attention is the fall in wage inequality thatoccurred after NAFTA, documented by Aiola and Juhn (2001), Robertson (2004)and López-Acevedo (2006). The fall in wage inequality emerges in consumptionsurveys, household surveys, the Industrial Census and the Monthly IndustrialSurvey (documented through 1999), and seems to be robust to different inequalitymeasures.

To illustrate the recent evolution in the trend in wage inequality, we draw fromtwo different sources. The first source is the quarterly

Encuesta Nacional deEmpleo Urbano

(National Urban Employment Survey). This survey is similar in

FIGURE 1Mexican Wages and US Border Enforcement

Source: Robertson (2005b).

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sample and design to the US Current Population Surveys and is used to calculatethe unemployment rate. The survey covers over 100,000 people each quarter andis conducted by Mexico’s national statistics institute (INEGI). To compare dataover time, I restrict the sample to males in 20 principal cities

4

with non-zeroearnings between the ages of 16 and 65 (inclusive). Although there are severalpossible measures of inequality, Figure 1 shows the estimated Gini coefficientfrom the sample bordered on either side by the 95 per cent confidence interval.

5

As established in the literature, income inequality rises sharply after Mexico’sentrance into the GATT. Around 1995, however, the rise levels off. The last halfof the sample, the NAFTA period, the Gini coefficient exhibits a noticeabledecline. As illustrated by the confidence intervals, the decline in the Ginicoefficient does not seem to be an artefact of noisy data.

Several recent papers highlight the importance of regional differences inforeign investment, trade and economic activity in explaining growing wageinequality in Mexico.

6

One way to analyse the relative contribution of regionaleffects would be to decompose the inequality measure into ‘within-region’ and‘between-region’ effects. While such a decomposition is not appropriate for theGini coefficient, other members of the Generalised Entropy class of single-parameter measures of inequality, such as the Theil index, may be decomposedinto between- and within-group components. While the overall pattern of theTheil index is basically identical to that of the Gini, a between-within regiondecomposition of the measure over time finds that the within-region componentmakes up between 96.6 and 99.6 per cent of the changes in inequality for theENEU surveys described above. In other words, growing inequality betweenregions is very small compared to nationwide phenomena. This result is similarto other recent papers analysing inequality in Brazil, such as Pavcnik et al.(2004), Gonzaga et al. (2006) and Ferreira et al. (2007).

The available ENEU data end in 2001. To get a more recent picture of theevolution of wage inequality in Mexico, consider the

Encuesta IndustrialMensual

(Monthly Industrial Survey). This survey is also conducted by INEGIand is based in the Mexican Industrial Census, which is taken every five years.For the 1994–2005 period, aggregated data for 205 industries are available on theInternet.

7

The survey is designed to cover 80 per cent of Mexican manufacturing

4

The cities are Mexico City (Distrito Federal), Mexico State, San Luis Potosí, Leon, Guadalajara,Chihuahua, Monterrey, Tampico, Torreon, Durango, Puebla, Tlaxcala, Veracruz, Merida, Orizaba,Guanajuato, Tijuana, Ciudad Juarez, Matamoros and Nuevo Laredo. These cities are chosenbecause they are the cities available in the 1987 ENEU.

5

The confidence interval is estimated using a bootstrap procedure with 500 repetitions.

6

For example, see Chiquiar (2002) and Sánchez Reaza and Rodriguez-Pose (2002). Kaplan et al.(2005) show important regional differences in post-displacement wage experiences.

7

See

Banco de Información Económica

at http://www.inegi.gob.mx.

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production. For the period covered in this paper, the survey covers about6,000 establishments.

8

The survey excludes firms in the maquiladora industry,basic petrochemicals, petroleum refining, and firms with 15 or fewer employees(

microindustria

). Variables include employment, hours and wages for production(

obreros

) and non-production (

empleados

) workers, as well as the value ofproduction and sales.

This survey allows us to measure wage inequality using the non-production-production worker wage ratio. While this measure is both widely used and subjectto much criticism, Robertson (2004) shows that these occupational classificationsare highly correlated with education measures, suggesting that they may be areasonable proxy for changes in relative wages.

Figure 2B shows the change in the employment-weighted average of thewithin-industry ratio of average non-production (empleados) to production(obreros) worker wage. During the crisis, the relative wage of skilled workerscontinued to rise, which is consistent with Verhoogen (2007). Once the recoverybegan, however, the relative wage of skilled workers (as a measure of inequality)begins to fall. Although the data are drawn from very different sources, havedifferent frequency and different coverage, the overall pattern of wage inequalityis the same as in Figure 2A. Furthermore, these data suggest that the decline inwage inequality continues until 2005.

Figures 2A and 2B illustrate that Mexico represents a clear example of adeveloping country that has experienced falling wage inequality following tradeliberalisation. This pattern presents a challenge for many of the prevailing explana-tions of wage inequality, since there are very few variables that rise prior toNAFTA but fall afterwards.

b. Competing Explanations

In Mexico, the rise in wage inequality has been linked to changes in industry-specific wage premiums (Revenga, 1997; Cragg and Epelbaum, 1996; andFeliciano, 2001), foreign direct investment (Feenstra and Hanson, 1997), changesin tariffs that favoured skilled workers (Hanson and Harrison, 1999), changes inexchange rates that induced skill-biased investment and quality upgrading(Verhoogen, 2007), skill-biased technical change (Cañonero and Werner, 2002),nominal rigidities (Kaplan, 2006), changes in relative output prices (Robertson,2004; and Nicita, 2004), and the supply and demand for education (LópezAcevedo, 2006). These explanations are not mutually exclusive, and all couldhave played a role in rising wage inequality after Mexico joined the GATTin 1986.

8

Over the sample period, the survey covers between 5,587 and 6,884 establishments.

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FIGURE 2AGini Coefficient with 95 Per Cent Confidence Interval

Notes:The dotted lines represent the 95 per cent confidence interval calculated using bootstrapped variance estimatesof 500 draws. The sample was restricted to males in the same 20 Mexican cities with non-zero earnings andbetween the ages of 16 and 65, inclusive.

Source: Author’s calculations using the Encuesta Nacional de Empleo Urbano for each quarter between 1988:1and 2001:4.

FIGURE 2BRelative Wages Before and After NAFTA

Notes:The relative wage is the average hourly wage of non-production workers divided by the average hourly wageof production workers, so that an increase (decrease) in the series is a rise (fall) in wage inequality.

Source: INEGI, Monthly Industrial Survey (EIM).

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Perhaps the leading explanation for changes in relative wages in developingcountries is skill-biased technological change. While the extent of technologicalchange in Mexico may be debatable, Cañonero and Werner (2002) argue thatSBTC is relevant for Mexico in the GATT period. Haskel and Slaughter (1998)[HS] argue that SBTC is not sufficient to explain wage inequality: it is the

sectorbias

of SBTC that explains changes in relative wages.

9

Therefore, I first estimateskill-biased technological change with Mexican industrial census data using themethodological approach described by [HS] for industries indexed by

k

:

∆

S

k

=

a

0

+

a

1

∆

log(

w

s

/

w

u

)

k

+

a

2

∆

(

K

/

Y

)

k

+

ε

k

, (1)

in which

∆

S

k

is the change in the non-production employment share in the totalwage bill,

w

i

represents the wage of each worker type,

K

is capital,

Y

is realvalue-added output, and the final term is the error. [HS] suggest that skill-biasedtechnological change is sector

k

can be represented by positive values of

a

0

+

ε

k

.Estimated values from the Mexican census data are all positive, suggesting thatall industries in all periods experienced SBTC (consistent with Cañonero andWerner, 2002). To evaluate the sector bias, [HS] regress their estimates of SBTCon the initial value of the non-production-production employment ratio. For thisanalysis I assume, like [HS], that technology does not affect prices.

The results, shown in Figure 3, suggest that the relationship between skillintensity and SBTC is weakly positive between 1986 and 1989, negative between1989 and 1994, and strongly positive from 1994 to 1999. The sector bias ofSBTC is in the opposite direction as would be expected if sector bias matters andSBTC were to explain the changes in wage inequality.

Another possible explanation is the Stolper-Samuelson theorem. Within theHeckscher-Ohlin framework, the Stolper-Samuelson theorem describes the linkbetween trade liberalisation and wage inequality as a relationship between therelative output prices and relative wages. An increase in the relative price ofskill-intensive goods could explain an increase in the relative wage of skilledworkers, even in a developing (or labour-abundant) country. Since price data aregenerally difficult to find, few papers use relative prices. Papers that actuallycompare changes in relative prices (perhaps most notably Beyer et al., 1999;Shinkai, 2000; Robertson, 2004; and Gonzaga et al., 2006) find a strong positiverelationship between changes in relative prices and relative wages in Chile,Bolivia, Mexico and Brazil (respectively).

These papers stand out in a literature that generally gives little weight toStolper-Samuelson effects. Early reviews, such as Wood (1997), suggest that anincrease in wage inequality was inconsistent with trade liberalisation in Latin

9

Xu (2001) finds that the elasticity of substitution may affect these results.

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FIGURE 3Skill-biased Technological Change Using Census Data

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America because Latin America was assumed to be less skill abundant. Otherstudies cite the relative lack of between-industry employment shifts as evidenceagainst the Stolper-Samuelson theorem. The intuition behind the theorem sug-gests, although the theorem itself does not strictly require, that trade liberalisationin a labour-abundant country will induce a shift towards less skill-intensiveindustries (see Deardorff, 1994, fn. 4). As resources move towards less skill-intensive industries, the demand for unskilled workers increases, raising therelative wage of skilled workers. The lack of movement between industries doesnot support the theorem, but does not necessarily provide evidence against thetheorem. Nevertheless, papers that use output prices also document significantchanges in between-industry movements in labour. In particular, Robertson(2004) shows that about 42 per cent of the increase in demand for skill over the1987–1994 period is explained by between-industry shifts, and about 32 per centof the fall in the demand for skill over the 1994–1998 period was due tobetween-industry shifts.

10

The relative price of skilled goods rises from 1987–1996 and falls from 1996to 2000, making changes in relative prices a compelling explanation for the riseand fall of inequality in the 1990s. Starting in 2000, however, the relative price ofskill-intensive goods within the non-maquila manufacturing sector began to rise, andcontinues to rise, which would be inconsistent with the Stolper-Samuelson theorem.

SBTC and relative prices are not the only factors that seem inconsistent withthe subsequent fall of wage inequality in the 2000–2005 period. Patterns inforeign direct investment and the real exchange rate are similar in the GATTand NAFTA periods. Furthermore, NAFTA tariff changes were small comparedto those that initiated the GATT era, possibly suggesting less of a role forindustry-specific wage premiums (although this explanation certainly meritsfurther research).

One possible candidate that survives the challenge is the supply of education.Education reform in 1992 increased mandatory education to age 15 (from age12). Additional reforms in 2002 will make preschool mandatory for all childrenages 3 and up by 2008, and are being phased in gradually.

11

López Acevedo

10

One problem with this simple calculation is that it abstracts from business cycle effects. Robertsonand Dutkowsky (2002) confirm that non-production workers have higher adjustment costs thanproduction workers in Mexico. This finding implies that the aggregate non-production-productionworker ratio will have a business cycle component. The relative employment of skilled workers,however, rises over the sample period. This is consistent with a rising supply of skilled workers,and a fall in the relative price of skill-intensive goods.

11

In 2005, 77.4 per cent of the population between the ages of 3 and 15 were enrolled in school.In 2005, 18.8 million children were in primary school (including preschool). Between 2000 and2005, enrolment at the secondary public school level rose from 5.4 million to 5.9 million, but therate of increase in university enrolment slowed (http://www.state.gov/r/pa/ei/bgn/35749.htm).

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(2006) argues that changes in education track both the rise and fall of inequalityover the 1980s and 1990s. López Acevedo suggests that changes in returns toeducation, driven by the interaction of supply and demand, explain a significantpattern of the changes in wage inequality, but does not explore the driving forcesbehind changes in demand for skill in the NAFTA era. Given that NAFTAliberalised markets with skill-abundant partners and that wage inequality fellever since NAFTA went into effect, another trade-related explanation is possible:a reorientation of Mexican manufacturing.

4. A TRANSFORMATION OF MEXICAN MANUFACTURING?

a. Horizontal Competition vs. Vertical Integration

The simplest form of the neoclassical Heckscher-Ohlin trade model assumestwo countries, two factors and two goods. As is well known, the pattern ofrelative factor abundance predicts trade patterns. The good that intensively usesa country’s abundant factor is relatively inexpensive, while the other good ischeaper in the other country. When trade barriers fall, prices change. Countriesincrease imports of the cheaper good and export the now-more-expensive good.If one of the factors were labour, this model predicts that labour in the twocountries would be substitutes for each other, particularly within sectors, inthe sense that the demand for labour would increase in one country and fallin the other.

With vertical integration (sometimes broadly grouped with outsourcing orproduction fragmentation), however, a different pattern emerges. With verticalintegration, the two countries specialise in producing different stages of thesame good. When two countries open to trade in this model, labour in eachcountry now has the potential to be a within-sector complement with labour ina different country. This is especially true if there are significant differencesin skill levels. Thus, a task that might be done by ‘less skilled’ workers in onecountry could be done by ‘skilled’ workers in the other country. This, of course,is the essence of Feenstra and Hanson (1997). The implication of this patternis that labour in the two countries would be considered complements, ratherthan substitutes. The rise in vertical integration, therefore, would change thekind of relationship between labour in the two countries: from substitutes tocomplements.

In Mexico, vertical integration is most evident in the maquiladora sector.Maquiladoras are assembly plants in Mexico that export goods assembled withimported inputs. These are largely foreign firms that have been the engine behindMexican manufacturing growth over the last 25 years. The rise in maquiladoraestablishments and employment potentially represents direct integration of the

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US and Mexican economies because it represents a fragmentation of the produc-tion process. Maquiladoras become part of the production chain of US companiesbecause they perform the assembly stage of production and therefore tighten thelinks between the two countries (see Hanson and Robertson, 2003).

While the rise of maquiladoras (in terms of total employment) has receivedsignificant attention, few papers have compared the growth of maquiladoras tothe growth of non-maquila manufacturing. The Mexican Monthly IndustrialSurvey (EIM) facilitates this comparison because, as noted above, the surveyexcludes firms in the maquiladora industry. To compare the relative growth inmanufacturing in the two sectors, I normalise total maquiladora employment inthe first six months of 1994 to one and total EIM employment to one for the sameperiod and compare the ratio of the two indices. Figure 4 shows maquiladoraemployment growth relative to the rest of Mexican manufacturing. Relative todomestic manufacturing, the maquiladora sector has expanded at a much higherrate. The 1999 Mexican

Industrial Census

reported a total of 4,232,322 workersin manufacturing in 1998. The average employment in the maquiladora sector in1998 was 1,014,006, suggesting that maquiladora employment made up just over23 per cent of Mexican manufacturing employment. By 2003 (according to the2004

Industrial Census

), that ratio had risen to over 25 per cent.

FIGURE 4Maquiladora Employment Relative to Non-maquila Manufacturing Employment

Notes:The series represents the ratio of maquiladora employment (normalised to 1 in 1994) to employment in theMonthly Industrial Survey (normalised to 1 in 1994). Both maquiladora employment and non-maquilaemployment (EIM) come from INEGI.

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b. Substitutes or Complements?

To test whether Mexican and US workers are substitutes or complements, Robertson(2006) matches Mexican manufacturing employment data with the US CurrentEmployment Statistics surveys (CES). The US Current Employment Statisticsprogramme covers about 300,000 employer units (over 35 per cent of total payrollemployment). The survey is conducted by the US Bureau of Labour Statistics withcooperation with individual states. The data include average hourly wages andemployment for production workers, but do not include value of production or earningsof non-production workers. As a result, monthly production value is not available atthe industry level.

12

Hours and earnings data are available for about 850 industries.The estimated coefficients come from a system of labour demand equations,

following Hamermesh (1993). The three labour demand equations represent USproduction workers, Mexican non-production workers and Mexican productionworkers. The estimated cross-price elasticities are used to evaluate whether thevarious factors are complements or substitutes.

To provide a benchmark, Robertson (2006) first applies this approach to themaquiladora sector. There are 10 manufacturing industries included in themonthly maquiladora statistics. These industries are matched to the CES datausing industry descriptions. The nature of the maquiladora industry suggests thatproduction workers in the maquiladora industry and production workers in USmanufacturing should be complements, as they are both part of the same produc-tion chain and engaged in different stages of production. In fact, this is exactlywhat the data suggest. Production workers in Mexican maquiladoras and USproduction workers are complements.

Given these expected results, Robertson (2006) then applies the same analysisto non-maquila manufacturing for the GATT period (1987–1994) and theNAFTA period (1994–2005). The results for the GATT period differ from themaquiladora results. Rather than being complements, Mexican productionworkers are within-sector substitutes for US production workers, as the Heckscher-Ohlin model might suggest. This result is consistent with the idea that Mexicanmanufacturing is engaged in similar activities as the US, such that trade liberal-isation would cause relative specialisation and trade across industries.

When the approach is applied to the NAFTA period, however, the oppositeresults emerge. During the NAFTA period, the estimates suggest that Mexicanproduction workers and US production workers are complements. This result mayhave significant implications for North American integration because it is consistentwith the idea that non-maquila Mexican manufacturing is moving towards integration

12

The Board of Governors of the Federal Reserve Board releases monthly production indices atthe industry level. These indices are not usually direct measures of output. Instead, for much ofmanufacturing, the output indices are constructed functions of the Current Employment Statisticsemployment data.

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into the North American production chain. In other words, Mexico and the USmight better be characterised as production partners than production competitors.

c. Ties to Inequality

Is it possible that the integration into the US production chain explains fallingwage inequality? There are two important factors that must hold for this to betrue. First, assembly activities must be less skill intensive than non-assemblymanufacturing. That is, the assembly sector and the rest of Mexican manu-facturing must be distinguished by differing skill levels. Second, the relativeprice of the less-skill-intensive activity must be falling. In this section, we providesuggestive evidence that both of these conditions hold.

(i) Factor intensity

The goal of the Mexican maquiladora sector originally was to foster develop-ment along the US-Mexican border. Otherwise known as the ‘in-bond’ assemblyindustry, the industrial design is to import materials for assembly and export theassembled goods. In other words, the goal of the maquiladora industry was to filla niche within the production chain.

Table 1 includes the employment ratios for maquiladora industries and thenon-maquiladora Monthly Industrial Survey. Maquiladora employment statisticsinclude three employment classifications: Obreros (production workers), Ténicosde Producción (production technicians) and Empleados (non-production workers).The Monthly Industrial Survey (EIM) includes two classifications, Obreros andEmpleados. The occupation descriptions do not clearly reveal where Ténicosbelong, although remuneration descriptions list Ténicos and Obreros as beingwage earners, while Empleados receive salaries. To calculate the employmentratios for each industry, I include Ténicos with the Empleados. Therefore, thedata in this table should be considered an upper bound for the relative employ-ment of skilled workers in each industry. The 10 industries listed in this tableinclude all of the non-service maquiladora industries available in the data. Themaquiladora industries were matched to the EIM industries at the four-digit levelusing industry-level descriptions; unmatched industries were not included.

The data in Table 1 reveal two characteristics. First, maquiladoras have lowerskilled-worker employment ratios in all industries except for furniture. Second,the within-industry employment of skilled workers increases throughout thesample period for the maquiladoras, but not in many of the matched non-maquilaplants. This may be due to a reorientation of the industry itself, away from ‘total’production (as described by the Heckscher-Ohlin model) towards assembly andbecoming a part of the global product chain.

The comparison of employment ratios seems somewhat at odds with previousstudies of maquiladoras, such as Feenstra and Hanson (1997). There are several

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reasons why these results may not be strictly comparable to their study. First, thetime period is different: Feenstra and Hanson (1997) focus on the pre-NAFTAperiod. Second, the data used to support their claim that investment in maquila-doras increases the demand for skill was based on wage bill comparisons, notemployment per se. Third, this comparison does not hold constant the actualactivities of the plants. In fact, using plant-level data for 1992, Bernard et al. (2004)find that, holding activity constant, maquiladoras tend to employ more skilledworkers than other plants. One possible explanation for the difference is thatmaquilas focus on assembly, while domestic plants engaged in a wider range ofactivities. In the process of assembly, maquilas may be more skill-intensive thannon-maquila assembly plants, but, overall, assembly is a more labour-intensiveactivity than the average activity of the non-maquiladora plant.

TABLE 1Non-production/Production Employment Ratios

Industry 1994 2004

EIM Maquila EIM Maquila

Food 0.468 0.165 0.567 0.222(0.015) (0.025) (0.012) (0.020)

Textiles 0.267 0.165 0.255 0.193(0.005) (0.005) (0.003) (0.002)

Furniture 0.237 0.212 0.225 0.240(0.005) (0.006) (0.003) (0.005)

Shoes 0.211 0.194 0.185 0.200(0.003) (0.005) (0.003) (0.008)

Chemicals 0.629 0.193 0.725 0.293(0.008) (0.008) (0.004) (0.021)

Electric 0.393 0.257 0.360 0.276(0.009) (0.006) (0.004) (0.011)

Electric Materials 0.892 0.246 0.775 0.300(0.035) (0.012) (0.065) (0.006)

Tools 0.381 0.200 0.353 0.224(0.006) (0.008) (0.007) (0.005)

Transport 0.352 0.238 0.306 0.276(0.006) (0.005) (0.007) (0.004)

Other 0.426 0.227 0.477 0.247(0.021) (0.008) (0.029) (0.003)

Notes:Maquiladora employment statistics include three employment classifications: Obreros (production workers),Ténicos de Producción (production technicians), and Empleados (non-production workers). The MonthlyIndustrial Survey (EIM) includes two classifications, Obreros and Empleados. The occupation descriptions donot clearly reveal where Ténicos belong, although remuneration descriptions list Ténicos and Obreros as beingwage earners, while Empleados are salaried earners. To calculate the employment ratios for each industry, Iinclude Ténicos with the Empleados. Therefore, the data in this table should be considered an upper bound forthe relative employment of skilled workers in each industry. The 10 industries listed in this table include all ofthe non-service maquiladora industries available in the data. The maquiladora industries were matched to theEIM industries at the four-digit level using industry-level descriptions.

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(ii) Relative pricesThe relative shift towards maquiladoras would be consistent with falling inequality

in Mexico if maquiladoras are less labour intensive and if the relative price ofmaquiladora output was rising relative to relatively skill-intensive non-maquiladoramanufacturing. To compute the average price of Mexican non-maquiladora manu-facturing output, we use unit value indices from the Monthly Industrial Survey,aggregated to a single index for manufacturing, and then divide that index by theMexican consumer price index. Assuming the quantities of domestic inputs remainconstant, a very heuristic estimate of the output price of the maquiladoras wouldbe given by the ratio of the value of exports to the value of imported inputs.

Figure 5 shows the evolution of these two price measures. The real price ofmaquiladora output has been increasing and the real price of non-maquiladoraoutput has been falling. The real price of Mexican manufacturing may be fallingbecause of an overvaluation of the exchange rate. Robertson (2003) documentsthe close relationship between the Mexican real exchange rate and the Mexicantrade balance, and shows that this appreciation is positively correlated with realwages. The appreciation of the real exchange rate following the peso crisis hasdriven down net exports and generated a significant trade deficit for much of theNAFTA period. The rising exchange rate drives down the price of imports, leadingto a decrease in the price of tradable goods relative to non-tradable goods.

FIGURE 5Maquila and Non-maquila Output Prices

Notes:Both series are normalised to 1 using the first six months of 1994 as a base. The maquiladora output priceis computed as the value-added divided by the value of imported materials, as described in the text. Thenon-maquila output price is the employment-weighted average of unit value Fisher price indices from themonthly industrial survey (EIM) divided by the Mexican consumer price index.

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The rise of the exchange rate and the falling price of Mexican non-maquiladoratradable goods would be consistent with the rise of the relative price of skill-intensive goods within non-maquila manufacturing if Mexican non-maquiladoraimports were relatively less skill intensive, which would be the case if Chinawere exerting a significant influence in Mexican trade (as suggested by Hansonand Robertson, 2006), or if Mexico had a predisposition towards exportingskill-intensive goods due to excessive ‘lumpiness’, as suggested by Bernard et al.(2004).

Maquiladoras, however, are not subject to the same pressures because they areintegrated into the production chain. The appreciation of the exchange rate raisesthe relative price of the exported goods, both by making imported intermediateinputs cheaper and by raising the value of the finished products. The combinationof real exchange rate appreciation and a reorientation of the manufacturingtowards vertical integration results in a fall in the relative price of the skill-intensive sector, non-maquila manufacturing.

Mexico, therefore, has experienced a relative shift in production towardsassembly. To the extent that assembly is labour-intensive, the relative rise in theprice of assembly and the shift towards assembly would be consistent with a fallin the relative wage of skilled workers. Figure 6 shows the change in the relative

FIGURE 6Relative Prices and Relative Wages

Notes:The relative goods price is the ratio of the two price series (non-maquila/maquila) shown in Figure 5. Therelative wage series is the series shown in Figure 2B truncated to the NAFTA period. The relative goods pricerepresents the relative price of skill-intensive goods, and the relative wage represents the relative wage ofskilled workers.

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wage of skilled workers and the relative price of skill-intensive output. Whenmaquiladoras are considered the ‘less-skill-intensive’ sector, and the non-maquiladoras are considered the ‘skill-intensive’ sector, the relative wage ofskilled workers follows the relative price of skill-intensive goods, consistent withthe Stolper-Samuelson theorem.

5. CONCLUSIONS

Mexico was a liberalisation leader in Latin America. As a result, Mexico mayhold important lessons for liberalisation for the rest of Latin America and,possibly, developing countries. The perceived lack of wage growth and risinginequality were reflected in the experiences of several other liberalising coun-tries, and may have contributed to the current backlash against globalisation.

This study reviews recent evidence on changes in absolute and relative wages.Recent evidence seems to suggest that, in fact, trade, which has been increasing,has been positively associated with wages. In the Mexican case, however, migrationplays an important role in national wage levels and rising US border enforcementmay have worked to mitigate the otherwise positive effects of trade liberalisationby pushing down Mexican wages.

In terms of relative wages, Mexico presents another challenge to the risingconsensus because inequality reversed its rise and has fallen steadily sinceNAFTA. While this seems intuitively consistent with a Heckscher-Ohlin-typeargument applied by Wood (1997) (that liberalisation between labour-abundantMexico and its skill-abundant Northern neighbours would lead to falling wageinequality), the exact mechanism still seems illusive. Mexican production workerschanged from being substitutes for US production workers in the GATT era tobeing complements with US production workers in the NAFTA era, consistentwith a reorientation of Mexican non-maquila manufacturing towards the NorthAmerican supply chain. The overall shift towards assembly operations may helpus understand falling wage inequality in Mexico, but clearly other explanationsare possible. Changes in the supply of education, in particular, may be a contribut-ing factor, and this study presents some preliminary heuristic evidence that theexpansion of assembly activities within Mexico may have increased the demandfor less-skilled workers.

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