Transcript Slide 1

What Has Happened To Wages In
Mexico Since NAFTA? Implications
For Hemispheric Free Trade
NBER Working Paper
Gordon H. Hanson
NBER Working Paper Produced By:
Gordon H. Hanson
Professor of economics in the Graduate
School of International Relations and
Pacific Studies and the Department of
Economics at the University of California,
San Diego (UCSD). He is also a research
associate at the National Bureau of
Economic Research and coeditor of the
Journal of Development Economics. In the
past, he also served on the faculties of the
University of Michigan and the University
of Texas. He is the author of over 50
academic research publications that are
largely in the area of international
 1st
Section – Discussion of recent literature
on the labor-market consequences of Mexico’s
economic reforms.
 2nd Section – Discussion on the rising skill
premia in Mexico.
 3rd Section – Discussion on regional wage
differences in Mexico.
 4th Section – Discussion on the convergence
in Mexican and U.S. wages.
 Final Section – Implications of Mexico’s
experience with NAFTA, and speculation on
the effects on a Latin American FTA with the
Important History in a Nutshell
1917 Mexico adopts new Constitution
◦ Amalgam of economic policies
Financial Crises of 1982 and 1994/95
◦ US bailout for Mexico during 94’/95’ Peso Crisis
NAFTA comes into force in 1994
◦ Free Trade Agreement between Mexico, Canada,
and the United States
◦ Extension of CUSFTA to Mexico
◦ Act is phased in over time
Impact of Trade on Mexico
Trade accounted for 11.2% of Mexico’s GDP
in 1980, but had grown to 32.2% by 2000.
FDI averages 1.3% of GDP from 1980-1994,
but grows to 2.8% of GDP from 1995-2000
2/3rds of FDI comes from the United States
In 2000, Mexico sends 88.7% of its exports
to and bought 73.1% of its imports from the
United States.
Located along border with the United
 In 2000, accounted for 47.7% of Mexico’s
exports and 35.4% of imports
 Act as a sub-assembly sector for
American industry.
 Main driver behind growth in the Mexican
More about Maquiladoras
Most Maquiladoras assemble one of three
types of goods, apparel, electronics, or auto
In 1995, these three industries accounted for
80.5% of total exports.
It is thought that Mexico has comparative
advantage in assembly-type activities, which
is why their industry is growing rapidly in
this area as opposed to being more
Rising Skill Premia
Wage gains were largest for more educated
workers that lived close to the border with
the United States.
This factor relates to the rise of
Maquiladoras, which account for 50% of the
increase in the skilled labor wage share
during the late 1980s.
Data appears to contradict Heckscher-Ohlin
Theorem and other related trade theory
due to Mexico’s presumed comparative
advantage in low-skill activities
Heckscher-Ohlin Theorem
Theory of international trade that posits
that differences amongst trading partners in
physical and human capital (labor), will create
productive differences that explain how
trade occurs.
Based on the concept of comparative
Mexico has an abundance of low-skilled
labor, thus giving it an edge in this area.
Labor should then earn rents in international
trade. Leontief Paradox?
Possible Explanations
Mexico had the most protection on lowskilled industries prior to liberalizing trade
Mexico does not trade with America in
isolation. China and other Asian nations
could account for this dilemma
NAFTA had not come into full effect by
2000. Many forms of American
protectionism (with regard to agriculture)
would not be done away with until roughly
Average of 400,000 Mexicans moved to
the United States during each year in the
 Most of theses immigrants come from
Agricultural regions in the Western
portion of the country. These states are
neither the poorest or the closest to the
United States.
 Longstanding regional networks help
Mexican workers find jobs in the US.
Regional Wage Differences
In 1980, 5 years before trade reform began,
46% of Mexico’s manufacturing was located
in the Federal District surrounding Mexico
City. Only 21% was located in states on the
U.S. border.
 In 1993, 8 years after reforms began, the
share of manufacturing in Mexico City had
fallen to 29% and the share at the border
had grown to 30%.
 In 1998, 4 years after NAFTA, Mexico City
had fallen further to 23% and the border had
grown to 34%.
Prior to trade reform, a 10% increase in distance
from Mexico City was associated with a 1.9%
decrease in the relative state nominal wage, and a
10% increase in distance from the United States
was associated with a 1.3% decrease in the
relative state nominal wage.
 After trade reform, the regional wage gradient
shifts, and distance from the United States results
in greater decreases.
 This data can most certainly be attributed to
changing trade dynamics due to the United States
Convergence in U.S. and Mexican
In a paper by Raymond Robertson, he
found that a shock that would raise wages
10% would raise wages in Mexican
interior cities by 1.8%, and wages in
Mexican border cities by 2.5%. This
suggests at least partial integration.
 Additional data analyzed by Robertson
suggests that the integration of the two
economies still has a long way.
Gordon Hanson further investigated this
issue and discovered that there has been
substantial variation in wage changes
across labor-market groups, and this
seems to suggest Raymond Robertson’s
analysis (based on high frequency data)
does not capture the entire picture.
 A lot of these issues come down to policy
changes and macro shocks to the
Labor Data
Mexican wage growth has been swamped
by higher relative inflation, which
overtakes any nominal gains.
Young women are the only cohort to
experience real wage gains. Especially
women who have completed at least 12
years of education.
Turning to regions, all have shown real
absolute and relative wage declines.
For border states, but not for interior
states, wage growth is higher for cohorts
where initial Mexican wages are lower
relative to U.S. wages.
 The wage growth in border states also
appears to be correlated with wage
growth in the United States.
 After filtering the data, Hanson concluded
that the real relationship that links wages
in Mexico and the United States (be they
trade, FDI, etc…) work through broad
changes in the returns to education.
Implications for the FTAA
Will boost trade in areas that are close to
ports and transit routes.
 Will cause a more uneven distribution of
income. Most other Latin American
nations don’t have quite as many
protections on agriculture so it might not
be as severe.
 Main beneficiaries will be educated city
dwellers that live near the coast.
My Thoughts
Given the recent political instability
across Latin American nations, I believe
that the increased unevenness in the
distribution of income could become
potentially catastrophic for many central
American nations.
 It shouldn’t be a problem for countries
like Columbia that have already liberalized
trade to a large degree.