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North-South Trade Liberalization and Returns to Skill in the South: The Case of Mexico

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  • Hazarika, Gautam

    ()
    (University of Texas at Brownsville)

  • Otero, Rafael

    ()
    (University of Texas at Brownsville)

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    Abstract

    This study examines the effect of NAFTA, an instance of North-South trade liberalization, on returns to skill in Mexico. Mexico is abundant in low-skill workers relative to the US and Canada, and so, by the Hecksher-Ohlin-Samuelson trade model, NAFTA ought to have raised the relative earnings of low-skill workers, that is, lowered returns to skill in Mexico. Analysis of Mexican labor micro-data yields the finding that while returns to skill in industries producing tradeables have risen, ceteris paribus, since Mexico embarked upon trade liberalization by joining the GATT in 1986, this rise was less pronounced by 1999 in industries liberalized relatively rapidly by NAFTA, launched in 1994, than in industries liberalized relatively slowly by this phased trade treaty. This is considered evidence of NAFTA holding back rise in returns to skill, since it is plausible such a dampening would have been more marked in industries more rapidly exposed to trade with Mexico's skill abundant northern neighbors. Hence, this study suggests trade with developed nations may lower returns to skill in developing nations. It is speculated this may slow the pace of private human capital accumulation in developing nations, with negative consequences for their economic growth.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3788.

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    Length: 19 pages
    Date of creation: Oct 2008
    Date of revision:
    Handle: RePEc:iza:izadps:dp3788

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    Keywords: human capital; Heckscher-Ohlin model; NAFTA;

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    References

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    1. Gene M. Grossman & Elhanan Helpman, 1994. "Endogenous Innovation in the Theory of Growth," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 23-44, Winter.
    2. Gary Burtless, 1995. "International Trade and the Rise in Earnings Inequality," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 800-816, June.
    3. Andre Varella Mollick, 2008. "Relative wages, labor supplies and trade in Mexican manufacturing: Evidence from two samples," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 17(2), pages 213-241.
    4. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
    5. Gordon H. Hanson & Ann Harrison, 1999. "Trade liberalization and wage inequality in Mexico," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 52(2), pages 271-288, January.
    6. Raymond Robertson, 2000. "Trade Liberalisation and Wage Inequality: Lessons from the Mexican Experience," The World Economy, Wiley Blackwell, vol. 23(6), pages 827-849, 06.
    7. Tybout, James, 1998. "Manufacuring firms in developing countries - how well do they do, and why?," Policy Research Working Paper Series 1965, The World Bank.
    8. Robertson, Raymond, 2004. "Relative prices and wage inequality: evidence from Mexico," Journal of International Economics, Elsevier, vol. 64(2), pages 387-409, December.
    9. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May.
    10. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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