Productivity Effects on Mexican Manufacturing Employment before and after NAFTA

A vast literature employs vector autoregressions (VAR) methods in order to capture whether innovations in productivity lead to increases or decreases in employment for U.S. manufacturing. Studying 25 Mexican manufacturing industries with annual data from 1984 to 2000, we examine labour productivity (value added per employee) and total factor productivity (TFP) effects on Mexican manufacturing employment. We find that productivity measures vary considerably in Mexico. Making use of panel data methods that control for sector specific effects, the business cycle and real wages, interesting results emerge. First, there are strong positive impacts of TFP (without and with human capital) on manufacturing employment, as well as ambiguous effects of labour productivity on employment. Second, the capital stock effect on employment varies across periods, yielding a positive impact for post-NAFTA and for the overall period. We interpret the latter as evidence that the increase in FDI inflows in the post-NAFTA period has made capital a stronger complement to labour more recently.