Agglomeration, the Price-Index Effect, and Migration in Post-NAFTA Mexico

This study examines how multiple agglomeration and dispersion forces shaped Mexico's regional economic geography during the early post-NAFTA period. When economic activity becomes geographically concentrated, consumers gain better access to differentiated varieties and face lower effective transport costs, reducing the local consumption price index and making a region more attractive as a migration destination. Building on this price-index mechanism from New Economic Geography, we focus on four spatial forces: proximity to the U.S. market, the manufacturing price-index effect, the service price-index effect, and density-related urban costs. Using bilateral interstate migration between 1995 and 2000, we proceed in two stages. First, we estimate the structural parameters of the model and recover state-level price indices for manufactured goods and services. Second, we examine how destination–origin differences in nominal wages, price indices, and urban costs are associated with migration across sectors, while controlling for the additional locational advantage of U.S. border states. The manufacturing price index is strongly and negatively associated with migration of manufacturing workers, whereas its cross-sector effects are more limited. By contrast, the service price index is negatively and significantly associated with migration across all sectors, indicating a broad domestic agglomeration force. Employment density is generally negatively associated with migration, consistent with urban costs acting as a centrifugal force, while real-wage differentials are positively associated with migration across most industries. Taken together, the findings suggest that post-NAFTA Mexico was shaped by the interaction of border-oriented manufacturing agglomeration, domestic service-sector agglomeration, and urban-cost-driven dispersion.