Wage gaps and manufacturing output: A comparison between production workers in Mexico and the United States

A substantial wage gap between Mexican and United States continues to exist between manufacturing production workers. This is despite a free trade agreement NAFTA (North America Free Trade Agreement) in which both countries are partners since 1994. While skill endowments, consumption patterns and social status are ostensibly heterogeneous in both countries, trade openness should render them comparable and eventually converging, according to the Factor Price Equalization (FPE) theorem. This study focuses exclusively on production and nonsupervisory workers in inland manufacturing in non-durable industries i) food; ii) textile products and mills; iii) chemicals, and durable industries iv) primary metal; v) machinery; vi) transportation equipment. The estimation technique relies on a time series error correction model during pre and post-NAFTA periods. The main findings of this research point out that the wage gap has expanded during the post-NAFTA period with respect to pre-NAFTA period. The post-NAFTA wage gap is affected negatively by a persistent Mexican currency undervaluation and an increase in the manufacturing output index ratio. As a result, the above FPE has not proved itself its validity in the present case.