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Employment and wage effects of trade liberalization : the case of Mexican manufacturing

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  • Revenga, Ana

Abstract

In 1985, after decades of an import-substitution industrial strategy, Mexico initiated a radical liberalization of its external sector. Between 1985 and 1988, import licensing requirements were scaled back to a quarter of earlier levels, reference prices were removed, and tariff rates on most products were substantially reduced. By 1989, Mexico was one of the most open economies in the developing world. Adjusting to trade liberalization required the reallocation of resources between sectors and entailed substantial dislocation of workers. The author analyzes how Mexico's trade liberalization (1985-87) affected employment and wages in indusry, focusing on how it affected average employment and earnings rather than on the link between trade and relative wages. She examines the tradeoff between wage and employment adjustment, identifies which labor groups benefited more from liberalization, and tries to associate changes in employment and wages directly with measures of change in trade protection, rather than link them to changes in imports and exports (which is more common). The author also finds that reductions in quota coverage and tariff levels are associated with moderate reductions in firm-level employment. A 10-point reduction in tariff levels (between 1985 and 1990) is associated with a 2- to 3- percent decline in employment in Mexico. Changes in quota average appear to have no discernible effect on wages, but reduction in tariff levels are associated with increases in average wages. This seems to reflect improved productivity in the reformed industries, which may be related to a shift toward the use of more skilled workers. There seems to have been a slight shift in the skill mix in favor of nonproduction workers. This was paralleled by a sharper increase in the wage differential between skilled and unskilled workers. The wages and employment of skilled production workers were significantly more responsive to changes in protection levels than those of nonproduction workers - perhaps partly because production workers were more heavily concentrated in the industries in which protection levels were greatly reduced.

Suggested Citation

  • Revenga, Ana, 1995. "Employment and wage effects of trade liberalization : the case of Mexican manufacturing," Policy Research Working Paper Series 1524, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1524
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    References listed on IDEAS

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    1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    2. Ana R. de Lamo & Juan J. Dolado, 1993. "Un modelo del mercado de trabajo y la restricción de oferta en la economía española," Investigaciones Economicas, Fundación SEPI, vol. 17(1), pages 87-118, January.
    3. Hanson, G.H. & Harrison, A., 1995. "Trade, Technology and Wage Inequality," Papers 95-20, Columbia - Graduate School of Business.
    4. Katharine G. Abraham & Susan N. Houseman, 1994. "Does Employment Protection Inhibit Labor Market Flexibility? Lessons from Germany, France, and Belgium," NBER Chapters,in: Social Protection versus Economic Flexibility: Is There a Trade-Off?, pages 59-94 National Bureau of Economic Research, Inc.
    5. Bentolila, Samuel & Dolado, Juan J., 1993. "Who Are the Insiders? Wage Setting in Spanish Manufacturing Firms," CEPR Discussion Papers 754, C.E.P.R. Discussion Papers.
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    Citations

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    Cited by:

    1. Independent Evaluation Group, 2006. "Assessing World Bank Support for Trade, 1987-2004 : An IEG Evaluation," World Bank Publications, The World Bank, number 6966.
    2. Munshi, Farzana, 2006. "Does openness reduce wage inequality in developing countries? A panel data analysis," Working Papers in Economics 241, University of Gothenburg, Department of Economics, revised 06 Feb 2008.
    3. Pradhan, Jaya Prakash, 2005. "How Do Trade, Foreign Investment, and Technology Affect Employment Patterns in Organized Indian Manufacturing?," MPRA Paper 19010, University Library of Munich, Germany.
    4. Kanbur, Ravi & Lustig, Nora, 1999. "Why is Inequality Back on the Agenda?," Working Papers 127690, Cornell University, Department of Applied Economics and Management.
    5. Lopez Julio, 2002. "Modernization, Heterogeneity and Employment in Mexico," International Review of Applied Economics, Taylor & Francis Journals, vol. 16(2), pages 227-242.
    6. Bacchetta, Marc & Jansen, Marion, 2003. "Adjusting to trade liberalization: The role of policy, institutions and WTO Disciplines," WTO Special Studies, World Trade Organization (WTO), Economic Research and Statistics Division, volume 7, number 7.
    7. Suryahadi, A. & Chen, P. & Tyers, R., 1999. "Openness, Technological Change and Labor Demand in Pre-Crisis Indonesia," Papers 377, Australian National University - Department of Economics.
    8. Norman V. Loayza & Luis Servén, 2010. "Business Regulation and Economic Performance," World Bank Publications, The World Bank, number 2554.
    9. Benjamin Aleman-Castilla, 2006. "The Effect of Trade Liberalization on Informality and Wages: Evidence from Mexico," CEP Discussion Papers dp0763, Centre for Economic Performance, LSE.
    10. Lopez-Acevedo, Gladys & Tinajero, Monica & Rubio, Marcela, 2005. "Mexico : human capital effects on wages and productivity," Policy Research Working Paper Series 3791, The World Bank.

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