Exports and Income Inequality in Mexico

Abstract

What is the effect of exports on local income inequality in developing countries? To respond to this question, we combine data on exports with a panel of welfare indicators for 2000 Mexican municipalities, and implement an instrumental variable approach to address endogeneity concerns. Our results show that a 10 per cent increase in the exports per worker reduces local income inequality, measured by the Gini coefficient, by 0.17 points (using a 0 to 100 scale). This is driven by income growth among households at the bottom of the income distribution. We also find that although exports do raise the total amount of labour incomes at the municipal level, average labour incomes do not change. This occurs because municipalities with growing exports also experience an increase in employment and working-age population driven by inflows of returning migrants and lower emigration outflows. Remittances also decline in response to rising exports.