Manufacturing Wage Gap in Mexico and the United States

Abstract

The main purpose of this paper is to estimate the pace and extent of the manufacturing wage gap for production and nonsupervisory workers between Mexico and the United States. In addition, a main tenet of international trade is being evaluated. The Factor Price Equalization (FPE) theorem is put to test for the pre-NAFTA (North America Free Trade Agreement) period of 1987-1994 and two NAFTA sub-periods, i.e., 1995-2006 and 2007-2013. Following the above-mentioned theorem, trade openness should render wages in both countries comparable and eventually converging. The estimation technique used to test this theorem relies on an error correction model in a time series setting, using monthly data. The introduction of a real exchange rate as an exogenous variable becomes relevant. A substantial wage gap between production workers is found, as convergence has not taken place. As a result, the FPE theorem is not valid for the present case. The wage gap between production workers remains to be substantial, with a tendency to expand.