Relative prices and wage inequality: evidence from Mexico

Abstract

This paper examines the link between relative goods prices and relative wages during two periods of Mexico's trade liberalization. The relative price of skill-intensive goods rose following Mexico's entrance to the General Agreement and Tariffs and Trade (GATT) in 1986, but fell after Mexico entered the North American Free Trade Agreement (NAFTA) in 1994. This paper adds a band pass filter to two established techniques to compare the relationship between prices and wages. Results from all three approaches are consistent with a positive long-run relationship between relative output prices and relative wages. The band pass filter results suggest that the relevant time frame for the relationship begins after 3–5 years.