Relative wages, labor supplies and trade in Mexican manufacturing: Evidence from two samples

Abstract

How do relative wages (between skilled and unskilled workers) respond to technical progress and to relative supply shifts? An empirical model of the wage premium for Mexican manufacturing is employed on two monthly data samples: one, from 1987 to 1995, displays the well-documented rising trend in wages right after Mexico joined GATT; the other, from 1994 to 2007, suggests slightly decreasing wages. The model provides support for skill-biased technical change (SBTC) and yields plausible elasticity of substitution for the first sample (σ = 1.03) and higher elasticity for the second (σ = 1.71). Allowing export intensity and the real exchange rate to modify the factor augmenting technology ratio, negative relationships are found for the earlier sample: the higher the export intensity or real exchange rate the lower relative wages. The error correction methodology and the bounds approach confirm these results. Combining trade and SBTC, this study supports the view that trade considerations have an impact on wage premiums at the very beginning of trade liberalization. In contrast, the benchmark model seems a more adequate representation when NAFTA and a market-oriented peso help consolidate Mexico in its path towards sustainable growth.