Abstract
AbstractMexico experienced a tremendous expansion of its export‐processing maquila sector during the 1990s. Since one of the main objectives of the maquiladora program was to promote formal employment, we study how the rapid increase in maquiladora activity has affected labor market outcomes and welfare in Mexico. We develop a heterogeneous‐firm model with imperfect labor markets that captures salient features of the Mexican economy such as the differences between maquila and non‐maquila manufacturing plants and the existence of an informal sector. We calibrate the model's parameters to match key cross‐sectional moments characterizing the Mexican economy. We find that the expansion of the maquila sector during the 1990s was a mixed blessing for Mexico. Our quantitative model indicates that the skill premium decreased by 2.7%, informality increased by 0.9%, and overall welfare decreased by 3.7%.
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