Trade, FDI, Migration, and the Place Premium: Mexico and the United States

Abstract

Large wage differences between countries (place premiums) are well documented. Neoclassical trade theory suggests that factor price convergence should follow increased commercial integration. Rising commercial integration, foreign direct investment, and migration followed the 1994 North American Free Trade Agreement between the United States and Mexico. This paper evaluates the degree of wage convergence between Mexico and the United States between 1988 and 2011. We match survey and census data from Mexico and the US to estimate the change in wage differentials for observationally identical workers over time. We find no evidence of long-run wage convergence among cohorts characterized by low migration propensities although this was, in part, due to large macroeconomic shocks. On the other hand, we do find some evidence of convergence for workers with high migration propensities. Finally, we find evidence of convergence in the border of Mexico vis-A -vis its interior in the 1990s but this was reversed in the 2000s. We conclude that the place premium is largely stable, even following large reductions to trade and investment barriers and high migration.