Gordon H. Hanson

Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras

In this paper, we examine the increase in the relative wages of skilled workers in Mexico during the 1980s. We argue that rising wage inequality in Mexico is linked to capital inflows from abroad. The effect of these capital inflows, which correspond to an increase in outsourcing by multinationals from the United States and other Northern countries, is to shift production in Mexico towards relatively skill-intensive goods thereby increasing the relative demand for skilled labor. We study the impact of foreign direct investment (FDI) on the share of skilled labor in total wages in Mexico using state-level data on two-digit industries from the Industrial Census for the period 1975 to 1988. We measure the state- level growth in FDI using data on the regional activities of foreign- owned assembly plants. We find that growth in FDI is positively correlated with the relative demand for skilled labor. In the regions where FDI has been most concentrated, growth in FDI can account for over 50 percent of the increase in the skilled labor share of total wages that occurred during the late 1980s.

Spillovers, foreign investment, and export behavior

Case studies of export behavior suggest that firms who penetrate foreign markets reduce entry costs for other potential exporters, either through learning by doing or through establishing buyer- supplier linkages. We pursue the idea that spillovers associated with one firms export activity reduce the cost of foreign market access for other firms. We identify two potential sources of spillovers: export activity in general and the specific activities of multinational enterprises. We use a simple model of export behavior to derive a logit specification for the probability a firm exports. Using panel data on Mexican manufacturing plants, we find evidence consistent with spillovers from the export activity of multinational enterprises but not with general export activity.

TRADE LIBERALIZATION AND WAGE INEQUALITY IN MEXICO

During the 1980s in Mexico the wage gap between skilled and unskilled workers widened. The authors assess the extent to which this increased wage inequality was associated with Mexicos sweeping trade reform in 1985. Examining data on 2,354 Mexican manufacturing plants for 1984–90 and Mexican Industrial Census data for 1965–88, they find that the reduction in tariff protection in 1985 disproportionately affected low-skilled industries. Goods from that sector, the authors suggest, may have fallen in price because of increased competition from economics with reserves of cheap unskilled labor larger than Mexicos. The consequent increase in the relative price of skill-intensive goods could explain the increase in wage inequality.

Increasing Returns, Trade and the Regional Structure of Wages

Trade theories based on increasing returns have two predictions for regional economies: employment concentrates in industry centers and regional nominal wages are decreasing in transport costs to industry centers. The author tests these hypotheses using data on regional manufacturing in Mexico before and after trade liberalization. Employment and wage patterns are consistent with the idea that market access matters for industry locations. Under the closed economy, industry concentrated in Mexico City. Since trade reform, industry has relocated to the United States-Mexico border. Estimation results show that regional manufacturing wages are decreasing in distance from Mexico City and from the border. Copyright 1997 by Royal Economic Society.

The Home Market Effect and Bilateral Trade Patterns

We test for home-market effects using a difference-in-difference gravity specification. The home-market effect is the tendency for large countries to be net exporters of goods with high transport costs and strong scale economies. It is predicted by models of trade based on increasing returns to scale but not by models of trade based on comparative advantage. In our estimation approach, we select pairs of exporting countries that belong to a common preferential trade area and examine their exports of goods with high transport costs and strong scale economies relative to their exports of goods with low transport costs and weak scale economies. We find that home-market effects exist and that the nature of these effects depends on industry transport costs. For industries with very high transport costs, it is national market size that determines national exports. For industries with moderately high transport costs, it is neighborhood market size that matters. In this case, national market size plus market size in nearby countries determine national exports.

Labor-market adjustment in open economies: Evidence from US states

Abstract In this paper we analyze whether regional economic integration across US states conditions local labor-market adjustment. We examine the mechanisms through which states absorb changes in labor supplies and whether industry production techniques are similar across states. There are two main findings. Firstly, states absorb changes in employment primarily through changes in production techniques that are common across states and through changes in the output of traded goods, with the former mechanism playing the larger role. In contrast, state-specific changes in production techniques, which are one indication of state-specific changes in relative factor prices, account for relatively little factor absorption. Secondly, industry production techniques are very similar across states, especially for neighboring states and states with similar relative labor supplies. Both sets of results are consistent with productivity-adjusted FPE across either large states or groupings of related states.

Economic integration, intraindustry trade, and frontier regions

Abstract In this paper, I examine how economic integration between the United States and Mexico has affected the location of economic activity in the United States. Using a data set on economic activity in U.S.-Mexico border-city pairs, I find that the expansion of export manufacturing in Mexican border cities has increased manufacturing employment in U.S. border cities. The results suggest that the North American Free Trade Agreement will contribute to the relocation of manufacturing production in the United States towards the U.S.-Mexico border region.

Untangling Trade and Technology: Evidence from Local Labour Markets

We juxtapose the effects of trade and technology on employment in U.S. local labor markets between 1990 and 2007. Labor markets whose initial industry composition exposes them to rising Chinese import competition experience significant falls in employment, particularly in manufacturing and among non-college workers. Labor markets susceptible to computerization due to specialization in routine task-intensive activities experience significant occupational polarization within manufacturing and non-manufacturing but no net employment decline. Trade impacts rise in the 2000s as imports accelerate, while the effect of technology appears to shift from automation of production activities in manufacturing towards computerization of information-processing tasks in non-manufacturing.

Immigration and the Economic Status of African-American Men

The employment rate of black men, and particularly of low-skilled black men, fell precipitously between 1960 and 2000. At the same time, their incarceration rate rose. This paper examines the relation between immigration and these trends in employment and incarceration. Using data from the 1960–2000 US censuses, we find that a 10% immigration-induced increase in the supply of workers in a particular skill group reduced the black wage of that group by 2.5%, lowered the employment rate by 5.9 percentage points, and increased the incarceration rate by 1.3 percentage points.

Political Economy, Sectoral Shocks, and Border Enforcement

In this paper, we examine the correlation between sectoral shocks and border enforcement in the United States. Enforcement of national borders is the main policy instrument the U.S. government uses to combat illegal immigration. The motivation for the exercise is to see whether border enforcement falls following positive shocks to sectors that are intensive in the use of undocumented labor, as would be consistent with political economy models of how enforcement policy against illegal immigration is determined. The main finding is that border enforcement is negatively correlated with lagged relative price changes in the apparel, fruits and vegetables, and slaughtered livestock industries and with housing starts in the western United States. This suggests that authorities relax border enforcement when the demand for undocumented workers is high.