?Por que se redujo la desigualdad salarial en Mexico despues del TLCAN?

AutorCampos-Vazquez, Raymundo M.

Why Did Wage Inequality Decrease in Mexico after NAFTA?


Inequality, measured using either income or wages, is an important topic that has been continuously debated among academics and the media. Since the 1980s, most countries in the world experienced an increase in wage inequality, and for some countries this trend continued during the 1990s. Mexico was no exception and went through a period of increasing inequality by the end of the 1980s. However, wage inequality in Mexico started to decline after 1994, the period after NAFTA was enacted. This could be surprising, given the relatively large literature explaining the causes of the increase in inequality in the late 1980s and early 1990s. (1) Figure 1 documents the patterns of wage inequality in Mexico. Even though the decline has been taking place since 1994-1996, there are few references for this episode in the literature. (2) In this paper I try to fill this gap and I give an explanation for the potential causes of this episode.

Wage inequality has continuously increased during the last 20 years in the United States and other developed countries (Katz and Autor, 1999, table 10). There is a debate about the causes of this increase. On the one hand, David Autor, Lawrence Katz and Daron Acemoglu among others (Acemoglu, 2002; Autor, Levy and Murnane, 2003; Autor et al., 2005, 2007, 2008) argue that skill biased technical change is the leading explanation for the increase in wage inequality. Since the supply of college educated workers increased during the period, the only possible explanation is that demand increased more than supply, and that the growth in demand is biased toward skilled workers. On the other hand, Thomas Lemieux, David Card and John Dinardo among others (Card and DiNardo, 2002; DiNardo, Fortin and Lemieux, 1996; Lemieux, 2006, 2008), criticize the view of skill biased technical change as the main source for changes in wage inequality. Instead, they argue that the increase in wage inequality at the end of the 1980s and beginning of 1990s can be seen as an episodic event rather than driven by skill biased technical change. According to their estimates, most of the increase in wage inequality, especially at the bottom of the wage distribution in that period, can be explained by the fall in the real minimum wage and a decline in unionization rates. More recently, Autor, Katz and Kearney (2008) recognize changes in the real value of the minimum wage and the fall of unionization rates as plausible explanations for the changes in lower tail inequality. However, they point out that institutional aspects cannot explain the continuous rise in upper tail inequality. They conclude that the increase in upper tail inequality cannot be explained by quantities but by returns, justifying the view of skill biased technical change as an important source for changes in wage inequality.

In some developed countries the wage structure has been changing favoring the high and low skilled workers. This process increases upper tail wage inequality but reduces lower tail inequality. For the U.S., Autor, Katz and Kearney (2007) show how high skilled jobs (occupations) in 1980 were the ones with the highest increase in demand, measured by the increase in the proportion of workers in those occupations. They also find that occupations in the lower tail increased their participation in the workforce, though at the expense of middle-tier jobs. Furthermore, in the U.K. Goos and Maning (2007) find a similar pattern to that in the U.S., and call this U-shaped pattern "job polarization". They conclude that skill biased technical change and job polarization are plausible explanations for the increase in wage inequality. In Germany, Dustmann, Ludsteck and Schonberg (2009) and Spitz-Oener (2006) find that job polarization is present, and that the increase in wage inequality can be explained in part by that process.

As explained above, inequality has continuously grown in developed countries since the 1980s. In contrast, Mexico exhibits a decrease in inequality after 1994. In this paper I explore the causes of such a decline. This is important for at least three reasons. First, societies generally prefer a more egalitarian distribution of resources. Hence, the example of Mexico may be useful to similar countries that desire to attain lower in equality levels. Second, it is also interesting to investigate whether Mexico has "job polarized" as other countries have, and analyze how this process modifies the wage distribution. Finally, other Latin American countries have recently experienced a decline in wage inequality; hence, the Mexican experience could help in building a consensus on why wage inequality has fallen in the region. (3)

In order to analyze the sources of the fall in wage inequality, I follow the Machado and Mata (2005) decomposition. In particular, I estimate quantile regressions and build counterfactuals of the wage distribution holding constant observable characteristics or returns in schooling and potential labor experience. This decomposition is similar to the DiNardo, Fortin and Lemieux (1996) non-parametric decomposition. The goal is to estimate the level of inequality using the endowments from one specific year, but assuming return values for a different year and vice versa. The results of the decomposition show that the returns to education and labor experience are the most important factor explaining the decrease in wage inequality. The decline in returns is explained by a substantial increase in college graduates in the last 10 years, but it is also due to slower growth in labor demand, especially for the top paid jobs. I divide jobs by "quality" using the occupation median wage in 1992, and show that top quality jobs did not grow as much as the increase in supply of high-skilled workers. Instead, low wage jobs increased their participation substantially at the expense of jobs in the middle of the distribution. In order to present further evidence on the effects of supply and demand, I decompose relative wage changes as in Bound and Johnson (1992). These results confirm that changes in relative supply are the main determinant behind the decrease in wage inequality.

A few recent papers have discussed the issue of why inequality in Mexico has fallen since NAFTA. Esquivel (2009) argues that the fall in inequality could be explained by a change in the composition of workers, and as a late outcome of trade liberalization. Robertson (2004, 2007) states that the fall in wage inequality is driven by traditional trade channels. Furthermore, Robertson (2007) asserts that workers in Mexico since NAFTA appeared to be complements to U.S. workers, not substitutes. Lopez-Acevedo (2006), using data for the period 1996-2002, shows how a different education composition structure affects earnings inequality. The current paper differentiates from the previous ones in several ways. First, this paper explores competing explanations of changes in wage inequality. Second, it provides empirical evidence on the job polarization hypothesis, a theory that has not previously been tested in Mexico. Finally, it formally decomposes the effect of returns and endowments of the labor force on the wage structure in Mexico. Using these decompositions, one can create counterfactuals of what would have happened to the wage distribution had the returns or endowments been constant throughout the period. Previous papers do not attempt to construct counterfactuals.

The paper is structured as follows. In the first section I describe the basic facts and trends of wage inequality in Mexico for different groups. Then I contrast different hypotheses of the decline of wage inequality in the last years. The third section introduces the Machado and Mata (2005) methodology in order to decompose wage inequality. In this section I present results for this decomposition, analyze whether job polarization occurred in Mexico, and relate this process to the change in wage inequality. I then calculate the per cent effect driven by supply, and the one driven by demand factors, following the Bound and Johnson (1992) decomposition. The fifth and final section offers some concluding remarks.

  1. Facts

    There are three sources of data in Mexico that can be used to calculate wage inequality: Expenditure Survey, Labor Survey and the Population Census. Census data is not used because there are only two points in time (1990 and 2000), and most of the decline in wage inequality is for the period 1998-2006. The labor survey has two drawbacks: it is not nationally representative given that it only has data for urban areas and, more importantly, its methodology changed after 2004 rendering it useless for my purposes. For those reasons, my analysis will be based on the Expenditure survey (ENIGH). The ENIGH is nationally representative and includes relevant variables such as income sources, expenditures and demographic characteristics. ENIGH surveys can be compared across years. ENIGH is available every two years since 1992, plus years 1989 and 2005. (4)

    In what follows I restrict the sample to all 18-65 year old workers with positive working hours and valid wage. When calculating hourly wage I follow Airola and Juhn (2005), and calculate monthly wage over 4.33 times hours of work, and when calculating descriptive statistics I use, as a weight, the person weight from the data times hours of work, as is commonly used in the wage inequality literature. Wages are in constant 2006 Mexican Pesos (MXP). I drop observations with real hourly wage less than $1 MXP. (5,6)

    Figure 1 Panel A plots the trends of wage inequality in Mexico since 1989 using the log difference between the 90th and 10th percentiles. As has been documented in the literature, Mexico experienced a large increase in wage inequality in the period before 1994. What has not been documented equally widely is the substantial decrease in wage...

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