Wages, Gaps And Derived Demand: The Case Of United States And Mexican Production Workers

Abstract

Despite Mexico joining NAFTA in 1994, a manufacturing wage gap between Mexico and United States production workers continues to remain at a considerable extent. Further, it increased as from 2007, systematically measured in dollar terms and adjusted by producer prices. While the Stolper-Samuelson and the Factor Equalization theorems seem not to hold, additional characteristics are analyzed through an error correction model, applied to three continuous and consistent pre and post NAFTA time periods. A positive Mexico-United States manufacturing output ratio and Mexican real exchange rate depreciations widens the wage gap. The manufacturing output ratio growth is found to affect negatively the demand for United States production workers. Meanwhile, Mexican hourly wages appear as a substitute of United States labor demand, with a coefficient approaching an elastic value. Far from any complementariness, wage divergences appear to be instrumental for the incidence of Mexican labor in United States manufacturing production workers.