Is the downturn in maquiladora employment cyclical or structural?

Purpose - The purpose of this paper is to examine the effect of cyclical and structural factors on the decline of maquiladora employment. In addition to the US industrial production, the cyclical factors examined are relative Mexican US wages, the Mexican exchange rate relative to the US, and US foreign direct investment (FDI). The paper also explores the effect of competition from China, a structural effect, on the decline of maquiladora employment. Design/methodology/approach - A vector error correction (VEC) model of maquila employment for the period 1980‐2002 is estimated and controlled for US industrial production, FDI flows, relative wage rates of Mexico and USA. To empirically investigate the structural differences of lower costs in Mexico vs China a seemingly unrelated regression (SUR) is estimated across three sectors: apparel and textile, electronic, and transportation. Findings - From the VEC maquila employment model it is found that, in addition to the strong effect of US industrial production on the maquila employment, there exist significant short‐ and long‐run effects of Mexico US exchange rate and Mexican wages relative to USA on maquila employment. The sectoral (SUR) model shows that competition from China has a bigger adverse effect on relatively labor‐intensive good and commodities which are cheaper to transport (such as textiles) over more bulky transportation goods. The transportation sector has a location advantage, though is more sensitive to the cyclical fluctuations in the US industrial production. Research limitations/implications - Future research should investigate the role of USA and world FDI exclusively into Mexico and maquiladora sector. Practical implications - Well designed controls, output choice, and location advantage are important for the growth and viability of small scale manufacturing industries. Originality/value - The VEC model for maquila employment and the SUR framework across main maquila sectors is the first to account for wages, exchange rate, and FDI in addition to the US industrial production in understanding the decline in maquiladora employment.