The effect of NAFTA on Mexico's wage gap

This paper studies how the North American Free Trade Agreement (NAFTA) affected the wage gap between high and low-paid workers within Mexico, considering internal migration. In low-skilled, labor-abundant developing countries, trade liberalization should theoretically increase the wages of low-skilled workers, decreasing income inequality. However, anecdotal evidence indicates that NAFTA increased the gap between rich and poor in Mexico, and empirical evidence is mixed (Hirte et al. 2020; Brülhart 2011; Bosch and Manacorda 2010; Nicita 2009; Chiquiar 2008; Hanson 2007; Gonzalez-Rivas 2007). Because trade may affect wages differently across regions within the country, accurate measures of wage effects must incorporate internal migration; otherwise, apparent wage convergence or divergence might only reflect a geographic resorting of workers. We evaluate wage changes by considering rural-to-urban migration. We first find a slight decrease in both internal and external migration in the years after NAFTA. Then, we find that all male workers see a wage reduction from trade openness, although the harm of high-wage workers almost doubled that of their counterparts with low wages. NAFTA also mitigated some of the wage differentials between the North and South. In summary, trade liberalization has reduced wage differentials among working-age men in urban areas.