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Input-Trade Liberalization and Formal Employment: Evidence from Mexico

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Abstract

This work investigates the role of input-trade liberalization on labor allocation between informal and formal employment in Mexico. Using individual household data for Mexico (1993-2001), we exploit exogenous input tariff changes applied to United States (U.S.) products when Mexico enters the North American Free Trade Agreement (NAFTA) in 1994. The theoretical mechanisms considered are the foreign input cost reduction that increases revenues in the formal sector and the foreign input-skilled biased channel, such that input-trade liberalization induces the reallocation of workers from informal to formal firms. Our findings confirm these mechanisms: individuals working in manufacturing industries experiencing the average reduction in input tariffs (12 percentage points) are almost 4 percent more likely to work in formal rather than informal occupations. This effect is concentrated on high-skilled workers which reinforces the input-skilled biased complementarity channel

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  • Maria Bas & Pamela Bombarda, 2023. "Input-Trade Liberalization and Formal Employment: Evidence from Mexico," Documents de travail du Centre d'Economie de la Sorbonne 23007, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:23007
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    1. Amiti, Mary & Cameron, Lisa, 2012. "Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia," Journal of International Economics, Elsevier, vol. 87(2), pages 277-287.
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    Cited by:

    1. Dix-Carneiro, Rafael & Kovak, Brian K., 2023. "Globalization and Inequality in Latin America," IZA Discussion Papers 16363, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    informal and formal employment; trade liberalization; household data;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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