Trade and Local Labor Market Outcomes in Mexico : Disentangling the Channels and the Roleof Geography, Sectors, and Trade Types

This study provides new evidence on the local labor market impacts of trade, differentiatingbetween the employment, income, migration, and informality channels. It uses a unique dataset matching information onexports and imports from customs with indicators on employment and labor incomes for around 2,000 Mexicanmunicipalities over 2004–14. The analysis uses an instrumental variable approach that combines the initialstructure of trade across municipalities with global trends in trade between low- and middle-income countries (excludingMexico) and the United States by sector. First, the study finds that expanding exports per worker in Mexico’smunicipalities increased labor force participation but not employment rates. Exports also raised total labor incomesbut not average labor incomes, implying a growing labor supply. The results also find that export and importexpansion increased immigration and lowered the rate of informal workers. Second, the analysis examines differencesby geography and sectors. It finds that trade affected labor markets in the North through the income and migrationchannels and in the South through the employment and informality channels. Exports benefitted the total incomesof workers in both the manufacturing and service sectors but reduced informality only in manufacturing. Third, the studysuggests a more favorable role of intermediate relative to final imports, driven by manufacturing imports. It alsofinds evidence for positive spillovers from global value chain participation through the employment and incomechannels. Finally, it examines how local policy mediates the labor market effects from trade, focusing on connectivity,labor market flexibility, and education spending.