October 2008

IZA DP No. 3788: North-South Trade Liberalization and Returns to Skill in the South: The Case of Mexico

This study examines the effect of NAFTA, an instance of North-South trade liberalization, on returns to skill in Mexico. Mexico is abundant in low-skill workers relative to the US and Canada, and so, by the Hecksher-Ohlin-Samuelson trade model, NAFTA ought to have raised the relative earnings of low-skill workers, that is, lowered returns to skill in Mexico. Analysis of Mexican labor micro-data yields the finding that while returns to skill in industries producing tradeables have risen, ceteris paribus, since Mexico embarked upon trade liberalization by joining the GATT in 1986, this rise was less pronounced by 1999 in industries liberalized relatively rapidly by NAFTA, launched in 1994, than in industries liberalized relatively slowly by this phased trade treaty. This is considered evidence of NAFTA holding back rise in returns to skill, since it is plausible such a dampening would have been more marked in industries more rapidly exposed to trade with Mexico's skill abundant northern neighbors. Hence, this study suggests trade with developed nations may lower returns to skill in developing nations. It is speculated this may slow the pace of private human capital accumulation in developing nations, with negative consequences for their economic growth.