Tracking Wage Inequality Trends with Prices and Different Trade Models: Evidence from Mexico

42 Pages Posted: 20 Apr 2016

See all articles by Timothy Halliday

Timothy Halliday

University of Hawaii - Department of Economics; IZA Institute of Labor Economics

Daniel Lederman

World Bank - Latin America and Caribbean Region

Raymond Robertson

Macalester College - Department of Economics

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Date Written: November 3, 2015

Abstract

Mexican wage inequality rose following Mexico's accession to the General Agreement on Tariffs and Trade/World Trade Organization in 1986. Since the mid-1990s, however, wage inequality has been falling. Since most trade models suggest that output prices can affect factor prices, this paper explores the relationship between output prices and wage inequality. The rise of inequality can be explained by the evolution of the relative price of skill-intensive goods relative to unskilled-intensive goods, but these prices flattened by 1999 and thus cannot explain the subsequent decline in wage inequality. An alternative trade model with firm heterogeneity driven by variations in the relative price of tradable relative to non-tradable goods can explain the decline in wage inequality. The paper compares this model?s predictions with Mexican inequality statistics using data on output prices, census data, and quarterly household survey data. In spite of the model's simplicity, the model?s predictions match Mexican variables reasonably well during the years when wage inequality fell.

Keywords: Rural Labor Markets, Labor Markets, International Trade and Trade Rules

Suggested Citation

Halliday, Timothy and Lederman, Daniel and Robertson, Raymond E., Tracking Wage Inequality Trends with Prices and Different Trade Models: Evidence from Mexico (November 3, 2015). World Bank Policy Research Working Paper No. 7471, Available at SSRN: https://ssrn.com/abstract=2686939

Timothy Halliday (Contact Author)

University of Hawaii - Department of Economics ( email )

Honolulu, HI 96822
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Daniel Lederman

World Bank - Latin America and Caribbean Region ( email )

1818 H Street NW
Washington, DC 20433
United States

HOME PAGE: http://sites.google.com/site/danielledermanworldbank/

Raymond E. Robertson

Macalester College - Department of Economics ( email )

1600 Grand Ave.
Saint Paul, MN 55105
United States

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