Labor market consequences of trade openness and competition in foreign markets: the case of Mexico November 2nd, 2012 Daniel Chiquiar Enrique Covarrubias Alejandrina Salcedo The views and conclusions presented in this study are exclusively the responsibility of the authors and do not necessarily reflect those of Banco de Mexico.

Index 1.Introduction 2.Regional exposure to trade openness and competition 3.Relationship between exposure measures and Mexican labor market indicators 4.Econometric analysis a) NAFTA b) Chinese competition 5.Conclusions 2

1. Introduction  This paper analyzes the labor market consequences of trade liberalization and of competition in international markets, for the Mexican case.  In particular, we look at the consequences of: o The introduction of NAFTA in 1994, which increased Mexican exports to the US. o The accession of China to the WTO in 2001, which increased Chinese exports to the US, substituting Mexican products in this market. 3

1. Introduction 4 Market Share in US Imports Percentage Source: Comtrade database, United Nations.

1. Introduction  Given its initial comparative advantages, Mexico responded to trade integration through NAFTA mostly by specializing in unskilled labor- intensive processes. NAFTA boosted the formation of regional production-sharing arrangements between Mexico and the US. Maquiladoras are a clear example of such arrangements. Moreover, they represent the increase in specialization of Mexican firms in unskilled labor intensive assembly activities.  The accession of China to the WTO increased competition for Mexican exports in the US market. There is a large overlap in the kind of products that both Mexico and China have specialized in, and therefore their export mixes are very similar. Consequently, the increase in Chinese exports had a negative effect on Mexico’s market share in US imports.  Mexican labor markets could have benefited from NAFTA, while increased Chinese competition could have had a negative impact. 5

1. Introduction  We follow Autor, Dorn and Hanson (2012), who estimate the effect that the increase in US imports from China had on the US labor market.  To identify such effect, they exploit regional variation in the exposure of local US labor markets to the increase in imports from China. Regions whose activities were more concentrated on the production of goods that experienced an important increase in imports would have a greater exposure, and their labor markets could have been more affected. They use an instrumental variables approach to identify a causal effect. 6

1. Introduction  Following their methodology, in this paper we estimate the effect of trade openness (NAFTA) and of the increase in Chinese competition in US markets on the Mexican labor market.  With this purpose, we estimate two measures of exposure: o Exposure to trade openness. o Exposure to Chinese competition in US markets.  Using variation at the regional level (metropolitan areas), we estimate the impact of a higher exposure level on labor market indicators in the last two decades.  We implement an instrumental variables approach too. 7

1. Introduction  We find significant effects of NAFTA and Chinese competition in US markets on the Mexican labor market. 8 Effects on the Mexican Labor Market of NAFTA and Competition from China

Index 1.Introduction 2.Regional exposure to trade openness and competition 3.Relationship between exposure measures and Mexican labor market indicators 4.Econometric analysis a) NAFTA b) Chinese competition 5.Conclusions 9

2. Regional exposure to trade openness and competition 10 Measures of exposure

 We base the analysis on metropolitan areas. NAFTA effect: 37 metro areas that comprise 161 municipalities and represent around 30 percent of the population. China effect: 56 metro areas that comprise 344 municipalities and represent around 60 percent of the population.  We distinguish between metropolitan areas in border and non border states.  The main data sources for the analysis are the employment survey, the economic censuses and UN Comtrade Regional exposure to trade openness and competition

12 Nafta effect: Map of Metropolitan Areas 2. Regional exposure to trade openness and competition

13 2. Regional exposure to trade openness and competition Chinese competition effect: Map of Metropolitan Areas

14 1/ The regions specialized in the automobile industry are those for which this industry represents at least 29% of its exposure to trade openness. 2. Regional exposure to trade openness and competition

15 2. Regional exposure to trade openness and competition

16 2. Regional exposure to trade openness and competition

3-digit SITC Industries that Contribute the Most to each Exposure Measure Grouped in 2-digit SITC Categories Regional exposure to trade openness and competition  In border cities, the 5 industries (at 3 digit SITC) that contribute the most to the exposure measures fall in the following categories (at 2 digits):

 The industries that allowed border regions to benefit from NAFTA are the kind of sectors in which Mexico has lost comparative advantage with respect to China, except for the automobile industry.  On the contrary, cities in non-border states do not show a clear specialization pattern Regional exposure to trade openness and competition

19 Revealed Comparative Advantage (RCA) of China and Sectorial Specialization Index (SSI) of Mexican Metropolitan Zones RCA of China vs. SSI of Metropolitan Zones in Border States (1999, SITC 2 digits) RCA of China vs. SSI of Metropolitan Zones in Nonborder States (1999, SITC 2 digits) Source: China RCA: Comtrade database, United Nations. SSI index: Mexican Economic Census 1999, INEGI. 2. Regional exposure to trade openness and competition

Index 20 1.Introduction 2.Regional exposure to trade openness and competition 3.Relationship between exposure measures and Mexican labor market indicators 4.Econometric analysis a) NAFTA b) Chinese competition 5.Conclusions

21 Logarithmic differences in unemployed population vs. exposure Change in unemployed population as a proportion of the labor force vs. exposure Source: ENEU (1993 and 2000), Economic Census (1994), and UN Comtrade. 3. Relationship between exposure measures and Mexican labor market indicators

22 Logarithmic differences of employed population vs. exposure measure 3. Relationship between exposure measures and Mexican labor market indicators All sectorsManufacturing Non-manufacturing Source: ENEU (1993 and 2000), Economic Census (1994), and UN Comtrade.

23 Logarithmic differences in wages vs. exposure measure 3. Relationship between exposure measures and Mexican labor market indicators All sectors Manufacturing Non-manufacturing Source: ENEU (1993 and 2000), Economic Census (1994), and UN Comtrade.

24 Logarithmic differences in unemployed population vs. index of exposure Change in unemployed population as a proportion of the labor force vs. index of exposure 3. Relationship between exposure measures and Mexican labor market indicators Source: ENE and ENOE (2000 and 2009), Economic Census (1994), and UN Comtrade.

25 Logarithmic differences of employed population vs. exposure measure 3. Relationship between exposure measures and Mexican labor market indicators All sectorsManufacturing Non-manufacturing Source: ENE and ENOE (2000 and 2009), Economic Census (1994), and UN Comtrade.

26 Logarithmic differences in wages vs. exposure measure 3. Relationship between exposure measures and Mexican labor market indicators All sectors Manufacturing Non-manufacturing Source: ENE and ENOE (2000 and 2009), Economic Census (1994), and UN Comtrade.

1.Introduction 2.Regional exposure to trade openness and competition 3.Relationship between exposure measures and Mexican labor market indicators 4.Econometric analysis a) NAFTA b) Chinese competition 5.Conclusions Index 27

28 4. Econometric analysis Estimation strategy to identify the effect of trade exposure on Mexican labor market variables

1.Introduction 2.Regional exposure to trade openness and competition 3.Relationship between exposure measures and Mexican labor market indicators 4.Econometric analysis a) NAFTA b) Chinese competition 5.Conclusions Index 29

30 Estimation of the effect of NAFTA openness exposure on unemployment All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p<0.1, a p< Econometric analysis: NAFTA openness

31 All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p< Econometric analysis: NAFTA openness Estimation of the effect of NAFTA openness exposure on unemployment Heterogeneous effects

32 Effect of exposure on unemployment rates 4. Econometric analysis: NAFTA openness

33 Note: Workers with an education level lower than high school are classified as unskilled. Number of observations : 37 cities. All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p<0.1 Estimation of the effect of NAFTA openness exposure on employment 4. Econometric analysis: NAFTA openness Dependent variable: logarithmic differences of employed population

34 4. Econometric analysis: NAFTA openness Note: Workers with an education level lower than high school are classified as unskilled. Number of observations : 37 cities. All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p<0.1 Estimation of the effect of NAFTA openness exposure on employment Heterogeneous effects Dependent variable: logarithmic differences of employed population

35 4. Econometric analysis: NAFTA openness Estimation of the effect of NAFTA openness exposure on wages Dependent variable: logarithmic differences of wages Note: Workers with an education level lower than high school are classified as unskilled. Number of observations : 37 cities. All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p<0.1

36 4. Econometric analysis: NAFTA openness Estimation of the effect of NAFTA openness exposure on wages Heterogeneous effects Dependent variable: logarithmic differences of wages Note: Workers with an education level lower than high school are classified as unskilled. Number of observations : 37 cities. All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p<0.1

1.Introduction 2.Regional exposure to trade openness and competition 3.Relationship between exposure measures and Mexican labor market indicators 4.Econometric analysis a) NAFTA b) Chinese competition 5.Conclusions Index 37

38 All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p<0.1, a p< Econometric analysis: Chinese competition Estimation of the effect of exposure to Chinese competition on unemployment

39 Effect of exposure on unemployment rates 4. Econometric analysis: Chinese competition

40 Note: Workers with education levels lower than high school are classified as unskilled. Number of observations : 53 metropolitan areas. All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p< Econometric analysis: Chinese competition Estimation of the effect of exposure to Chinese competition on employment Dependent variable: logarithmic differences of employed population

41 4. Econometric analysis: Chinese competition Note: Workers with education levels lower than high school are classified as unskilled. Number of observations : 53 metropolitan areas. All regressions are estimated by instrumental variables and in all cases the proportion of women who work and the proportion of the population with high school education are included as controls. Standard errors given in parenthesis. *** p<0.01, ** p<0.05, * p<0.1 Estimation of the effect of exposure to Chinese competition on employment Dependent variable: logarithmic differences of wages

1.Introduction 2.Regional exposure to trade openness and competition 3.Relationship between exposure measures and Mexican labor market indicators 4.Econometric analysis a) NAFTA b) Chinese competition 5.Conclusions Index 42

 Based on the methodology proposed by Autor, Dorn and Hanson (2012), we have exploited regional variation in Mexico to study the effects of trade openness and trade competition on the Mexican labor markets in the last twenty years. We found that NAFTA had a positive impact on labor market indicators (unemployment, employment, and wages), while the increased competition from China in the US market has had a negative effect. It is noticeable that metro zones in border states were able to benefit more from NAFTA, but were also more vulnerable to Chinese competition. Those metro zones specializing in the auto industry could be avoiding the negative effects of increased Chinese exports Conclusions