The Wage Gap In Mexico
Over the past few years there has been a substantial increase in wage inequality between skilled and unskilled workers in the country of Mexico. This increase in the wage gap happened in accordance with both a period of rapid technological change and the process of trade liberalization that began in the mid-1980s. Historically, Mexico has been characterized by the coexistence of highly competitive, outward-oriented industrial sectors, and backward agricultural, poorly developed regions. Somehow public policy decisions and the political economy behind them have not promoted stronger linkages between those sectors and regions. This paper will attempt to explain the causes of this disparity, analyze Mexico’s growth of inequality, and provide some possible alternatives. It is important to first establish what globalization and wage inequality is. For these two factors are important to understanding Mexico’s situation.
Globalization is the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, mainly through trade and financial flows. The term sometimes also refers to the movement of people in terms of labor, and knowledge through technology, across international borders. While the term is fairly new (introduced around the 1980’s), its processes has been enacted throughout history. For example, the world system of the world empire is an ancient form of globalization. This system was practiced by early empires like Rome and Egypt. This system mostly was focused on political and economic domination. Today there is the world economic system, which is mainly focused on economic profit.
The term “globalization” is a very controversial subject. Some view it as a process that is beneficial; they view it as a key to future world economic development. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards, and prevents social progress. Globalization has provided some outer-core nations with the opportunity for advancement. However, at the same time, these countries are not developing at the same rate. One of the ways it can be seen is through the disparities between wages.
Wage inequality is the disparity between the distribution of wages between individuals and groups within a society. Two determinants of a society’s wage inequality are: the availability of work in the labor market and education. In the labor market, wages are determined by the supply and demand for different types of work. Those jobs that are limited and have a high percentage of people willing to work those jobs have a low wage. In contrast, those jobs that are in high demand but only a few workers are willing, or able, to work have a higher wage. A person’s availability to education also contributes to wage inequality. Education influences the wage in the labor market. The higher the education required for a job, the higher the wage. In a non-core (third world) country, a person that was born into poverty would have little to no access to proper education, meaning that they would end up staying in there original socio-economic status.
Mexico had a very prosperous economy from the early postwar years until the mid-1970s. However, in 1982, they fell into remarkable debt, inflation, and stagnation. Mexico had to deal with plunging oil prices, rising interest rates, excessive regulations, and excessive state management of the economy (The Conference Board 1992). In 1985, the government decided to open the economy to trade. Mexico joined the General Agreement on Trade and Tariffs (GATT), which involved cutting tariffs and eliminating many non-tariff barriers. Mexico had largely been close to trade dating back to the 1950s. The government had previously implemented a policy to protect the country from excessive trade by raising tariffs and the creation of import licenses in the late 1940s (Wilkie 1990). The Mexican government also removed many barriers to foreign investment in 1989. There were reduced limits on the foreign share of equity ownership in a Mexican firm and requirements for foreign firms to obtain government approval for technology transfer from abroad and other activities. In 1994, NAFTA consolidated and extended these reforms and tied them to equal access to the U.S. and Canadian markets. Under the agreement, Mexican tariffs on all industrial goods from the United States and Canada would be zero by 2003 (Robertson 2004). Along with its economic opening, Mexico privatized state-owned enterprises, deregulated entry restrictions in many industries, and used wage and price restraints to combat inflation. Wage inequality in Mexico has greatly influenced the increase of overall income inequality. The impact or effect of wage inequality can be divided into two distinct periods. Mexico at the time of joining the General Agreement and Tariffs and Trade (GATT) in 1986 and further liberalized trade with Canada and the United States by joining the North American Free Trade Agreement (NAFTA) in 1994 (Robertson 2004).
Between 1984 and 1994, Mexico had experienced great increases to their wage inequality.
The opening of the economy induced the expansion of the export-oriented industries at the expense of the import-competing ones (Cortez 2001). Given that the export-oriented industries highly demanded skilled labor, this expansion caused higher demand for skilled labor relative to the demand for unskilled labor. Higher relative demand for skilled labor, in turn, induced positive changes in the relative return to higher education; therefore, generating a widening wage gap between high and low educational attainment.
This graph shows that the proportion of workers with no formal education and primary education has steadily declined over time: from 60% in 1984 to 47.6% in 1996. The percentage of workers with secondary and college education, on the other hand, increased. It went from 40% in 1984 to 52.4% in 1996. Second, the largest changes in the distribution of education occurred in the second half of the 1980s, while the 1990s are characterized by small changes. Third, despite the improvements, the bulk of workers still have low educational levels (Cortez 2001). In regards to the degree of wage inequality, there are two notable outcomes. First, wage inequality has barely grown among workers with low educational attainment. Among workers with no formal education, it declined. Second, inequality among workers with higher educational achievement grew significantly. In particular, inequality among college-educated workers grew by more than 39%. Education levels lagged in rural areas. Rural workers had an average of only 4.5 years of schooling (less than a primary education) in 1994—and almost 80 percent had a primary education or less. These results are affected by rural-urban migration, however. While primary schools are available to most in rural areas, secondary schools are scarce. Students have to move away to continue their studies and may never return. In addition, more educated people are attracted to the cities, which promise better paying jobs.
The Foreign Direct Investment (FDI) shows that increasing wage inequality is largely due to changes not between industries, but rather due to changes within industries. For increasing wage inequality occurred in all alike. In an economy where the capital goods industry is underdeveloped, technical progress is achieved mainly through the increase in imported capital goods. Therefore, the technical progress argument and the foreign direct investment are the same. The FDI view argues that by bringing technology that is skill-biased, it contributed to the increasing wage gap between skilled and unskilled labor (Henson 1999). This reason applies most to the manufacturing industry. First, foreign-owned firms pay higher wages than domestic firms. Second, foreign firms exhibit higher labor productivity than domestic firms. Third, foreign-owned firms tend to assemble in capital-intensive industries and in regions with more advanced infrastructure. Fourth, there is no wage spillover from foreign investment to domestic firms.
This graph shows the wage ratio in Mexico’s manufacturing industry between skilled and un-skilled workers. The real average wage of skilled workers in Mexico’s manufacturing industry was 2.25 times larger than the real average wage of un-skilled workers in 1988. This ratio increased steadily between 1988 and 1996, when it reached about 2.9, but has remained practically stable ever since, with two slight reductions in the last 2 years of the sample. Throughout the 1988–2000 period, the wage gap between skilled and unskilled workers real wages in Mexico increased by about 27% (Henson 1999). A closer look at the graph suggests that the pattern of wage inequality changed after the implementation of NAFTA. Another factor that has been overlooked is the changes in unions. For many years, labor unions were important in setting working conditions for a significant number of workers. Unions offered workers higher wages, job stability, better social benefits and bonuses. On average, unionized workers earned higher wage rates than nonunionized workers. The wage difference between union and nonunion increased substantially during the 1990s after a significant decline in the late 1980s. In effect, between 1984 and 1996, the wage difference had grown by 17.1% among male workers and by 9.3% among female workers. The degree of wage inequality is much higher among nonunion workers for both males and females. However, beginning in the early 1980s and throughout the 1990s there has been a number of changes that have limited the range for action of labor unions. Union coverage in Mexico has declined dramatically over the same time period that wage dispersion has risen. Union workers in Mexico typically consist of lower paid un-skilled workers. Thus, this effect on unions lead to an increase in the overall dispersion of wages, unions raised the wages of higher-paid skilled workers relative to those of lower-paid unskilled workers (Fairris 2003). The decline in unionization can also be explained by political and economic events that have taken place since the mid-1980s. According to Cortez (2001), for example, he states that workers became increasingly disappointed in their labor unions for several reasons. First, workers disliked the anti-democratic means that their union leaders used to elect themselves. Second, workers felt that the organization leadership no longer represented their interests since it negotiated agreements with the government and private sector without considering their opinions. Third, there was an unwillingness and inability of the leadership to change in accordance with the on-going economic transformation. Among workers who have decided to remain unionized, however, a significant portion reacted to these issues by constituting more democratic and representative labor unions. The implementation of NAFTA created the world’s largest free trade area, which now has over 406 million people producing more than 11 trillion dollars worth of goods and services. The dismissal of trade barriers and the opening of markets have led to economic growth and rising prosperity in all three countries. NAFTA has expanded trade and investment opportunities in the United States, Canada, and Mexico. Since 1994, the total volume of trade between the three NAFTA parties has expanded from 297 billion dollars to 676 billion dollars in 2000, an increase of 128 percent. Each day the NAFTA parties conduct nearly 1.8 billion dollars in trilateral trade, according to the NAFTA center office of field operations. Mexico exported 154 billion dollars to its NAFTA partners in 2000, 238 percent more than in 1993, the year prior to the start of NAFTA implementation. Since 1994, Mexico’s annual average capital inflow is more than three times the annual amount received in the years prior to the Agreement, and the total stock of investment in Mexico has grown by 72 percent in 2000. The rise in trade has led to increased employment and prosperity in all three countries. During NAFTA’s first 7 years employment in Mexico grew by 28 percent, generating 2.7 million jobs. In Mexico, the export sector is the leading generator of job creation where more than half of the new jobs created between 1994 and 2000 were related to export activity. NAFTA has contributed to raising standards of living. Trade has led to the development and dispersion of technology, greater productivity, and to the creation of more and better paying jobs in all three countries. In Mexico, export-oriented manufacturing jobs pay wages nearly 40 percent higher than the rest of the manufacturing industry. Both households and businesses have further benefited as tariff elimination on NAFTA imports has helped moderate prices on consumer goods and inputs into production. Liberalized trade is a boon to manufacturers, who benefit from a greater supply of inputs at prices that enable them to be globally competitive. In fact, during the first seven years of NAFTA implementation, production in North America has grown by over 30 percent, compared to slightly less than 20 percent increase in the preceding seven years. The creation of NAFTA has greatly helped Mexico achieve national equality. However the progress by Mexico has come at a price. The agreement has taken a toll on both U.S. and Mexican jobs, according to the Institute for Policy Studies (IPS). While real wages for Mexican manufacturing workers declined 13.5%, more than half a million U.S. employees have entered government retraining programs after their companies moved production south or north of the border, says IPS. The pact has also destroyed Mexico’s small farmers, says IPS, by bringing in an influx of subsidized U.S. food imports. About 1.3 million farm jobs have been lost since 1993, as indicated in a recent report by the Carnegie Endowment for International Peace. “NAFTA has been a disaster for us,” says pig farmer Julian Aguilera to Business Week. Companies instead of meeting amongst themselves should take North America’s 350 million plus citizens into consideration. NAFTA must be renegotiated with the not only the citizens in mind but with consultation of the public. The criteria for renegotiation should place the interests and priorities of the population at the center of considerations. One interest should be the increase in support for education. Too little emphasis has gone to improving education for all, particularly those least able to do so on their own. Education helps to reduce poverty no matter what its consequences are for distribution. Moreover, educating children at the bottom of the income distribution will make a positive move towards meeting the increasing demands for skills, whether technical or a college education. But it is also critical to ensure universal basic education, so that children’s opportunities to obtain higher education are as equal as possible.
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