An important implication of increasing-returns-based theories of industry agglomeration, such as Rauch (1991), Krugman and Livas (1996), and Thomas (1997), is that regional wages decrease with transport costs to industry centers. This result is due to a combination of congestion in agglomerated regions, which drives up local housing prices relative to housing prices in outlying locations, and labor migration between regions, which, given housing-price differentials, requires that nominal wages in industry centers be sufficiently high that real wages are equalized across locations. comments

Under ISI in Mexico, industry concentrated in Mexico City. Though trade barriers were high, they were not prohibitive. There was still some production for foreign markets, mainly in the United States. Given trade barriers that are sufficiently large, Krugman and Livas (1996) show that two types industry centers may emerge: a principal center (in Mexico City), in which firms produce for the domestic market, and a smaller center (in northern Mexico), in which firms produce partly for the foreign (U.S.) market. Table 3 shows that in 1980, five years before trade liberalization began, 69.3% of the Mexico’s manufacturing labor force was located in Mexico City and the surrounding central states, and 21.0% of the manufacturing labor force was located in Mexican states on the U.S. border. Northern and southern states, which account for 40.5% of Mexico’s land area, contained only 11.3% of.