ECONOMIC INTEGRATION AND INDUSTRY LOCATION: Mexico-U.S. Integration and the Structure of Wages in Mexico 3

If wages differ between nations, the North specializes in high-skill tasks, such as research and design, and the South specializes in low-skill tasks, such as the product assembly performed by maquiladoras. If we allow Northern firms to outsource production to the South, they will choose to move the least skill-intensive activities that they perform. By moving low-skill activities to the South, the average skill intensity of production rises in the North. Interestingly, the same happens in the South, since the South initially specializes in very low-skill tasks. Outsourcing from the North to the South thus raises the relative demand and the relative earnmgs of high-skilled workers in both countries, contributing to a global increase in wage inequality. payday loans that accept prepaid debit cards

In Feenstra and Hanson (1997a), we use data on regional manufacturing activity in Mexico to examine whether the relative earnmgs of skilled workers have risen more in regions where foreign investment has been more concentrated, as would be consistent with our model. We use regional data on maquiladoras to measure the spatial distribution of foreign direct investment in Mexico. Consistent with the theory, we find that the relative demand for high-skilled workers is higher in regions where maquiladoras have expanded most rapidly. In regions where maquiladoras are concentrated, growth in maquiladora activity can account for over 50 percent of the increase in the skilled labor wage share that occurred in Mexico during the late 1980’s. These results suggest that foreign outsourcing, in the form of maquiladoras, has contributed to a rise in wage inequality in Mexico. While we believe that foreign outsourcing has also contributed to the U.S. rise wage inequality (see Feenstra and Hanson, 1997b), trade with Mexico alone is surely too small to have had a large impact on the relative demand for labor in the United States.