journal review mexico

8/2/2019 Journal Review Mexico

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Present by: Norfaizah binti Abas GM04222


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Issuesy Mexicos liberalisation and the increase in wage

inequality in Mexico.

y Prediction of Neoclassical Trade theory Heckscher-

Ohlin Samuelson (HOS) framework.

Mexico (a relatively low skill labor abundance

country) was a largely closed economy from1950s to mid-1980s.


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Issue :

Trade liberalization and the rise in wage inequality

y During the 1980s, Mexico experienced a dramatic

increase in wage inequality. The wages of more-

educated, more-experienced workers increase relativeto those of less-educated, less-experienced workers.

y In 1985, Mexico announced that it was joining the

General Agreement on Trade and Tariffs (GATT),bringing an end to four decades of import substitution

industrialization.


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y The government proceeded to drastically reduce most

trade barriers in the following three years. It was in

1985 that wage inequality in Mexico began to rise.

y Price of goods from low-skilled industries fallen after

trade liberalization because of increased competition

y Consequently, wages of low skilled workers fell while

wages of skilled workers in export industries increased

Issue :

Trade liberalization and the rise in wage inequality


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y Heckscher Ohlin-Samuelson framework suggests that

countries should use trade barriers to protect skill-

intensive goods.

y Argues that international differences in labor, labor

skills, physical capital or land (factors of production)

create productive differences that explain why tradeoccurs.

Countries have relative abundance of factors of production.

Production processes use factors of production with relative intensity.

Issue :

Prediction of Neoclassical Trade theory

Heckscher-Ohlin Samuelson (HOS) framework.


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Prediction of Stolper-Samuelson Theorem.

given an increase in the relative price of less-skill-

intensive industries, the wages of less-skilled workers

should increase relative to the wages of more skilledworkers, thus reducing income inequality

Arguments proceeds as follows: Assumes that a labor-

abundant country initiates trade. This will lead to an

increase in the price of abundant factor, labor and a

decrease in the price of the scarce factor, capital.

The Stolper-Samuelson Theorem


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A theory that predicts changes in the distribution ofincome when the relative price of goods changes, say

because of trade. If the relative price of a good increases, then the real

wage or rate of return of the factor used intensively inthe production of that good increases, while the real

wage or rate of return of the other factor decreases.


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The ability to obtain goods and services, that is real income,depends not only on changes in income but also changes in productprices.

Thus workers who consume only the cheaper, imported capital-intensive good are clearly better off, since their nominal income hasincreased and the price of the capital-intensive has fallen. Theirabsolute and relative command over this product has increased.

In other words

if a country imports L-intensive goods, international trade lowers theprice of such goods and makes laborers worse off.

if a country exports L-intensive goods, both the economy and workersgain more.

Main implication :


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Trade liberalization causes prices of skill intensivegoods to increase relative to those of non-skillintensive goods

Price changes reduced demand for labor in non-skillintensive industries

Shift in employment toward skill-intensive industriesresulting in increased demand for skilled workers


Pattern in Mexico


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The Effect Wage Gap


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The Effect Wage Gap


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Findings

Trade liberalization in Mexico increased the demand for

skilled workers and as a result, increased wage inequality.

Mexico protected less-skill intensive industries and trade

liberalization caused the relative price of skill-intensive

goods to rise.

Increased demand for skilled labor -The change inrelative prices and demand for skill has created

opportunities for more educated workers that should be

met with strong and rapid investments in education.


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Findings

Found that rise in wage inequality is linked to changes in

Tariffs that favoured skilled workers

Correlations between tariffs and skill intensity in Mexicoare supportive of Stolper-Samuelson effects - SS predictsincrease in relative wages in Mexico, the relative prices of skill-intensive goods

must have risen following trade liberalization.


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Conclusion

If import competition from low wage countries putdownward pressures on the wages of unskilled workersin the developed countries, then we should observeopposite movements in wages in developing countries.

Possible reason :

Because in manufacturing industries, exporting firms require at least some levelof education from the workers

Trade therefore, does not directly benefit workers without any education Unskilled workers in import competing industries (whom were in abundance in

Mexico) adversely affected by trade liberalization because competition from

relatively more low-skill abundance country like China

The wage inequality pattern will dissipate in the future aslow-skill workers improve through training/education tofulfill demand in skilled labor sectors


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THANK YOU

journal review mexico

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