Real wage convergence or non-convergence after the North American free trade agreement (NAFTA) Case study of the manufacturing sector in Mexico and the United States

The principle objective of the present research paper is the study of the impact of the North American Free Trade Agreement (NAFTA) on real wages in Mexico and United States. Our conclusions are that NAFTA did result in a significant divergence and not convergence –as expected- of real wages in the two countries; for both labor and capital intensive industries. In other words, convergence implies that real wages should fall in one country (United States) and rise in another (Mexico) relatively. For the purpose of our analysis, we present two different cases in the manufacturing sector. Firstly, we present real wages’ movements per employee from the same sub-manufacturing sectors from Mexico and United States in labor-intensive industries. Secondly, we present real wages’ movements per employee from different sub-manufacturing sectors from Mexico and United States, the former from labor-intensive industries and the latter from capital-intensive industries. The two samples introduced are part of our empirical research. The study period selected is from 1993 to 2010 (last data available) as to analyze real wage per employee movements during the NAFTA period. The database is provided by the United States Bureau of Labor Statistics and the Mexican National Institute of Statistics and Geography. As a corollary of our major objective on real wage movements, we made an assessment on Mexico’s specialization patterns and export structure. This assessment is presented with regard to Mexico’s NAFTA most important trading partner: United States, previously and after NAFTA period. The analysis is based on the theoretical framework of the doctrine of comparative advantage and factor price equalization theorem as to link trade and wages. In the particular case of Mexico this topic is of relevance because trade liberalization was materialized through the signature of NAFTA that came with expectations and promises of resulting in the increase of Mexican wages and raising the living standards of Mexican workers. On our personal point of view, we feel this is an important topic because it brings one essential aspect of the discussion in the academic area. Moreover, it gives an understanding of the impact of free trade agreements on real wages. Evaluating the promises and expectations that come from trade liberalization as a path to improve living conditions for the majority is mandatory in the development economics area. Mexico embarked on significant political and economic reforms at the beginning of the 1990s and is an essential trading partner of the United States, so the examination of the effects of NAFTA and its benefits to Mexican workers in the manufacturing sector should receive a deep assessment. Finally, this paper intends to contribute in a reflection of Neo-classical economics’ ideologies and its underlying effects for developed and developing countries’ trade relationships. If we only had more reflections thirty or twenty years ago about the effects of trade integration on wages recognizing the implications of skills differentials between developed and developing countries things might be rather different.