"Study examines trends in income distribution in Mexico during the period of trade and economic liberalization. Makes the obvious but often ignored point that the prediction of orthodox theory can turn out to be false if its assumptions are not fulfilled and if offsetting forces are at work. The study's detailed analysis of the effective protection rates in 1989 shows how inadequate reforms have been as far as the promotion of efficient resource allocation"--Handbook of Latin American Studies, v. 57.

October 1995 Cuts in Mexico's tariff levels were associated with a slight decline in employment in Mexico and with increases in average wages (perhaps reflecting improved productivity in the reformed industries and a shift toward the use of more skilled workers). The wages and employment of skilled production workers were significantly more responsive to changes in protection levels than those of nonproduction workers. In 1985, after decades of an import-substitution industrial strategy, Mexico initiated a radical liberalization of its external sector. Between 1985 and 1988, import licensing requirements were scaled back to a quarter of earlier levels, reference prices were removed, and tariff rates on most products were substantially reduced. By 1989, Mexico was one of the most open economies in the developing world. Adjusting to trade liberalization required the reallocation of resources between sectors and entailed substantial dislocation of workers. Revenga analyzes how Mexico's trade liberalization (1985 - 87) affected employment and wages in industry, focusing on how it affected average employment and earnings rather than on the link between trade and relative wages. She examines the tradeoff between wage and employment adjustment, identifies which labor groups benefited more from liberalization, and tries to associate changes in employment and wages directly with measures of change in trade protection, rather than link them to changes in imports and exports (which is more common). She finds that reductions in quota coverage and tariff levels are associated with moderate reductions in firm-level employment. A 10-point reduction in tariff levels (between 1985 and 1990) is associated with a 2- to 3-percent decline in employment in Mexico. Changes in quota coverage appear to have no discernible effect on wages, but reductions in tariff levels are associated with increases in average wages. This seems to reflect improved productivity in the reformed industries, which may be related to a shift toward the use of more skilled workers. There seems to have been a slight shift in the skill mix in favor of nonproduction workers. This was paralleled by a sharper increase in the wage differential between skilled and unskilled workers. The wages and employment of skilled production workers were significantly more responsive to changes in protection levels than those of nonproduction workers -- perhaps partly because production workers were more heavily concentrated in the industries in which protection levels were greatly reduced. This paper -- a product of the Country Operations Division 1, Latin America and the Caribbean, Country Department II -- was prepared for the World Bank labor markets workshop held in July 1994.

Between 1986 and 1990, the Mexican government reduced tariffs and import license coverage by more than 50%. The author, using micro-level data, analyzes the impact of trade reform on Mexican wages and employment. Industries that had greater reductions in protection levels, she finds, had a larger percentage of low-skill workers. Wage dispersion increased in both the non-tradables sector and, to a much greater degree, the tradables sector. This pattern suggests that trade reform increased wage inequality. The decline in import license coverage appears to have reduced relative wages of workers in reformed industries by 2%, but did not affect relative employment. Reductions in tariffs had no statistically significant effect on relative wages or relative employment.