Trade liberalisation and wage inequality: Lessons from the Mexican experience

To describe the links between trade and income inequality, I discuss Mexico's liberalisation and the increase in wage inequality in Mexico in Section 2. I then describe how changes in relative prices that were linked to the change in tariffs contributed to wage inequality in Section 3. In this section, I explain how the increase in relative wages was consistent with the HOS framework. The rise in inequality seems to contradict the neoclassical framework because, if Mexico were actually abundant in less-skilled workers, then the relative price of skill-intensive goods should have fallen when tariffs fell. However, Mexico used trade policy to protect less-skill-intensive industries and cut these tariffs more, causing this change in relative prices. Consistent with the Stolper-Samuelson theorem, the relative price of skill-intensive goods rose when trade barriers fell. Beyond the Stolper-Samuelson theorem, other papers find that an influx of capital and changes in production technology also contributed to the rising demand for skill. I examine the effects of foreign investment and changes in plant technology in Section 4. I draw from these lessons to discuss policy implications and conclusions in Section 5.