FDI and the growing wage gap in Mexican municipalities

Abstract

Inward foreign direct investment (FDI) has generally been linked to higher wages, but evidence remains sparse on the overall effects of FDI on average wages, the wage gap between skilled and unskilled labour, and inter-industry heterogeneity. We address these issues for Mexican municipalities and industries for a period of increasing FDI and sectoral change that saw growing wage inequality. By combining two non-experimental techniques we find that FDI in Mexico was associated with higher wages, mostly for skilled workers-but also for unskilled ones-and a widening gap between them. Effects vary both between and within industries depending on location, and they either wax or wane when the initial or incremental effects are considered.