Rising College Premiums in Mexico: How Important is Trade?

Abstract

The literature on wage inequality in liberalizing developing economies has largely attributed rising skill premiums to trade-induced increases in the demand for skilled labor within "sectors" (industries, occupations, or industry-occupation pairs). Although there is strong evidence from many countries of trade-induced increases in skill demand within manufacturing, we show that in Mexico, the most studied country in this literature, economy-wide increases in college premium can be explained without reference to these demand shifts. Evidence that skill premiums have increased because of within-sector increases in skill demand mostly comes from decompositions that suppress di¤erences in wages across occupations. We show that this is unduly restrictive, for example if incomes change and Engel curves for services are non-linear. Mexico's college premiums were lifted by increased demand for professional services, many of which are not directly tradeable. This explanation also reconciles gender di¤erences in the changes in skill premium with changes in employment composition. Job opportunities in non-traded sectors may matter more for wage inequality than trade policy. [JEL: F16, O15, J21]

The effects of trade and services liberalization on wage inequality in India

“…It suggests either that trade policy alone does not explain the shift in wage inequality, or that the effects of trade policy operate primarily through their impact on wages (especially those of skilled workers) in nontradables. In this respect, the results are simpatico with recent results from Mexico (Mehta and Acuna-Mohr 2010).…”

“…In particular, increases in returns to postsecondary or college education can be linked to the increasing returns to specific occupations that also require, or are typically staffed by, people with a college education. In Mexico, for example, a rapid increase in earnings of professionals and administrators was a key driving force behind increases in the returns to postsecondary education over a period of trade reforms, a finding that has been attributed to increased demand for individuals who could respond to the rapid changes introduced by the reforms (Cragg andEpelbaum 1996, Mehta andAcuna-Mohr 2010).…”