Economic Reform In Mexico And Wage Inequality

The 1980s was the period when wage inequality had become very prominent after the economic reforms in Mexico. Different economists held different opinions about economic reform and wage inequality in Mexico.
Different views:
Few economists felt that wage inequality could be tamed if skilled workers are employed. While some feel that increase in the need for skilled workers is not the reason, wage inequality is largely due to globalization. Few economic analysts felt as Mexico carried on extensive trade with other countries who had unskilled labor force, disparities have resulted.

Disparities in demand for skilled labor:
Trade liberalization was one of the reforms introduced by Mexico, the government in Mexico introduced a chain of reforms, which were market oriented.

These included liberalization in capital markets, reforms in financial markets and privatization. It just happened that trade liberalization as well as introduction of the other reforms took place simultaneously. Among these, reforms in financial market and capital account liberalization escalates skill premium.
Some economists (Cragg and Epelbaum) feel that these factors are responsible for the wage inequality in the country. It was found out from extensive research carried out by economists that there is a tendency of the skill premiums to rise in almost all sectors of the economy. Changes in factor productivity has a connection with wage inequality in Mexico. Studies reveal that during the period 1984 to 1994, there was increase in enrollment in the post secondary schools. Effects of economic reform in Mexico and wage inequality was due to the fact that owing to crisis in all macroeconomic parameters, the educated were impacted more than the less educated. There was a rise in the levels of education and to the same effect, demand for skilled labor failed to increase.

Trade liberalization- As an economic reform in Mexico and wage inequality effects:
It is believed that prior to the implementation of trade reforms in Mexico, policies related to import substitution, were unable to provide protection to the low skilled workers proportionately. It was also found that due to liberalization in trade, the protected sector paid less wages to the workers. The protected sectors were characterized by low skilled labors and was more labor intensive.

Another reason for wage inequality in the country was outsourcing. Outsourcing was usually done by foreign companies. To study the effects of outsourcing on wage inequality Feenstra and Hanson created a model, which was basically trade based. According to their findings, there was an increase in wage inequality in Mexico. Since, outsourcing was done outside the country, the wage bill decreased. Feenstra and Hanson in the year 1996 also found that foreign direct investment or FDIs have a direct impact on wage bills.

From the above section, it can be concluded that economic reform in Mexico and wage inequality are closely related. With liberalization in trade, there is a general tendency for the wage inequality to rise in the country. Trade liberalization alone cannot be held responsible for the increase in wage inequality as a consequence of economic reform in Mexico. Market oriented reforms- privatization, reform in taxation system, reform in financial market, liberalization in capital account are some of the other factors responsible for increase in wage inequality in the country. It is also assumed that trade flows, which were based on factor endowments as well as comparative advantage had a profound effect on the structure of wage. Wage inequality increased steeply in the initial stages of the economic reforms in Mexico. This period was between 1984 to 1994. However, wage inequality subsided and there was stability of skill premium in the country. Between the years 1994 and 1995, the country was subjected to crisis in the macroeconomic parameters. This crisis affected educated as well as skilled workers. There was an increase in the availability of post secondary workers. This may be referred to as one of the reasons why wage inequality slowed down. This was followed by a dying demand of skills during the second half of 1990. Therefore, when wage inequality slowed down , it implied that effects of economic reform in Mexico was waning away. However, as global markets are opening up and there is increase in foreign capital, international trade, and demand for skilled labor is on the rise.

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Last Updated on : 26th June 2013

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