After more than 25 years of trade policy reforms aimed at trade integration between the US, Mexico, and Canada, the North American Free-Trade Agreement (NAFTA) has been put into question. As the renegotiations are proving extremely difficult, a return to protectionism and tariff battles looms over the region.
Trade integration episodes are expected to foster economic development by reallocating resources towards more productive sectors and firms. However, the impact of international trade on labour markets is controversial, as there are winners and losers, and inequality in earnings tend to increase with international trade. Recent studies have additionally shown that trade liberalisation affects informality rates in the labour market (Dix-Carneiro and Kovak 2017, McCaig and Pavcnik 2018, and references herein). Informal workers do not have a formal labour contract and as such are not entitled to labour rights or benefits. Informality rates are high in middle- and low-income countries. However, even high-income countries’ labour markets are characterised by a dual system where jobs with different level of protection and benefits coexist. The increase in the share of atypical jobs has become particularly acute with the rise of the ‘gig economy’. Informal jobs tend to offer lower earning opportunities, worse working conditions, and no or little social safety nets compared to formal jobs. Therefore, understanding the effects of trade policies on informality rates is a crucial aspect of policies tackling the issues of inequality and poverty. In this investigation it is crucial to account for gender differences. Indeed, trade liberalisation has been shown to affect gender gaps in wages and labour force participation (Juhn et al. 2014, Sauré and Zoabi 2014, Gaddis and Pieters 2017, among others). Exploiting the Mexican trade liberalisation episode in the 1990s, we explore the labour market impact of reductions in Mexican import tariffs across gender and sectors (Ben Yahmed and Bombarda 2018).
Trade liberalisation and the labour market in Mexico
Among NAFTA members, Mexico was the country with the highest tariffs and experienced the largest cut during the NAFTA phase-in. Over the period 1993-2001, Mexican import tariffs on US products declined on average by 14%. To provide a full picture of the implication of this change on the labour market, it is important to consider the dual system of the Mexican labour market. Mexico has a large share of informal employment, as do most Latin American countries. Figure 1 shows that the drop in the Mexican import tariff coincides with formal employment reallocated from the service sector into the manufacturing sector.
Figure 1 Formal employment and Mexican import tariff
Data source: Authors‘calculation based on the ENEU, Mexico and tariff data from Iacovone and Javorcik (2010).
Moreover, the Mexican labour market exhibits striking gender differences. The extremely low female labour force participation is one illustration of this. Less than 40% of women participated to the labour force in the early 1990s, and this share remained below 50% in the early 2000s. Although women are more likely to be in formal jobs when they are in paid employment, the gender gap in formality rates shrank over the 1990s (Figure 2). It was 8% (6%) in the service (manufacturing) sector in 1993, and was reduced to less than 1% (2%) in 2001.
Figure 2 Formality rates among female and male employees
Data source: Authors’ calculation based on the ENEU, Mexico
Our empirical exercise considers two aspects of trade liberalisation. We start by focusing on within-industry reallocation of employment across formal and informal jobs exploiting time variation in industry-specific tariffs. Then, we adopt a local labour market approach and study changes in formal employment within regions that faced different exposure to tariff reductions. Exposure to trade liberalisation varies across regions because of different industry mixes. Moreover, the regional exposure to tariff reductions is gender-specific as men and women work in different industries.
Trade liberalisation and informality within tradable sectors
To study the relationship between Mexican trade liberalisation and the probability of holding a formal job for men and women, we use individual data from the Mexican labour force survey, the Encuesta Nacional de Empleo Urbano (ENEU), and data on Mexican import tariffs on US products. Our findings show that workers employed in an industry that experienced the average reduction in tariffs of 14% are 2% more likely to hold a formal job than workers in an industry facing no tariff reduction. Within sectors, firm characteristics matter. First, workers are more likely to hold formal jobs in large firms. This is in line with the literature on firms and informality, which shows that informal firms tend to be smaller (see La Porta and Shleifer 2014 among others). Second, the effect of trade policy reforms depends on a firm’s size. Considering trade liberalisation in Argentina, Cruces et al. (2017) find that industries with a large share of employment concentrated in small firms experience an increase in informality. We complement their analysis using individual data and find that a reduction in the sectoral tariff increases the probability of holding a formal job only in firms with more than 50 employees, and that this formalisation effect increases with firm size. This finding may be explained by a reallocation of employment towards bigger trade-oriented firms within sectors. Indeed, trade-oriented firms tend to be more intensive in formal jobs (Nataraj 2011, McCaig and Pavcnik 2015).
Trade liberalisation and informality in local labour markets
A recent but growing body of work has shown that international trade has different effects across regions within a country because of different industry mixes across regions. We additionally exploit the fact that men and women work in different industries within regions, and compute gender-specific regional exposure to trade liberalisation.
Exploiting yearly variation in tariffs between 1993 and 2001, we show that regional exposure to Mexican tariff reductions lead to an increase in the probability of formal employment for both men and women in the tradable sectors, and the effect is larger for men. However, results differ when we consider the non-tradable sectors. Indeed, women employed in a non-tradable industry in a region exposed to a strong reduction in tariffs have been lesslikely to hold a formal job than women working in a non-tradable industry in a region facing no reduction in tariffs.
To interpret the finding that the probability of holding a formal job has increased more for men than for women, we use a multi-sector Ricardo-Viner model with female and male labour, and formal and informal jobs. In this context, trade liberalisation leads to a greater increase male formal employment share relative to female formal employment share if comparative advantage sectors are intensive in formal labour, and if male labour is relatively more substitutable for capital than female labour.
Our results differ from those in Dix-Carneiro and Kovak (2017), who find that Brazilian micro-regions more exposed to tariff reductions experienced an increase in informality even 20 years after the trade reform. Nevertheless, our results seem in line with Atkin (2016), who documents a formal employment boom in Mexican export-oriented manufacturing industries over the 1990s. Moreover, export-oriented sectors benefited from the fall in Mexican tariffs as intermediate inputs became cheaper. Indeed, Mexican exports to the US use a very high share of US inputs (de Gortari 2017). Menezes-Filho and Muendler (2011) find for Brazil that lower intermediate-input tariffs are associated with lower odds of transitions into unemployment and out of the labour force, resulting in significantly more transitions into formality. However, reductions in product-market tariffs have opposite effects. This suggests that country differences in global supply-chains may be partially responsible for differing effects of import tariff reductions on formal employment across countries.
Our findings show that trade liberalisation has heterogeneous effects on the likelihood of formal employment. First, within tradable sectors, we find that only workers employed in large firms experience an increase in the probability of holding a formal job with tariff reductions. Second, tradable and non-tradable sectors are affected in different ways, and it seems relevant to account for the potential employment reallocation and spillovers across sectors. Third, men and women face different exposure to trade liberalisation and therefore the formal employment response to trade policy reforms varies across gender. While the probability of formal employment increases in tradable sectors, especially for men, women are more likely to hold an informal job in non-tradable sectors.
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