Labor Skill, Trade and Capital Intensity, and the Fall of Manufacturing Real Wages: Panel Evidence from Mexican Industries

Abstract The paper studies the fall in manufacturing real wages that took place in Mexico after the China shock of 2001. It shows, first, that the wage reductions reflected a significant transmission of the China shock, plus a weak link between labor-productivity and real-wage growth; and second, that the weight of these two factors was conditioned by the skill level of workers and the trade and capital intensity of industries in Mexico. Thus, while the China shock hit harder medium and high-skilled workers in capital-intensive industries, the weak link between productivity and wage growth affected more the low-skilled in trade-intensive industries. Results come from the estimation of wage equations by skill level for an annual panel of 20 manufacturing industries at NAICS three-digit level, for different periods but focusing on 1996–2017 (the NAFTA period) and 2003–2017 (the post-China shock period).