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Firms and Labor in Times of Violence: Evidence from the Mexican Drug War

Hale Utar ()

No 7345, CESifo Working Paper Series from CESifo Group Munich

Abstract: I study urban violence due to drug trafficking and how it affects the industrial development in an emerging economy. Employing rich longitudinal plant-level data over 2005-2010 that covers all of Mexico, and exploiting plausibly exogenous spatiotemporal variation in homicide rates during the outbreak of violence in Mexico commonly referred to as the Mexican Drug War, I show that a violent environment has significant negative impact on manufacturing plants’ output, product scope, employment and capacity utilization. Violence generates a negative blue-collar labor supply shock, leading to significant increase in skill-intensity within firms. It also deters internal, but not international, trade. The effect of the violence shock on firms is very heterogeneous: the output effect of violence increases with reliance on local demand and sourcing, and the employment effect of violence is stronger on plants with higher shares of lower-wage and female workers. The results reveal significant distortive effects of the rise of violence on domestic industrial development in Mexico and suggest that the Mexican Drug War accounted for the majority of the aggregate decline in manufacturing employment in Mexico over the sample period.

Keywords: drug war; Mexico; firms; violence; organized crime; trade; technology; labor; productivity; re-allocation (search for similar items in EconPapers)
JEL-codes: L25 L60 O12 O14 O54 R11 F14 (search for similar items in EconPapers)
Date: 2018
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