Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector
Eric Verhoogen ()
No 2913, IZA Discussion Papers from Institute of Labor Economics (IZA)
This paper proposes a new mechanism linking trade and wage inequality in developing countries – the quality-upgrading mechanism – and investigates its empirical implications in panel data on Mexican manufacturing plants. In a model with heterogeneous plants and quality-differentiated goods, only the most productive plants in a country like Mexico enter the export market, they produce higher-quality goods to appeal to richer Northern consumers, and they pay high wages to attract and motivate a high-quality workforce. An exchange-rate devaluation leads initially more-productive, higher-wage plants to increase exports, upgrade quality, and raise wages relative to initially less-productive, lower-wage plants within each industry. Using the late-1994 peso crisis as a source of variation and a variety of proxies for plant productivity, I find that initially more-productive plants increased the export share of sales, white-collar wages, blue-collar wages, the relative wage of white-collar workers, and ISO 9000 certification more than initially less-productive plants during the peso crisis period, and that these differential changes were greater than in periods without devaluations before and after the crisis period. A factor-analytic strategy that relies more heavily on the theoretical structure and avoids the need to construct proxies finds similar results. These findings support the hypothesis that differential quality upgrading induced by the exchange rate shock tended to increase within-industry wage inequality.
Keywords: quality upgrading; trade and wage inequality; exchange-rate shock (search for similar items in EconPapers)
JEL-codes: F16 J31 O12 L11 (search for similar items in EconPapers)
Pages: 76 pages
New Economics Papers: this item is included in nep-dev, nep-int and nep-lab
References: Add references at CitEc
Citations: View citations in EconPapers (19) Track citations by RSS feed
Published in: Quarterly Journal of Economics, 2008, 123 (2), 489-530
Downloads: (external link)
Journal Article: Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector (2008)
Working Paper: Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp2913
Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Access Statistics for this paper
More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().