November 16, 2003

Notes: Eric Verhoogen

Eric Verhoogen is on the junior economics job market from Berkeley this year. He's not my student, but he has what is by all accounts a great job market topic with real, very interesting results:

Eric Verhoogen: Eric Verhoogen (2003), "Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector: Theory and Evidence from an Exchange Rate Shock" (Berkeley: U.C. Berkeley xerox).

Abstract: This paper proposes a new explanation of the coincidence of expanding trade and rising wage inequality in developing countries, and investigates its causal implications in a panel of Mexican manufacturing establishments. In a theoretical setting with heterogeneous firms and quality differentiation, only the most productive firms in a developing country like Mexico enter the export market, and they produce a better-quality good for export than for the domestic market in order to appeal to richer developed-country consumers. An increase in the incentive of developing-country producers to export to a developed country generates differential quality upgrading within industries, as more-productive firms increase exports and produce a greater share of high-quality goods, while less-productive firms remain focused on the domestic market. Producing high-quality goods in turn requires paying high wages both to white-collar and to blue-collar -- but especially to white-collar -- employees, and quality upgrading raises wage inequality both between firms and within the firms that upgrade. The empirical part of the paper uses a major exchange rate shock -- the Mexican peso crisis of late 1994 -- to test this causal mechanism. I find robust evidence that, during the years of the crisis, initially more-productive plants (1) increased wage levels for both white-collar and blue-collar workers and (2) increased the relative wage of white-collar workers, as compared to initially less-productive plants. This pattern is absent in the periods before or after the crisis years. The results thus provide strong support for the hypothesis that differential quality upgrading induced by the exchange rate shock was partly responsible for the increase in wage inequality in Mexico in the mid-1990s.

Posted by DeLong at November 16, 2003 12:27 PM | TrackBack

Comments

Very plausible. Its amazing someone hasn't thought of it before.

Note, though, that this mechanism does not create absolutely lower wages for anyone - it just boosts some without affecting others. Not much cheer for the anti-globalists from this.

Posted by: derrida derider on November 17, 2003 12:04 AM

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What if the saviors of the Mexican export industry had been Scandinavian firms? In other words, were pay scales perhaps shifting to meet cultural norms at the "Home Office?"

Posted by: Josh Narins on November 17, 2003 04:21 AM

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