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Shocks Hit Workers Twice In Offshoring Industries: Lessons From Mexico

Daniel Lederman's picture

Factory in Mexico. Source: Alan Grinberg -- http://www.flickr.com/photos/agrinberg/5536586224/The world is increasingly interconnected, and nowhere is a better example of that than the border between Mexico and the US. Lined with factories, the division between the two countries is blurred by a comprehensive trade agreement, international production chains, and other economic and social ties. On the Mexican side of the border, close to 3,000 factories import components and raw materials, workers assemble goods, and most of the finished products are destined for the US.

Is this good for Mexican workers? These export-oriented industries provide nearly two million jobs, a boon for development. But it turns out that these jobs can disappear quickly: the economic health of the US has a large impact on Mexican workers’ employment status, with downturns and booms amplified through a number of channels. Although the US economy is rarely volatile, this is an important finding that could have policy implications around the world. Mexico is similar to the increasing number of countries that have encouraged export-oriented industry as a strategy for development and enacted trade reforms integrating the local economy with the world market.

Our research, supported by the World Bank’s International Trade Department in collaboration with the Inter-American Development Bank and Macalester College, uses data from Mexican social security records and US customs to examine the impact of US-based economic shocks on the offshoring maquiladora labor market of Northern Mexico. We extract four specific findings from the data. We found that when Mexican imports dropped, so did employment in the maquiladora industries. This is contrary to most conventional wisdom on trade (and the bulk of empirical literature), which says that when imports decline, employment increases because import-competing industries thrive. In that more typical scenario, a decline in imports cushions the harmful impact of a decline in demand for exports. But our finding is consistent with an environment that depends heavily on imports for the assembly of finished products, as is the case in Northern Mexico. This environment, we observe, is subject to large swings in employment (existing academic research suggests it is twice as volatile as employment in similar industries on the US side of the border). Indeed, the maquiladora industry gets hit twice when the economy sours in the US – once because shoppers in the US aren’t buying and a second time because US-made components and raw materials aren’t coming in.

We also found that negative trade shocks led to layoffs in the maquiladora industries rather than wage cuts. This could be because individual firms are small relative to the overall labor market, and so they take wages as given in the short run. What happens on the international trade stage impacts not the size of their paycheck, but whether they have a job at all.

A third pattern revealed by our research was that the skill level of employees in maquiladora industries rose in response to economic downturns. Indeed, our results suggest that increases in imports and exports lead to the disproportionate hiring of lower-skilled workers, and a trade collapse triggers job-loss among those lower-skilled workers. Put another way, the primary beneficiaries of a boost in trade are lower-skilled workers, but they are also the primary losers when trade decreases suddenly.

And, finally, we found that trade shocks that affected employment in related industries also hurt the maquiladora factories. This can be described as a “ripple effect” that spreads across industries within northern Mexico and amplifies the volatility of employment in the sector. In fact, we found that a drop in related imports has an impact on employment that is of equal economic magnitude to a drop in direct imports. For example, a drop in imports of computer chips, associated with a large hit to computer assembly workers, could do equal harm to workers in services industries (restaurants, retail stores, e.g.) that serve the workers in the computer assembly plants.

These lessons from Mexico shed some light on the relationship between trade and employment in a specific setting that is becoming increasingly common around the world – that of export-oriented industry that also depends on a regular flow of imports. While globalization and its associated trade flows are generally good for development, and Mexico’s ties to the United States have been beneficial for both countries, it is also important to recognize how workers are affected by fluctuations in trade flows. As more and more developing countries take on an outward-oriented strategy for growth, Mexico’s experience should help policymakers understand how that strategy can affect workers. Ideally, examinations such as this one will help countries develop complementary policies to stabilize employment in this trade-sensitive sector.