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"Input-Trade Liberalization and Formal Employment : Evidence from Mexico"

Abstract :

This work investigates the role of input-trade liberalization on labor allocation between the informal and the formal manufacturing sector in Mexico. Using individual household data for Mexico (1993-2001), we exploit exogenous input tariff changes applied to U.S. products when Mexico enters the NAFTA in 1994.
The theoretical channel considered is the foreign inputs-skilled biased channel, such that input-trade liberalization induces the reallocation of workers from informal to formal firms. Our findings confirm this mechanism : individuals experiencing the average reduction in input tariffs are 5.5 percentage points more likely to work in formal rather than informal occupations. This effect is concentrated on high-skilled workers which reinforces the input-skilled biased complementarity channel.