Looking for Local Labor-Market Effects of the NAFTA

John McLaren and Shushanik Hakobyan

Perhaps the most passionately debated issue in trade policy within the United States in a generation has been the North American Free Trade Agreement (NAFTA), signed by the governments of the US, Canada and Mexico in 1993. Opponents within the US believe that it has devastated some parts of the country by encouraging multinationals to shift operations to Mexico, while proponents argue that it has boosted US exports and thus job growth. Despite the age of the agreement, as recently as 2008 it became the subject of intense political debate, with Democratic presidential candidates competing with each other in denunciations of the agreement in Ohio, a state in which many voters blame the agreement for local economic difficulties (Austen, 2008). Brown (2004, Ch. 6) presents a passionate example of the liberal non-economist’s case against the NAFTA, arguing that it has destroyed millions of US jobs as well as causing environmental problems.

One aspect of popular opposition to the NAFTA has been the claim that it has had a disparate impact geographically, that it has devastated particularly vulnerable towns even as others have prospered. Unfortunately, economists to date have not provided an answer to the question of whether or not NAFTA has indeed had the effects ascribed to it by its opponents. This paper is an attempt to do so. We ask whether or not we can identify subsets of US workers whose incomes were seriously diminished by the agreement, and if so, do they follow an identifiable geographic pattern.

We try to identify local labor-market effects of the tariff reductions brought about by the NAFTA, using publicly available US Census data from 1990 and 2000, taken from the Integrated Public Use Microdata Series (IPUMS) project at the Minnesota Population Center ( This data has enough richness to enable us to capture the features we need to capture.

Three features in particular that we need to capture should be highlighted.

(i) We need to be able to control for a worker’s industry of employment, in order to allow for the likelihood that workers in industries that compete with imports from Mexico1 will be affected differently than workers in other industries. The census data has a very coarse division of workers into industries that allows us to do so adequately.

(ii) The issue that has been foremost in much of the political debate is a geographic one: The claim that workers in some vulnerable locations have been harmed, relative to workers in other places. Thus, we need detailed geographic data, and a measure of how vulnerable a given location is likely to be to the effects of the NAFTA. The IPUMS data divide the country into 543 similar-sized, non-overlapping pieces and so this allows us to control for geography. In particular, in addition to controlling for the industry in which a worker is employed, we can control for how many of the other workers within a worker’s location are employed in industries that will compete directly with imports from Mexico. This will be interpreted as the ‘local vulnerability’ of the labor market to the effects of NAFTA.

(iii) The agreement was framed as a gradual phase-in of tariff reductions between the three countries, starting in 1994 and continuing for 10 years. The negotiated schedule of liberalization was different for each sector of the economy. As a result, for some industries, the period from 1990 to 2000 would represent the period of an announcement of tariff reductions, most of which occurred after 2000. For other industries, the same period would be a period of rapid elimination of tariffs. Consider two hypothetical industries. Industry A benefitted from a 12% tariff in 1990; by 2000, the tariff on imports of that industry’s products from Mexico had fallen to 9%, with the remaining 9% scheduled to be eliminated between 2000 and 2004. Industry B benefitted from a 3% tariff as of 1990, which was completely eliminated on imports from Mexico by 2000. Both of these industries saw a drop in their respective Mexico tariffs of 3 percentage points in the sample period 1990-2000, but we would not expect the same economic effects in these two cases since in the case of Industry A, most of the tariff reduction is anticipated, rather than being realized over the period of the data. In any model of dynamic adjustment, anticipated tariff changes can have important effects over and above realized tariff changes. To deal with this, we measure the extent of anticipated tariff reduction by the initial tariffs (since all intra-NAFTA tariffs needed to be eliminated over the course of the agreement), and control for this in regressions in addition to the actual realized tariff reduction between 1990 and 2000.

We find that NAFTA-vulnerable locations that lost their protection quickly experienced significantly slower wage growth compared to locations that had no protection against Mex­ico in the first place, particularly for blue-collar workers. For the most heavily NAFTA-vulnerable locations, a high-school dropout would have up to 9 percentage points slower wage growth from 1990 to 2000 compared to the same worker in a location with no initial protection. There is, however, an even larger industry effect, with wage growth for high-school dropouts in the most protected industries that lose their protection quickly falling 16 percentage points relative to industries that were unprotected to begin with. The effects are weaker for more educated workers, and barely noticeable for college graduates.

In addition, we find evidence of anticipatory effects. Comparing two locations that ex­perience the same drop in weighted average tariff over the sample period, if one of them still has high tariffs on Mexican imports and thus expects further drops in protection soon, while the other is now unprotected, the location expecting further tariff drops on average sees wage increases as less-educated workers leave the area, making less-educated workers scarcer.

. Note that we are not interested in imports from Canada, since tariffs between the US and Canada had already been eliminated by the Canada-US Free Trade Agreement. Back to text

Shushanik Hakobyan will join the Department of Economics at Middlebury College as an assistant professor in the fall of 2011. Her research interests are in the area of international trade, with a focus on preferential trade agreements and labour market outcomes of trade liberalization. She holds a PhD from University of Virginia, MAs from University of Virginia (Economics) and Johns Hopkins University (International Relations), and a BA from the Yerevan State University of Economics. 

John McLaren is a professor in the Department of Economics at the University of Virginia.  His interests are in the labour-market effects of trade liberalization and the political economy of trade policy.  He has taught previously at Columbia, the University of Maryland, Princeton and Yale, and holds a PhD from Princeton.


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