Wage Effects of a U.S. - Mexican Free Trade Agreement

This paper analyzes the extent to which education will be subsidized when the subsidy rate is determined by majority voting. The analysis takes place in a framework where education is a discrete decision and all individuals would like to obtain an education because of its effect on future earnings. Individuals differ in their initial income levels. Mexico doesn't seem economically large enough now to have a significant effect on the prices of goods and the earnings of labor in the United States, but Mexican population growth and productivity gains induced by liberalization will make the Mexico of the future much larger than today, especially in those sectors that use intensively Mexico's abundant low-skilled labor. Furthermore, in a free trade agreement with the United States, Mexico has an incentive to concentrate production on those sectors that are most protected by the U.S, from third-country competition, and to export all that product to the high-priced protected U.S. market. For all these reasons, the Mexico of the future is large enough to undo current or future U.S. protection designed to maintain wages of low-skilled workers. With or without a free trade agreement. the United States faces a substantial problem with the continuing economic deterioration of the lowest skilled workers. A free trade agreement with Mexico would keep the U.S. from using protectionism to deal with this problem.