Increasing Returns, Trade and the Regional Structure of Wages

Abstract

Trade theories based on increasing returns have two predictions for regional economies: employment concentrates in industry centres, and regional nominal wages are decreasing in transport costs to industry centres. I test these hypotheses using data on regional manufacturing in Mexico before and after trade liberalisation. Employment and wage patterns are consistent with the idea that market access matters for industry location. Under the closed economy, industry concentrated in Mexico City. Since trade reform, industry has relocated to the United States--Mexico border. Estimation results show that regional manufacturing wages are decreasing in distance from Mexico City and from the border.