Introduction

The classical theory of international trade argues that international trade impacts employment. On the one hand, workers who are employed in industries that compete through imports experience losses with trade openness, on the other hand, employment increases in export industries. However, the effects of trade openness are more complex because they generate varied impacts depending on the type of economic activity and the level of development of countries or regions (^{Crozet & Orefice 2017}).

The classic Heckscher-Ohlin model predicts that countries with a relative abundance of labor export goods that require intensive labor. From this perspective, a developing economy, such as Mexico, would be driven to produce labor-intensive goods for export, as is the case for the export maquiladora industry. Therefore, under this logic, the expansion of trade in this sector would generate greater demand for labor in the labor market, thus increasing total employment, in particular, in the states that concentrate this type of manufacturing activity.

In contrast, the new theory of international trade, which analyses the growing importance of intra-industrial trade, considers the possibility that labor-intensive economies increase their demand for capital, which increases the demand for imports and improves employment conditions (^{Feenstra & Hanson, 1997}). In this way, the differentiation of output and economies of scale determine the expansion of intra-industry trade, which modifies the composition of employment through manufacturing industries (^{Jenkins & Sen 2006}).

Several studies have conducted empirical tests of the relationship between exports and employment. ^{Artuc et al. (2019}) analysed the effect of changes in the trade exposure index on jobs, wages and labor informality in various South Asian countries for the 1999-2011 period. The econometric estimates of ordinary least squares indicated that there was no positive impact on total direct employment, but there was a reduction in informal employment and growth in formal employment. ^{Kiyota (2016}) used an input-output matrix and found that in the 1995-2009 period, exports, predominantly manufacturing, had an effect on employment in the economies of China, Indonesia, Japan and Korea. In particular, the effect on the manufacturing of machinery, electrical equipment and transportation was highlighted, translating into greater employment of workers in nonmanufacturing activities.

In the United States (USA), ^{Feenstra et al. (2019}) estimated the impact of industrial exports by sector for the 1991-2011 period using econometric forecasts and a Leontief matrix to study the impact of exports on employment. Their results indicate that manufacturing exports generated approximately 300 000 jobs that compensated for job losses resulting from imports from China. In relation to the analysis of the link between exports and the labor market in Mexico, ^{Varela Llamas and Retamoza Yocupicio (2020}) studied the 2005-2019 period using an autoregressive distributed lag model, finding that exports have a positive effect on the growth of industrial activity and formal employment.

It has been argued that the effects of the North American Free Trade Agreement (NAFTA) on the Mexican economy have been positive but moderate. The benefits have focused on the manufacturing sector in terms of the adaptation of technology imported from the USA, a higher employment rate, greater macroeconomic stability and the synchronization of the growth cycle of the economies of Mexico and the USA. However, disparities in income and occupation remain at the regional level (^{Villarreal & Fergusson, 2017}). Likewise, since the establishment of NAFTA, there has been a notable increase in employment in the manufacturing sector in Mexico. In the first 10 years of the Agreement, approximately one million jobs were created; however, this figure did not have a significant impact on the total employment dynamics in the Mexican economy (^{Blecker, 2014}). As a complement to the growth of manufacturing exports, manufacturing imports also exhibited very dynamic growth, which was concentrated in the import of inputs for export manufacturing production.

Trade openness and foreign investment intensified the existing regional advantages on the northern border; this openness and investment are driven by geographic proximity and local economic interactions, significantly boosting trade integration and manufacturing activity. Since 1997 to 2000, the exports of northern border states have increased their share in the national GDP, reflecting the impact of the economic integration of the United States and Mexico on bilateral trade (^{Mendoza, 2005}).

The export manufacturing industry has become a fundamental sector of the economy of the northern border region, both for its weight in total exports and for its contribution to the generation of labor. However, the employment growth rate has not been as dynamic relative to the overall economic activity of the country (^{Tavares Luna & Varela Llamas, 2019}). In this regard, it has been argued that the growth of the manufacturing sector in Mexico has not been a decisive factor in increasing formal employment because the relative importance of this sector in the total economic activity is lower than that of the service sector (^{Almonte et al., 2020}). However, some studies have found, based on input-output matrices, that manufacturing exports have a positive impact on production and employment (^{Ruiz Napoles, 2017}).

Manufacturing activities in which high levels of foreign direct investment (FDI) are concentrated show significant growth in employment for both skilled and unskilled workers (^{Saucedo et al., 2020}). Regionally, the economies of the border states of Mexico and the USA, particularly those of border states such as California and Texas, have experienced an increase in trade integration. This has led to employment trends in the northern Mexican border region showing greater synchronization with employment trends in the United States (^{Mendoza, 2009}). Thus, the growth of employment in the northern border region of Mexico has been concentrated in the service, manufacturing and trade sectors (^{Grijalva Monteverde, 2004}). In particular, the states on the northern border of Mexico have had sustained growth in manufacturing jobs derived from their proximity to the United States and the boost from NAFTA. Employment concentrated in the transportation and electronics industries stand out (^{Angoa et al., 2009}).

The northern Mexican border region is characterized by a greater share of manufacturing production and exports compared to the national average in Mexico and by growth and a significant proportion of manufacturing employment among total employment in the region. For this reason, it is important to estimate the extent to which foreign trade is a determining factor in employment in this border region of Mexico. To address this objective, this paper is structured as follows. The next section describes and analyses the evolution of employment and foreign trade in the northern border region. Then, the theoretical perspective and methodological strategy to estimate the relationship between foreign trade and employment are presented, the results of the estimates are discussed, and finally, the conclusions of the study are presented.

Evolution of trade and employment on the northern border of Mexico

The economic integration of the states on the northern Mexican border with the United States economy accelerated as a result of the boost of NAFTA on foreign direct investment and international trade (^{Mendoza, 2005}). Likewise, a new agreement between the United States, Mexico and Canada (T-MEC) has established guidelines that can continue to promote the growth of jobs associated, particularly, with manufacturing economic activity. The expansion of total employment in the region of the northern border states of Mexico has been greater than the growth seen by the country as a whole. Thus, between 2005 and 2020, the average annual growth rate of the employed population of the border region was 1.9%, while for the entire country, this rate was lower, reaching only 1.4% (Figure 1).

In addition, for the manufacturing sector, the difference between growth rates is even greater in the border region. The average annual growth rate in the same period for the secondary sector nationally was 1.5%, and the growth rate for the northern border states was 2.1% (Figure 1). Employment patterns along the northern border suggest the existence of factors that have had a greater impact in that region than in the rest of the country. Furthermore, when analysing the growth rates of the total employed population and the secondary sector at the national level and in the border region, each of the border states saw a total growth rate and manufacturing sector growth rate that were higher than the national level for the reference period. In particular, the cases of the states of Baja California, Chihuahua and Sonora stand out.

Figure 1 Growth rates of total employment and of the national manufacturing sector and in the northern border states, 2005-2020 

In addition, the creation of manufacturing jobs has varied within the region. Some states have consolidated their capacity to create new jobs, while others have decreased it, indicating the relative importance of job creation in the region. For example, Chihuahua, which for several years has been established as the main manufacturing job centre along the northern border of Mexico, has increased its contribution to the creation of manufacturing jobs in the region, with an average quarterly variation of 2.4% during the 2013-2020 period (Table 1). Similarly, Baja California has shown a rapid employment growth rate of 2.5%. Additionally, Coahuila and Sonora, although they have experienced sustained growth in the number of manufacturing jobs, both seem to face difficulties in recovering growth dynamics as of 2018, when the region faced a reduction in the rate of growth of this type of employment.

Regarding the evolution of exports, the northern border region generates a large percentage of total exports from Mexico. The proportion of the total has remained relatively constant from 2007 to 2020, representing 64.6% in 2007, with a slight reduction in its share in 2020 to 60.7% (Table 2). The growth of manufacturing exports both nationally and in the northern border region of Mexico has increased rapidly, reaching an average annual rate of 5.3% for the national manufacturing sector and 4.6% for the northern border in the 2007-2019 period. Therefore, although in recent years the importance of exports from the border region has decreased slightly, it is still considered a determining factor for all exports from Mexico and has a great impact on economic activities along the northern border.

Export dynamics for the northern border region states of Mexico have exhibited differentiated behaviour. Within the northern border region, Chihuahua, Coahuila, Nuevo León and Baja California account for the highest proportion of the region’s manufacturing exports (Table 3). Likewise, these states exhibited the highest growth rates in the period and greatly exceeded the growth rate for the border region as a whole. The high share of manufacturing exports linked to the predominance of manufacturing jobs in the region suggests the possibility that manufacturing trade has driven total employment in the border region.

With regard to imports of the states along the northern border of Mexico, as in the country as a whole, the manufacturing sector plays a predominant role in total imports. Notably, manufacturing imports from the U.S., through means of transportation, reached an average annual growth of 4.1% in Mexico, while in the northern border region, the average annual growth rate was 4.7% (Table 4). To a large extent, the greatest dynamism of import growth is related to intra-industrial trade, carried out by the maquiladora and export manufacturing industries, within the framework of the growing development of global supply chains.

In particular, the largest volumes of imports are located in Chihuahua, Nuevo León and Baja California. In addition, the first two states presented average annual growth rates higher than the national average and the northern border region average. Thus, Chihuahua had an average growth rate in the period of 6.3%, with that for Nuevo León being 6.2%; for the northern border region, it was 4.1%, and nationally, it was 5.3%. The greater relative growth of imports and exports in the northern border states occurred, in part, from the growing trade within the automotive and electronic sectors, which have a significant number of production and export plants located in the northern border region (^{Mendoza-Cota, 2021}). This trend has allowed greater relative trade in the region with the United States, which has impacted economic activity and employment in the region.

The analysis of the proportion of the value of manufacturing exports and imports with respect to the value produced in this same sector in the states of the northern border region suggests that those with a greater penetration of their manufacturing trade into the United States economy would have also experienced a greater sustained increase in the number of manufacturing jobs and were even able to hold onto their relative importance among the region’s total manufacturing employment. In particular, the state of Chihuahua, whose economy produces the highest number of manufacturing jobs among the six border states, saw a gradual increase in the penetration of its manufacturing exports and imports that reached, on average, 72% and 52%, respectively, during the period analysed (Figure 2).

Source: own elaboration with data on state GDP from national accounts and exports obtained from the series of the external sector of the Economic Information Bank of the National Institute of Statistics and Geography

Note: VME: value of manufacturing exports; VMI: value of manufacturing imports; VMP value of manufacturing production

Figure 2. Evolution of the proportion of manufacturing exports and imports with respect to the value of manufacturing production in the states of the northern border of Mexico, 2013-2020 

Baja California, meanwhile, experienced a process of manufacturing trade integration with the US economy that gradually intensified until 2017 and seemed to decrease slightly during 2018 and 2019, in accordance with the trends for state manufacturing jobs (Figure 3). The penetration of manufacturing trade, in this case, reached an average of 44% for exports with respect to the value of production and 21% for imports. The process of trade integration for Tamaulipas’ manufacturing activity, on the other hand, contrasts markedly with that experienced by the set of border states due to the rapid increase in the penetration of their manufacturing exports and imports.

Source: own elaboration with data on employment, unemployment and underemployment rates and monthly results of the National Survey of Occupation and Employment, for the Population Aged 15 Years and Older (Economic Information Bank of the National Institute of Statistics and Geography)

Figure 3 Evolution of the number of manufacturing jobs in the northern border states of Mexico, 2013-2020 

In this regard, as seen in Figure 2, the proportion of the value of manufacturing exports with respect to the value of production increased from 13% to 34%, while that for imports increased from 7% to 12%, which corresponds with the increasing trend in manufacturing jobs. The states of Coahuila, Nuevo León and Sonora have processes of trade integration in their manufacturing activities with the US economy that has remained stable over the past 17 years, with a slight increase in the penetration achieved by manufacturing exports and imports in the latter state (Figure 2), which could explain the difficulty that these states found in resuming the growth rate of manufacturing jobs reached in 2018.

Figures 4 and 5, which describe, respectively, the relationship between the penetration of manufacturing exports and imports with respect to employment in this sector clearly indicate, in both cases, that more trade integration favours the creation of manufacturing jobs. This aspect would explain, therefore, why some states such as Chihuahua and Baja California continue to strengthen their trade ties with the US economy as a channel to consolidate their labor markets, particularly those tied to manufacturing activities, and why states such as Tamaulipas are making significant progress in integrating their state economy into the US economy through manufacturing trade. This aspect, however, would imply that the states of Coahuila and Sonora would have to push the creation of location advantages and productive capacities that allow them to compete effectively in the attraction and creation of manufacturing companies while developing the conditions to increase the penetration of their manufacturing trade. With respect to the state of Nuevo León, greater integration of manufacturing activity with the US economy would create additional jobs to those created by the economic activities most integrated into the national economy.

Source: own elaboration with data on state GDP from national accounts and exports obtained from the series of the external sector of the Economic Information Bank of the National Institute of Statistics and Geography

Note: VME: value of manufacturing exports; VMP: value of manufacturing production

Figure 4 Scatterplot of export penetration and employment in the manufacturing industry of the states of the northern border of Mexico, 2013-2020 

Source: own elaboration with state GDP data from national accounts and exports obtained from the series of the external sector of the Economic Information Bank of the National Institute of Statistics and Geography and imports from the US Census Bureau: Economic Indicators Division. USA Trade Online

Note: VMI: value of manufacturing imports; VMP: value of manufacturing production

Figure 5 Scatterplot of import penetration and employment in the manufacturing industry of the northern border states of Mexico, 2013-2020 

The review of the evolution of exports and imports and employment in the manufacturing sector of the region of the northern border states of Mexico suggests that the region’s trade with the United States plays a predominant role in the employment dynamics of the region. In this sense, it is relevant to establish an econometric model to carry out estimates to measure the extent to which this activity has impacted the labor market of the northern border region of Mexico.

Theoretical and methodological aspects to evaluate the effect of trade on employment

In general, the theoretical perspective for analysing the impact of international trade on employment in the manufacturing sector is based on the proposition that exports and imports affect the labor input required for production. There are different theoretical approaches that highlight the potential factors that can determine the way in which the growth of international trade impacts employment growth. From Keynesian theory, export growth, as a component of aggregate demand, can stimulate production and, therefore, employment (^{Villanueva, 2017}). However, international trade can also influence employment due to its impact on labor productivity because it can modify the sectoral composition of the economy and guide it towards capital-intensive activities (^{Gibson, 2011}).

The approaches of the classic models of international trade indicate that countries with an abundance of labor will experience an increase in labor-intensive exports. In the case of the Mexican economy, there is an increase in labor-intensive maquiladora exports. According to the Stolper-Samuelson theorem, changes in employment occur through changes in relative prices in international trade, which determine shifts in the demand for employment between industries and generate changes in business productivity. However, it has been stated that the positive impact of trade on employment may be greater in developing countries because many imports are noncompetitive (^{Wood, 1995}).

In addition, intra-industry trade is related to the adjustment of the costs of production factors. ^{Lovely and Nelson (2000}, ²⁰⁰²) used a two-sector model to analyse the effects of intra-industry trade. Their results indicate that intra-industry trade generates adjustments at the intersectoral level, which implies long-term changes in the relative prices of the factors. Likewise, the empirical analysis has shown that in some countries, the marginal intra-industrial trade indicator has been associated with adjustments in the labor market, particularly in the short term (^{Brülhart, 2000}). Additionally, ^{Cabral and Silva (2006}) estimated a panel model to analyse the relationship between intra-industry trade and labor mobility and suggest that this occurs both between sectors and between occupations.

Intra-industry trade also has implications for the production processes of some manufacturing activities at the international level. For example, the U.S. automotive industry has experienced significant structural changes that have fragmented the production processes of that industry across different countries. This trend has boosted vertical intra-industry trade in the U.S. automotive and auto parts subsectors with its main trading partners (^{Türkcan & Ates, 2011}). In this way, the context of the growing intra-industrial trade in the total world trade and, in particular, of vertical intra-industrial trade (^{Greenaway et al., 1995}), which characterizes a large part of the trade of the states bordering Mexico, allows us to assume that international trade has the potential to increase the demand for labor.

In this way, when assuming an economy without full employment, the impact of foreign trade on jobs can be analysed through an aggregate demand model, where employment E is a function of output Y and the employed workers per output unit L: E = LY (1). When obtaining the growth rates of expression 1, growth in employment E˙=L˙+Y˙ (2) is a function of the increase in the coefficient of employment per unit of output and the growth of the output (^{Gibson, 2011}). From the above, it can be deduced that as long as foreign trade generates output growth, employment increases. Thus, to determine the impact of trade on employment, it is necessary to analyse the effect of trade on economic growth and, subsequently, its effect on changes in employment.

Results of the estimations

To analyse the effect of foreign trade on employment in the northern Mexican border region, two dynamic panel models were established; the first includes the lags of the total employment variable as regressors, and the second includes the lags of manufacturing jobs in Mexico as regressors. Initially, the Arellano-Bond estimator test was performed for both models to determine if the dynamic panel model presented a serial correlation with the differentiated residuals.

Regarding the first model for total employment in the northern border region, the results do not reject the existence of a correlation in the first difference of the AR(1) errors; therefore, the model is considered adequate and does not show a serial correlation (Table 7). Additionally, to corroborate whether there are restrictions on the exogenous instruments of the dynamic panel estimation, the Sargan test was estimated. The p values of the Sargan statistic were 0.98 for one lag; therefore, the dynamic model shows instrumental variables that are exogenously valid. Regarding the second model, the Arellano-Bond and Sargan tests indicate that there is no correlation with or restrictions of the instrumental variables (Table 8).

The dynamic panel model for the set of economic activities along the northern border was estimated based on a lag. The results show that the coefficients of GDP and import penetration were positive and statistically significant. The coefficient of the inputs of the formal sector was negative and statistically significant (Table 9). These results indicate that the shift in employment rate at the northern border is related to the economic activity dynamics and inversely related to wages, which corresponds to the theoretical approach of the model. However, the coefficient of export penetration was negative, a result that does not conform to the approach of trade openness as a driver of employment growth. The penetration of imports in the northern border region of Mexico has a positive and statistically significant impact on employment in the region. This result suggests that global value chains and intra-industry trade play driving roles in employment dynamics.

In the model for the manufacturing sector in the states of the northern border of Mexico, the coefficients of value of production and of penetration of exports and imports were positive and statistically significant (Table 10). The results suggest that foreign trade with the US plays an important role in the promotion of manufacturing jobs in the states along the northern Mexican border. In addition, the estimates highlight the importance of this sector in the economic dynamics of the northern border states. Finally, the coefficient of wages was negative and statistically significant; therefore, low wages, particularly those paid to workers in the maquiladora plants along the northern border, have been an incentive for job growth. This could imply a complicated scenario for achieving growth in manufacturing jobs coupled with a substantial increase in the income of workers in the manufacturing sector along the northern border of Mexico.

Conclusions

The establishment of the NAFTA and later the T-MEC and the geographic proximity to the US have significantly increased foreign investment and trade in Mexico. In particular, there is a greater trade integration of the states in the northern border region of Mexico. This has increased manufacturing activities and employment in the region. The states of Chihuahua and Baja California stand out and have been characterized as having faster employment growth in the region. Likewise, there is a notable share in both the penetration of exports and the penetration of imports in several states along the northern border. The models that relate employment to exports and imports suggest that greater trade integration with the United States would promote employment in the border region.

The analysis of the impact of foreign trade on employment has generally been approached from the perspective of classical theory and the new theory of international trade. From the traditional model of trade theory, the effect on employment will depend on the negative impact of imports that compete with domestic production, the growth of employment in the export sector, and the capital-labor ratio that characterizes this sector. The new theory of international trade suggests that the internationalization of production processes has generated a growing intra-industrial trade that allows imports and exports to have a positive effect on employment tied to international trade.

From the perspective of the aggregate demand approach, employment growth is a function of an increase in the employment coefficient per unit of output and the effect of foreign trade on output growth. Using an empirical dynamic panel model based on this approach, estimates were made in which the dependent variable is employment and is a function of trade penetration, state GDP, the value generated in the manufacturing industry and the average wages of workers in the northern border states. The results indicate that export penetration does not have an impact on total employment in the region. However, the output level and imports showed positive and significant coefficients. Likewise, wages in the region were negative, which conforms to the assumptions of the model. The results of the estimates for total employment in the region suggest that the effect of export penetration has not had a multiplier effect to boost the economic growth of border states as a whole. This result is probably related to the limited impact of export income on demand in the northern border region, which may be restricting the multiplier effect from exports.

However, the model that was estimated for the manufacturing sector in the northern border region indicated positive and significant coefficients for both export and import penetration. The above results suggest that the growth in manufacturing jobs is significantly linked to foreign trade in this sector in this border region. The importance of foreign trade in the dynamics of manufacturing jobs can be explained by the development of global supply chains and the fragmentation of production processes, which led to a significant increase in maquiladora and export manufacturing establishments in the northern border region of Mexico. In addition, the results of the estimations indicate that the coefficient of manufacturing wages was negative, suggesting that the low wages paid to workers in the maquiladora and export manufacturing industry could be a limitation for the manufacturing trade in generating multiplier effects in total economic activity and, therefore, for employment in other economic activities in the northern border region of Mexico.