Degree Name

Master of Arts (MA)

Semester of Degree Completion

1996

Thesis Director

Minh Q. Dao

Abstract

According to the conventional theories of international trade, trade liberalization equalizes factor prices across countries involved in trade. The North American Free Trade Agreement (NAFTA) is a newer form of regional economic integration between a developing country, Mexico, and two developed countries, the United States and Canada. Complying with proposition of conventional theories, it is rational to expect that NAFTA will lead to equalization of factor prices among theses three countries. On the other hand, the existence of a wide gap in wages between the United States and Mexico may lead to lower wages in the U.S.A. This study, however, will show that the wage and employment effects of NAFTA on the U.S. manufacturing sector is insignificant. The reason for this is because the U.S. trade with Mexico consists of a tiny amount compared to total U.S. trade volume which suggests a very insignificant effect on both wages and employment in the United States.

In order to estimate the effect of NAFTA on wage and employment in the U.S. manufacturing sector, this study develops a set of equations in two stages: two basic equations in the first stage; and three supplementary equations in the second stage. Wage and employment are the endogenous variables in the basic equations. In the supplementary equations, productivity in the U.S. manufacturing sector, a foreign direct investment ratio, and Mexican exchange rates are the endogenous variables. These are also the explanatory variables in the basic equations. To secure the effects of NAFTA on wage and employment, a pre-NAFTA trade liberalization dummy variable, D1, and a NAFTA dummy, D2, are included in the supplementary equations. The linear regression technique is applied to one of the basic as well as one supplementary equation. Also, a log linear technique is used in the remaining basic and supplementary equations

Estimated coefficients of D2 represent the values by which NAFTA has changed values of the explanatory variables in the basic equations. Then, these estimates are used to calculate the effects of NAFTA on the U.S. manufacturing wage and employment level.

The overall results of the regression analysis suggest a statistically insignificant impact of NAFTA on wage and employment. Only the Mexican exchange rate has been able to generate significant influence on the U.S. manufacturing employment level. However, the total effect is estimated to be a very small gain in the U.S. manufacturing employment level. Although the results seem to support the hypothesis, the insignificant NAFTA coefficients may be due to the existence of multicollinearity.


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