| Description |
The effect of the North American Free Trade Agreement (NAFTA) on the U.S. labor market is particularly interesting because the employment level is a key determinant of overall economic welfare. This research investigates the impact of NAFTA tariff reductions and U.S. macroeconomic conditions on U.S. employment and wages in 21 manufacturing sectors from 1994 to 2008. The estimation results reveal that U.S. macroeconomic fluctuations dominate the effects of trade liberalization. Domestic Consumption, labor productivity, GDP, capital expenditures, and land prices contributed significantly to the U.S. labor market movement. Most of the job losses in manufacturing sectors are attributable to a decrease in capital expenditures, an increase in labor productivity and land prices, and a change in the structure of employment. Competition from unskilled Mexican labor is estimated to lower wages of U.S. unskilled labor while competition from skilled Canadian labor is estimated to reduce wages of U.S. skilled labor. However, these negative effects are offset by higher productivity of aggregate U.S. labor, causing an overall increase in U.S. wages. In addition, I observe the inverse relationship between employment and wages. A decrease in employment is associated with an increase in wages per worker. To produce a finer set of results this research combines econometric work with computable general equilibrium analysis by evaluating the success of the GTAP model in predicting the impact of NAFTA reductions on U.S. employment and wages. The model performs well in simulating both production and nonproduction wages as a result of trade liberalization. The performance of the model in simulating the absolute changes in both U.S. employment and wages is less accurate. The model was only able to account for a minuscule fraction of the variance of changes in employment and wages. This research also examines the relative factor-price convergence among NAFTA countries from 1981 to 2008. The regression results reveal that commodity prices and relative factor endowments made a significant contribution to the factor-price convergence among the U.S., Canada, and Mexico. Moreover, labor-saving productivity growth also plays a significant role in driving trends in wage-rental ratios in Canada, emphasizing the importance of innovation induced by factor scarcities. |
