Rising Wage Inequality in Mexico: Structural Reforms or Changing Labor Market Institutions?

Over the period of the mid-1980s to the mid-1990s Mexico experienced a significant increase in wage inequality. The literature has typically attributed this rise in inequality to trade liberalization and foreign direct investment. We argue, however, that a better explanation can be found in the changing labor market institutions such as declining union power and the declining real value of the minimum wage. We offer evidence to suggest that these domestic institutional changes have indeed contributed to growing wage inequality, and show that the timing of these institutional changes better matches the trajectory of wage inequality in Mexico than does the timing of reforms.