WAGE INEQUALITY AND MARKET POTENTIAL Evidence for Mexico

This paper examines the relationship between market potential and wages of manufacturing workers in the states of Mexico, using a standard model of New Economic Geography. The evaluation is considered an important aspect in developing countries, such as the distinction between formal and informal workers. The estimates show that, in general, the elasticity of market potential on wages is 0.082, which is robust to different measures related to the theories of agglomeration and endogeneity problems and spatial autocorrelation. It is also found that wages of informal workers are less sensitive to changes in market potential compared to the wages of formal employees and benefit from externalities generated by the presence of foreign firms. A simulation suggests that up to 10.7% of the wage gap between workers in states bordering North America and located in southern Mexico can be attributed to economic geography; this effect is smaller for informal workers and for the case of formal doubles.