Tsukuba Economics Working Papers
No. 2009-010

Is a skill intensity reversal a mere theoretical curiosum?
Evidence from the U.S. and Mexicoby
Yoshinori Kurokawa
June 2009This version: May 2011

UNIVERSITY OF TSUKUBA
Department of Economics
1-1-1 Tennodai
Tsukuba, Ibaraki 305-8571
JAPANIs a skill intensity reversal a mere theoreticalcuriosum? Evidence from the U.S. and Mexico
Yoshinori Kurokawa
University of Tsukuba
May 9, 2011
(Published in Economics Letters, 112 (2011), 151-154.)

Abstract
A rising skill premium in two countries can be explained by the HeckscherOhlin model assuming a "skill intensity reversal." This assumption, however,poses an empirical challenge since past research has found little evidence forthe so-called "factor intensity reversal." We now show clear-cut evidence forthe existence of a skill intensity reversal.
Keywords: Heckscher-Ohlin model; Skill intensity reversal; Wage inequality;
Electronics products
JEL classi…cation: F11; F14; F16

Tel.&fax: +81-29-853-7426. E-mail address: kurokawa@dpipe.tsukuba.ac.jp. I am very gratefulto Timothy Kehoe for his invaluable guidance and to Cristina Arellano, Michele Boldrin, and Terry
Roe for their helpful advice. I am also grateful to Winston Chang, Taiji Furusawa, Koichi Hamada,Katsuhito Iwai, Liaoliao Li, Michihiro Ohyama, Yoshimasa Shirai, the editor, and an anonymous referee for their detailed comments and suggestions. I wish to thank seminar participants at the Tradeand Development Workshop at Minnesota, Keio, SUNY-Bu¤alo, the MVEA 44th Annual Meeting,the MEA 72nd Annual Meeting, the Spring 2008 Midwest International Economics Meetings, andthe 2009 JEA Annual Fall Meeting for their useful comments. I also thank Andrew Cassey, Kirsten
Jamsen, and Kim Strain for their careful correction of my English, and Daniel Chiquiar and Gordon
Hanson for their help with Mexican data. However, the remaining errors are exclusively mine. This
paper previously circulated under the title "Skill Intensity Reversal and the Rising Skill Premium:
Evidence from the U.S. and Mexico."1

1

Introduction

One of the interesting facts about the U.S. and Mexican economies is that, as in Table
1, both countries showed a rise in the relative wage of high-skilled to low-skilledworkers in manufacturing industries from 1994 to 2000.1 Table 1 also shows that
U.S.-Mexican trade as a percent of GDP increased in each country during the same
period.2 Hence, this increased trade might have contributed to the recent increase inskill premium in these countries.3
At …rst sight, this seems to pose a serious theoretical challenge to us. This isbecause the standard Heckscher-Ohlin (H-O) model predicts that the relative wageof high-skilled to low-skilled workers should increase in the high-skill abundant U.S.
but decrease in low-skill abundant Mexico after trade liberalization.4
This, however, is merely an apparent theoretical challenge. In fact, as also documented by Reshef (2007), the rising skill premium in these two countries can be
explained simply by the static two-good H-O model if we assume a "skill intensity
reversal."5 That is, U.S. exports to Mexico of goods which are relatively high-skill
intensive compared to other goods within the U.S. but relatively low-skill intensive
within Mexico will increase demand for U.S. high-skilled workers but decrease demandfor Mexican low-skilled workers. On the other hand, U.S. imports from Mexico of
goods which are relatively low-skill intensive within the U.S. but relatively high-skill
intensive within Mexico will decrease demand for U.S. low-skilled workers but increasedemand for Mexican high-skilled workers. Thus the relative wage of high-skilled to1

As will be discussed in Section 3.1, here we use non-production and production workers as anindex for high-skilled and low-skilled workers. We calculate the relative wages based on the U.S.
Annual Survey of Manufactures (ASM) and the Mexican Monthly Industrial Survey (Encuesta Industrial Mensual, or EIM). The EIM data exclude maquiladora employment and otherwise represent
all of Mexican manufacturing (Robertson, 2006).
2Here, trade is the sum of U.S. exports to and U.S. imports from Mexico, and the data for tradeand GDP are from the International Trade Administration and the Bureau of Economic Analysis.
3
As will be shown later, our interest is in a static story, so here we look at a one-time increasein the skill premium comparing 1994 and 2000. The time-series movements of the skill premium
during the period 1994-2000 are thus outside the scope of this paper. Note, however, that the EIMshows that the Mexican skill premium increased between 1994 and 1996, and since then, it has
become stable (Esquivel and Rodríguez-López, 2003). Robertson (2004) argues, using the Mexican
Industrial Census, that it declined from 1994 to 1998.
4
In fact, past trade studies have provided non-H-O-based explanations for the rise in skill premiumin the two countries. For example, see Feenstra and Hanson (1996), Dinopoulos and Segerstrom(1999), Acemoglu (2003), Sayek and Sener (2006), and Kurokawa (2011). See Feenstra and Hanson(2003) and Kremer and Maskin (2006) for a survey on trade and inequality.
5
Reshef (2007) shows, using simulations, that tari¤ reductions can largely increase the skill premium under the existence of skill intensity reversals.

2

TABLE 1
U.S. and Mexican Skill Premium and U.S.-Mexican Trade, 1994 and 2000
Year

U.S.
Skill Premium

Mex.
Skill Premium

U.S.-Mex. Trade/U.S. GDP

U.S.-Mex. Trade/Mex. GDP

1994

1.78

2.89

1.42%

23.85%

2000

1.91

2.95

2.52%

42.58%

low-skilled workers will increase in both countries.6
A serious empirical challenge is, however, imposed on us. This is because little
evidence for the so-called "factor intensity reversal" has been found in manufacturingindustries in past empirical studies (Leontief, 1964; Ball, 1966; Moroney, 1967), thus
supporting Samuelson’s (1951-1952) impression that a factor intensity reversal has
much less empirical importance than theoretical interest.7
Should we thus conclude that a factor intensity reversal is theoretically interesting but empirically unimportant? The answer is no. This is because the so-calledfactor intensity reversal has so far referred only to a capital/labor intensity reversal.
However, our focus is now on a skill intensity reversal. Unfortunately, no serious
empirical work on skill intensity reversal has been done until now although a divisionof factors by skills has recently become more and more important in international
trade theories. Thus it is time to revive the factor intensity reversal controversy of
the 1960s with the fresh viewpoint of a skill division among labor.
This paper now provides clear-cut empirical evidence for the existence of a skill
intensity reversal. We …rst show that both the U.S. net exports to Mexico of electronics products and the U.S. net imports from Mexico of non-electronics products
signi…cantly increased from 1994 to 2000.
We next show that the electronics products were relatively high-skill intensive
compared to the non-electronics products within the U.S. but relatively low-skill
intensive within Mexico both in 1994 and in 2000. Here, let us recall that, as Table
1 has shown, the skill premium also increased in both countries. All of the above
evidence is compatible with the static two-good H-O story with the reversal of relativeskill intensities.
6

Of course, all industries in the U.S. might use skilled labor more intensively than do the corresponding industries in Mexico, but it is the reversal of relative skill intensities that the H-O theory
says can account for the increase in the wage gap in both countries. Thus, in the following discussion,
the word "skill intensity reversal" refers to the reversal of relative skill intensities between the twocountries.
7
Maize (corn) production is frequently cited as an example of the factor intensity reversal between
the U.S. and Mexico in terms of capital and labor. If maize is relatively labor intensive in Mexico
but relatively capital intensive in the U.S., Mexican imports of maize from the U.S. would hurt laborin both countries (Larudee, 1998).

3

2

Evidence for U.S.-Mexican Trade

First, let us identify the industry which accounts for the major U.S. net exports to
Mexico. It is the electronics industry, which is here de…ned by the 2-digit SITC
(revision 3) category 77.
Figure 1(a) shows the U.S. net exports of the electronics products to Mexico in
1994 and 2000. As can be seen, they remarkably increased from 1994 to 2000. In
fact, as shown in Table 2, it is in 2000 that the U.S. electronics industry became
the largest net export industry to Mexico of all the 2-digit SITC categories of U.S.
manufacturing industries. Next, let us de…ne all the other 2-digit SITC categories of
U.S. manufacturing industries as the non-electronics industry. Figure 1(b) shows the
U.S. net exports of the non-electronics products to Mexico in 1994 and 2000. As canbe seen, they remarkably decreased from 1994 to 2000. In other words, the U.S. net
imports of the non-electronics products from Mexico signi…cantly increased from 1994
to 2000. The data for Figures 1(a) and 1(b) and Table 2 are from the International
Trade Administration.
Thus, in the following main text, we divide the manufacturing industries into theelectronics industry, whose U.S. net exports increased from 1994 to 2000, and thenon-electronics industry, whose U.S. net imports increased during the same period.

3

Evidence for Skill Intensity Reversal

3.1

De…nition of Skill Intensity

Let us de…ne skill intensity for manufacturing industry i by8
The Number of Non-Production Workers in Industry i
NPDi
=
.
PDi
The Number of Production Workers in Industry i
Here, we have used non-production and production workers as an index for highskilled and low-skilled workers. This classi…cation is made in the ASM and the EIM,
and it is used as an index for the skill level for workers in many papers. Feenstra andHanson (1996), for example, use the classi…cation for both U.S. and Mexican skills aswell as does our paper.
In fact, there is evidence for the U.S. which exhibits that this non-production andproduction classi…cation works well as a division of the labor force by skill (Berman
8Here, the number of workers in an industry is aggregated (not a weighted average) across …rms
in the industry.

4

(a) Electronics(b) Non-Electronics

FIGURE 1. U.S. Net Exports of Electronics and Non-Electronics
Products to Mexico, 1994 and 2000

TABLE 2Top 5 U.S. Net Exports to Mexico in Manufacturing Industries, 2000
Rank

SITC CodeDescription

Millions USD

1
2
3
4
5

77
99
89
65
57

Electrical Machinery, Apparatus & Appliances
Low Value Shipments
Miscellaneous Manufactured Articles
Textile Yarn, Fabrics
Plastics in Primary Form

4,764
4,446
2,837
2,254
2,156

et al., 1994; Sachs and Shatz, 1994; Berman et al., 1998). There is also evidence
for Mexico. Robertson (2004) shows that production workers have less education in
every industry than non-production workers and that industries with higher relative
employment ratios of non-production to production workers also have higher average
education levels. Hanson and Harrison (1999) argue that there are no data for Mexico
that provide a more detailed breakdown of employment by skill and by industry.
Thus using the non-production/production classi…cation to classify skill intensity
seems valid in both the U.S. and Mexico, albeit imperfectly.

3.2

Skill Intensity Reversal between the U.S. and Mexico

Figures 2(a) and 2(b) plot the skill intensities of the electronics and non-electronics
industries in the U.S. and Mexico in 1994 and 2000. The broken lines represent the5averages of skill intensity within each country. Here, we de…ne the 2-digit SIC 1987
category 36 and the 3-digit ISIC (revision 2) category 383 as the U.S. and Mexican
electronics industries, respectively. These approximately correspond to the 2-digit
SITC (revision 3) category 77 used in Section 2.9 The data for Figures 2(a) and 2(b)are from the ASM and the EIM.10
If an industry in the U.S. and Mexico showed a similarity in relative skill intensity,then the industry’s skill intensity would be located in the …rst or third quadrants inthese …gures. That is, this industry would be relatively high-skill intensive comparedto the other industry within each country or relatively low-skill intensive within eachcountry.
However, the electronics industry actually exhibited a skill intensity reversal bothin 1994 and in 2000. As can be seen, the industry’s skill intensity is located in thesecond quadrant in these …gures. That is, this electronics industry was relatively highskill intensive compared to the non-electronics industry within the U.S. but relatively
low-skill intensive within Mexico.
On the other hand, the non-electronics industry also exhibited a skill intensity
reversal both in 1994 and in 2000. As can be seen, the industry’s skill intensity is
located in the fourth quadrant in these …gures. That is, this non-electronics industry
was relatively low-skill intensive within the U.S. but relatively high-skill intensive
within Mexico.
It is worth noting that the skill intensity reversal in the electronics industry displayed in these …gures is compatible with the structure of technologies in Feenstra
and Hanson (1996, 1999), whereby the low-skill abundant country specializes in the
low-skill intensive operations within a given industry, and similarly the high-skill
abundant country specializes in the high-skill intensive operations.
Note also that it can be shown that the skill intensity for the electronics productindustry was located in the …rst quadrant in 1987. This indicates that this industry
was relatively high-skill intensive within each country and thus there was no skill
intensity reversal in the late 1980s.
9Haveman’s Industry Concordances (http://www.macalester.edu/research/economics/PAGE/HA
VEMAN/Trade.Resources/TradeConcordances.html), now maintained by Robertson, provides many
correspondence tables between the major classi…cation systems.
10
Note that Figures 2(a) and 2(b) use di¤erent scales, since here we want to emphasize therelative relationship between the skill intensities of the two industries which determines a comparativeadvantage in the H-O model. The absolute values of the skill intensities are not of interest in thispaper.

6

(a) 1994(b) 2000

FIGURE 2. Skill Intensity in U.S. and Mexico, 1994 and 2000

U.S. relative wage (WL/WH)
Electronics

H

A: U.S. skill intensity of electronics
B: U.S. skill intensity of non-electronics
C: Mex. skill intensity of non-electronics
D: Mex. skill intensity of electronics

A

B

C

Non-Electronics

D
Mex. relative wage (WL/WH)

L

FIGURE 3. Isoquant Curves of Electronics and Non-Electronics

4

Conclusion and Next Steps

We have shown that the U.S. net exports to Mexico of the electronics products, whichwere relatively high-skill intensive compared to the non-electronics products within
the U.S. but relatively low-skill intensive within Mexico, signi…cantly increased from1994 to 2000. The skill premium also increased in both countries. Thus all of theabove evidence is compatible with the static two-good H-O story with the reversalof relative skill intensities. In fact, trade in electronics products, one of the largest
product categories in U.S.-Mexican trade, is a signi…cant example of a skill intensity
reversal between the U.S. and Mexico.
7

Of course, several next steps could be taken for future research. First, this paper
has provided motivational evidence for a further empirical analysis. Thus a next
logical step is to formally test the relationship between trade, skill intensity reversals,
and skill premium.11
Second, as shown in Figure 3, a skill intensity reversal is theoretically possible
only when the isoquant curves of the export and import sectors have more than
one intersection. This in turn depends on whether these two sectors have di¤erent
elasticities of substitution between skills. Since we have presented in this paper solid
empirical evidence that a skill intensity reversal actually exists, a next logical step isto return to the fundamentals— to investigate the technological structures of the U.S.
and Mexico and estimate their elasticities of substitution between skills.
Third, our purpose has been to show evidence compatible with the two-good H-Omodel, so here we have used very aggregated data. It would also be interesting to lookat very disaggregated data and investigate the skill intensities of various disaggregatedgoods.
Finally, this paper has been focusing on the discrepancy between the standard
H-O model and the data after the North American Free Trade Agreement (NAFTA),
showing a possible resolution on the basis of a skill intensity reversal. Note, however,that the skill premium in the U.S. and Mexico actually began to rise in the late 1980s,
when we could not observe any clear-cut skill intensity reversal. Kurokawa (2011),
for example, has successfully eliminated the discrepancy between the model and thedata before the NAFTA without assuming this skill intensity reversal. A next stepis, thus, to connect these pre- and post-NAFTA studies.12

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12
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