skilled labor. In contrast, Feenstra and Hanson (1997) find a significant link between higher FDI and the expansion of skilled labor in total wages. None of these studies, however, identifies the causal impact of the growth in exports and imports experienced by Mexican municipalities on local labor markets. Exceptions include newer studies which examine the local labor market outcomes in Mexico following growing import competition from China in the United States (Mendez 2015, Chiquiar, Covarrubias, and Salcedo 2017, and Robertson, Halliday and Vasireddy 2019).

Third, this paper adds to the scarce number of studies on low- and middle-income countries investigating the effect of trade on local labor market outcomes. Recent studies for China and Vietnam find a positive effect of exports on labor market outcomes and poverty reduction at the subnational level (Erten and Leight 2019; McCaig 2011, McCaig and Pavcnik 2018) and on reduced poverty and inequality at the state-level in Brazil (Castilho, Menéndez, and Sztulman 2012). Other recent papers find that increasing exports per worker result in higher wages for workers generally and in declining informality in India and Sri Lanka (Artuc et al. 2019) and Bangladesh (Robertson et al. 2020). In contrast, a recent study on the Arab Republic of Egypt finds no significant effect of rising exports on wages, informality, and female labor force participation at the local level (Robertson et al. 2021).

Fourth, the analysis also sheds light on differences by geography and sectors. The study finds that trade affected labor markets in the North through the income and migration channels, while it affected the South through the employment and informality channels. Specifically, total labor incomes and the number of immigrants in Northern municipalities expanded due to both higher exports and imports per worker. In contrast, export expansion in the South benefited labor force participation and employment rates (and to a lesser extent also migration), while increasing imports per worker hurt them. In a second stage, we assess whether a municipality’s trade expansion affects labor market outcomes differently across sectors. Our findings suggest that export expansion in Mexico benefited total labor incomes in both the manufacturing and service sectors. Since the trade data in the dataset mainly consist of goods, this finding could point to an indirect linkage effect, i.e., goods exports may rely on domestic services inputs, thereby benefitting total labor incomes in service sectors. Expanding exports per worker also reduced the informality rate in the manufacturing sector.

Fifth, this study not only examines the impact of exports but also of imports, especially of different types of imports and GVC spillovers more broadly. The absence of effects of imports through the employment and income channels could point to a more nuanced role of imports. The latter include not only final imports that can compete with domestic production, but also imported inputs used for domestic or export production. To explore this question further, we distinguish between intermediate and final imports drawing on the Economic Census data. The direction of coefficients suggests a more favorable role of intermediate relative to final imports through the employment channel, driven by manufacturing imports. In contrast, we find a positive and significant role of both intermediate and final services imports through the employment channel.

In addition, the analysis uses GVC participation measures drawing on Economic Census data at the state level and finds evidence for positive GVC spillovers on labor markets at the municipality level through the employment channel. This complements evidence at the firm-level suggesting that GVC-participating firms employ more workers relative to exporter-only, importer-only and purely domestic firms (World Bank 2020). We also find a positive association with total labor incomes, but a negative one with average labor incomes, which again may be linked to growing labor supply through the migration channel.

Finally, this study explores the role of selected policy factors that mediate the impact of trade on local labor markets. We focus on three policy areas, namely connectivity, labor market flexibility and spending on education. Connectivity has been identified as a determinant of trade and GVC participation across a large set of countries (Fernandes, Kee and Winkler 2021), so workers in locations with better connectivity may benefit more strongly from trade expansion. We find that higher imports per worker 3