reduction in the informality rate could also indicate that workers may prefer the benefits of being formal (such as contributions to pensions or retirements) over the prospect of higher incomes. In sum, changes in exports in the South seem to materialize in labor market gains through the employment and informality rather than the income channel.

Shifting the focus on imports, the analysis confirms the positive effect of rising imports per worker on total labor incomes in the North, whereas their impact on labor force participation and employment rates are only significant based on the IV estimates when no control variables are added. As was the case for exports, we find a positive effect of imports on net inward migration, partially explaining the lack of effects through the employment channel due to the increase in labor supply, while increasing imports do not affect the informality rate. In the South, rising imports per worker decrease both labor force participation and employment rates. Specifically, a 10 percent growth in imports per worker reduces labor force participation and employment rates by 0.066 and 0.071 percentage points, respectively. It appears that given the lower integration into trade and GVCs in the South, imports are more likely to be competing with domestic production, thereby also lowering the demand for local labor. This finding could also explain why an expansion of imports in the South does not reduce the informality rate. Due to the lower job prospects, our results also find that the effect of exports and imports on immigration is smaller in the South.

# 4.2 Sectors: Trade and sectoral labor market effects

A municipality’s trade expansion could affect labor market outcomes across sectors differently. Appendices 10 and 11 show the results differentiating between manufacturing and services labor market outcomes using OLS and IV estimation. Focusing on the IV estimates, higher exports per worker resulted in higher total manufacturing labor incomes, but not average manufacturing labor incomes (Appendix 10, Panel A). A 10 percent increase in exports per worker thus expanded total labor incomes in the manufacturing sector in Mexico by 2.3 percent. However, the results find no labor market effects through the employment channel, which again could be partially explained by the diluting effect of the migration channel increasing labor supply. Expanding exports per worker also reduces the informality rate in the manufacturing sector. In particular, a 10 percent increase in exports lowers the informality rate by 0.55 percentage points on average. In contrast, increased imports per worker had no significant labor market outcomes in manufacturing via any channel.

Interestingly, there is a positive effect of trade expansion at the municipality level for labor market outcomes in services through the income channel (Appendix 11). Higher exports and imports per worker both increase total labor incomes in services, although the effect is more pronounced for exports than for imports. A 10 percent rise in exports per worker expanded total labor incomes in the service sector by 3.2 percent, while a 10 percent increase in imports per worker affected total labor incomes in services by almost 0.5 percent. Overall, our findings suggest that export expansion in Mexico benefitted total labor incomes of both manufacturing and service sectors. Since trade data in our dataset consist mainly of goods, this finding points to an indirect linkage effect, i.e., goods exports may rely on domestic services such as business services or utilities, thereby increasing total labor income also in service sectors.

# 4.3 Type of imports: Final versus intermediates

This section assesses whether the type of imports matters differently for the labor market effects from trade expansion. The absence of significant effects of imports through the employment and income channels in section 3 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.

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