little evidence of increased subcontracting (Sanchez, Joo and Zappala 2001) in Mexico that would suggest a large subcontracting out of formerly formal jobs for competitiveness purposes.

**_Wages have probably benefited over the medium term:_** Conditional wages are, in fact, higher in industries more exposed to trade. IADB (2004) documents numerous studies suggesting employment declines during the adjustment process, particularly in industries with substantial rents, and among specific demographic groups  but assert that there is no empirical basis for a permanent decline. The widening skill earnings gap discussed below is observed in all countries that liberalized their economies, but seems less directly related to trade _per se_ than to greater skill biased technology flows common around the world.

**_The emerging jobs seem desirable._** Though sample sizes are small, surveys of _maquila_ workers suggest these jobs are as attractive (see for example, Sargent and Matthews 1999) or more so than alternatives and Feenstra and Hanson report (1996) that such firms tend to demand more in terms of skills than other industries.  Employees in the flower industry in Ecuador and the fruit industry in Chile earn more and have more stable incomes than those in traditional industries (de Ferranti, et al 2002)in the agricultural sector. Sanchez, Joo and Zappala (2001) argue that micro firms that are more closely linked to large (and hence more likely to be tradeables producing) firms earn premia of around 30 percent on non-linked micro firms.

**_Worker risk_** Despite concerns that trade liberalization would lead to greater worker uncertainty (Rodrik 1997), at present there is little evidence of it. Most recently, IADB (2004) finds no evidence of reallocation between industrial subsectors and Wacziarg (2001), using a global panel including LAC, finds only weak and borderline significant effects.  One key transmission mechanism, an increased wage elasticity of labor driven by higher product elasticities, has not materialized in Colombia or Chile and shows only fragile appearance in Mexico (Fajnzylber and Maloney, forthcoming).  Further, extracting the permanent component of worker income variance in the Mexican urban labor survey, Krebs, Krishna and Maloney (2004) find no increase in the permanent component of risk, but a transitory increase corresponding to the adjustment period.

In sum, there are transitory impacts of trade liberalization, but openness does not appear correlated with many of the expected evils. There is actually surprising low reallocation after liberalization, no permanent changes in unemployment, mixed impacts on wages in the medium term, an expansion of the wage gap, and overall increased job quality in exporting and import competing industries.

# **Further work**

- **<u>Measurement of labor market outcomes:</u>** There is some concern about lack of crosscountry comparability of labor market indicators.  It may be that Mexico’s consistently lower unemployment rates reflect a better functioning labor market than, say than that of Argentina with much higher secular levels, or it may perhaps reflect measurement differences, including those arising from how workers approach the standard survey questions.

- **<u>Complementary policies:</u>** Recent work in the region, particularly on NAFTA, increasingly stresses that trade reform offers opportunities, but it is not a panacea that obviates reforms in other areas.  Exposure to international competition may make certain labor market distortions more critical, but as yet there is little work studying the necessary complementary policies in the areas of legislation, collective bargaining, skill accumulation, and active labor market policies.  It goes without saying that raising the

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