8 percent (29.9 . 33.0) of that increase in earnings inequality is attributable to the change in the distribution of wage rates over that decade. (Using the broader Monetary income concept, around 75 percent of the increase in earnings inequality is explained by the change in wage rates.) On the other hand, changes in the distribution of education attainment are shown in both cases to have contributed to a reduction in earnings inequality, though by modest amounts; -2.6 and -0.1 percent. Changes in hours worked also contributed modestly toward reducing income inequality. In light of this evidence, we can safely rule out increased schooling inequality as an explanation of the increased income inequality that took place in Mexico over the last decade.

Three broad hypotheses that do not hinge on changes in the distribution of education attainment are frequently advanced to explain the similar increases in earnings inequality experienced in Mexico and other countries.<sup>6</sup> These link the increase of earnings inequality to (i) the increased openness of the economy, (ii) institutional changes in the labor market, and (iii) skill-biased technological change. The first of these hypotheses argues that as trade barriers are reduced, an economy is placed under increased competitive pressures to specialize along its lines of comparative advantage. A developed country that is relatively high skill-abundant, like the United States, will be induced to specialize in high skill- or education-intensive activities as its low-skill industries come under increased competitive pressure from low skill-abundant, low-wage countries.

This explanation has several problems when applied to the United States, and becomes even less persuasive when applied to Mexico. Mexico greatly liberalized its trade regime since 1984. However, the reduction of its trade barriers has mostly been visa-vis imports from the developed countries, notably the United States and Canada, whose share in total Mexican merchandise imports increased from 68 percent in 1985 to 73 percent in 1993 (and to 77.5 percent in 1996). Since Mexico is a low skill-abundant country compared to its two northern neighbors, it would be expected that the liberalization of trade Would have induced a specialization pattern that would raise the relative demand (and hence wages) for the lesser educated members of the labor force. This did not happen. Instead, the increase in earnings inequality observed in Mexico is identical to that observed in the United States: less educated workers experienced real wage declines, while highly educated workers experienced real wage improvements. 7

- 6 See, for example, the Symposium on Wage Inequality published in Journal of Economic Perspectives (1997) and the Symposium on "How International Exchange, Technology and Institutions Affect Workers" published in The World Bank Economic Review (1997).

- 7 The trade-based explanation may still be relevant to the extent that greater openness facilitates the transfer of ideas and technology, which is identified below as the more persuasive explanation of the increase in earnings inequality. A variant on the globalization/technology nexus explanation, advanced by Feenstra and Hanson (1994), involves outsourcing behavior where multinational enterprises in the developed country relocate their lower skill-intensive activities to the less skill-abundant developed countries. However, what is a low skill activity in the United States may be a high-skill activity in Mexico, which could explain the identical evolution of earnings inequality in both countries.