Skill allocation in North American economies Liliana Meza González, Ph.D. Universidad Iberoamericana Presentation for NAALC meeting CIDE, November 13th, 2006

Dimensions of skill (from the Human Capital Theory) Years of formal education Years of experience (learning by doing) On the job training Age Health Type of occupation

North American Population pyramids, 2005

North American Population pyramids, 2040

Mechanisms of skill allocation between countries Trade Inter-industry trade Intra-industry trade Outsourcing Foreign Direct Investment Labor Migration

Skill allocation in NA due to trade (manufacturing sector)

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Decomposition analysis This is done to test whether the changes in the share of employment of production workers come from movements within industries or from movements between industries.

Regression Analysis To obtain correlations between employment and wage bill shares of certain kind of workers and different industry characteristics (including economic integration with other NA countries)

Labor demand analysis This helps us figure out if US and Mexican populations in the manufacturing sectors have been complements or substitutes.

(1)(2)(3) Constant Output US Blue Collar Employ ment MX White Collar Emplo yment MX Blue Collar Employ ment US Hourly Wage Blue (0.032)**(0.008)**(0.009)** MX Hourly Wage White (0.008)**(0.006)**(0.005)** MX Hourly Wage Blue (0.009)**(0.005)**(0.006)** Production Value (0.005)** Constant (0.101)**(0.075)** Observations9900 Standard errors in parentheses * significant at 5%; ** significant at 1% Table 5

Evidence The manufacturing sector produces less than 25% of GDP in the three economies. The agricultural sector produces less than 4% of GDP in the three countries. The tradables sector represents around 30% of GDP in the three countries. Around 70% of GDP in each country is subject to skill allocation through other means than inter-industry trade: Intra-industry trade, outsourcing, FDI and migration. There is evidence [Feenstra and Hanson ( )] that outsourcing, FDI and intra- industry trade increases the demand for skill labor in the source and the receiving countries. Most of the skill allocation among the three countries is happening through migration of low skill labor to the largest economy in the region.

Concluding remarks The main mechanism for skill allocation in the region has been migration of the low skil population. Canada has taken advantage of the skill composition created by the strong attraction forces of the region, but the US manufacturing sector has been decreasing and employing more skilled labor, maybe due to an increasing productivity and the competition from other regions of the world (especially Asia) Outsourcing, FDI and intra-industry trade seem to be causing an increasing demand for skilled labor in Mexico and the US, creating both supply and demand forces for migration of the unskilled labor to the service sector of the largest economy. It would be advisable to give Mexico a special treatment as a source country of unskilled labor (highly needed in the American and Canadian service sector) and to try to enforce labor laws in the three countries to protect labor rights of North-American population. More and better education for the Mexican population should be a main labor policy in the region, so Mexico stops being the main source of unskilled labor to the region.