Why Did Wage Inequality Decrease in Mexico after NAFTA?

Contrary to what happened before NAFTA, wage inequality in Mexico decreased after 1994. This paper investigates the forces behind the post-NAFTA decrease in wage inequality. Using a quantile decomposition, I show that the decline in wage inequality is driven by a decline in the returns to education and potential experience, especially at the top of the wage distribution. Supply and demand are the main contributors to this change. On the supply side, there were substantial increases in college enrollment rates after 1994, which translated into an increase in the proportion of workers with a college degree. However, this increase in supply was not met by an increase in demand for the highly educated: the proportion of the workforce in top qualified occupations and close to the top occupations did not increase as much as the increase in supply. As a result, college educated workers exercised wage pressure in top and less-than-top qualified occupations. A Bound and Johnson (1992) decomposition confirms that changes in relative supply are the main determinant behind the decrease in wage inequality.