Academic journal article Journal of Money, Credit & Banking

Dollarization and the Mexican Labor Market

Academic journal article Journal of Money, Credit & Banking

Dollarization and the Mexican Labor Market

Article excerpt

THE ADOPTION OF THE U.S. DOLLAR as legal tender in Mexico may have a profound impact on the Mexican labor market as well as on the important--and politically sensitive--link between the Mexican and American economies, the large-scale migration of Mexican nationals to the United States. There is some uncertainty about whether dollarization will make the Mexican labor market more sensitive to economic shocks or help stabilize the Mexican economy. Dollarization might increase volatility in employment and lead to a larger emigrant flow. On the other hand, dollarization and the concomitant dependence on the Federal Reserve System's monetary policy might reduce economic volatility.(1) This "dollarization externality" could hasten the process of economic convergence between Mexico and the United States and greatly reduce the incentives of Mexican nationals to emigrate.

The decision to emigrate is essentially the choice to increase the expected return on one's human capital by paying the fixed cost of uprooting oneself and moving across international borders.(2) This paper presents a general equilibrium model of that decision. It is an extension of Rogerson (1988), and its essence is that the decisions to work or to emigrate involve fundamental nonconvexities. In particular, one must work full-time or not at all, or one must migrate or stay at home. The equilibrium involves a lottery, in which individuals who are identical ex ante end up being unemployed, participating in the domestic labor force, or emigrating. The share of people who emigrate depends upon the relative rate of return on going abroad. An attractive aspect of the equilibrium is that foreign remittances can be an important part of national income. Since the fixed cost of emigrating from Mexico into the United States may be relatively small, any theoretical analysis of the effects of dollarization on the Mexican economy cannot ignore the potentially strong interplay between macroeconomic policy and migration patterns. Our model does not have an explicit role for monetary policy, but it does have a double factoral terms of trade that can be interpreted as the real exchange rate. Also, it allows for the analysis of stochastic capital flows, perhaps a very important concomitant of Mexican dollarization.

The model shows that emigration might dampen cyclical increases in Mexican unemployment, especially if the return on emigrating rises when the demand for labor falls in the domestic economy. If dollarization is a signal that helps to attract more foreign capital, the relative rate of return on emigrating might drop. In that case, dollarization might hasten the process of economic convergence between Mexico and the United States, perhaps leading to a large reduction in the number of Mexican emigrants.

In analyzing the potential importance of dollarization on the politically sensitive issue of Mexican emigration to the United States, the paper also presents an empirical study of how both legal and illegal flows of Mexican immigrants respond to relative changes in economic conditions between the two countries.(3) There has been a very rapid rise in the number of Mexicans who have migrated to the United States in the past few decades, with Mexican nationals becoming an ever-more important component of the foreign-born population in the United States. During the 1950s, about 30,000 thousand Mexican immigrants entered the United States legally during a typical year. By 1996, the United States was admitting 164,000 Mexican nationals legally. The Immigration and Naturalization Service also estimates that another 150,000 Mexicans entered--and stayed in--the United States illegally. If we account for both the legal immigrants and the undocumented workers, the Mexican immigrant flow in the 1990s was ten times as large as it was in the 1950s. As a result of these trends, Mexican nationals made up only 6.2 percent of the foreign-born population in the United States in 1960, but made up over 27. …

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