qn-ans Cota, J.E.M (2013). US–Mexican Economic Integration and its Effects on
Unemployment in Mexico’s Northern Border States ( excerpts)
1. Examine impact of the economic activity of the US–Mexico trans-border region on
the unemployment rate of the northern border states of Mexico. How do you relate
changes in the unemployment rate to changes in the GDP of the Mexican and American
border states?
The GDP of the Mexican border states and the GDP of the US border states exhibited a
negative relationship with respect to the unemployment rate. These results corroborate a
negative relationship between the unemployment rate and the GDP of the Mexican border
states but, most importantly, with the GDP of the US border states, providing evidence
that the economic integration at the border region has created a situation where the labor
market of the northern border states of Mexico depends on the economic activity of the
US border states.
3. Why do changes in wages correlate positively to changes in unemployment rate
High wages would discourage the employment of the labor force. Wages had a positive
correlation with respect to the unemployment rate.
4. Why do GDP of the Mexican border states and the GDP of the US border states
exhibited a negative relationship with respect to the unemployment rate?
A negative relationship between the unemployment rate and the GDP of the Mexican
border states but, most importantly, with the GDP of the US border states
The economic integration at the border region has created a situation where the labor
market of the northern border states of Mexico depends on the economic activity of the
US border states.
The labor employment of the American and Mexican border states has been affected by
consumption and production patterns in the US.
The effect of the economic recession on labor unemployment is linked to specific
regional and institutional determinants exports (their composition and diversification),
labor migration and remittances and the dependence on Direct Foreign Investment-- the
decline in exports caused by the slowing of the US economy impacts the maquiladora
activity (in-bond assembly industry) and employment in the northern border states of
Mexico.
Tradable sector dynamics has been related to movements of the exchange rate, which
may increase the competitiveness of the sector with a depreciation of the Mexican peso,
and the economic integration with the US economy that has expanded the demand for
manufacturing goods (maquiladoras) produced in Mexico
5. Why does Mexican exports negatively correlate to the unemployment rate of the
border states of Mexico for the years 2003–2005 and 2008–2009?
The importance of maquiladora economic activity in terms of employment is even more
relevant for the northern border states, since the states of Baja California and Chihuahua
accounted for 13.3% and 15.3% of the total maquiladora labor employment in 2010
Given the weight of the maquiladora and export activities, it is apparent that the
economic integration of the US and Mexico at the trans-border region has impacted the
rhythm of economic growth and, consequently, the behavior of labor employment in the
region. Given the level of economic integration of the border region, the behavior of the
business cycle on both sides of the border presents a very similar pattern. From 2003 to
2009, the annual movements of the aggregate GDP of the border states of both the US
and Mexico moved in a similar direction, increasing from 2003 to 2007 (although the US
cyclical component dipped briefly between 2004 and 2005). After 2007, the cycle
decreased until 2009 (Figure 2).
For understanding the concepts in this paper:
Excerpt from Investopedia:
http://www.investopedia.com/university/macroeconomics/macroeconomics7.asp The
business cycle is the pattern of expansion, contraction and recovery in the economy.
Generally speaking, the business cycle is measured and tracked in terms of GDP and
unemployment – GDP rises and unemployment shrinks during expansion phases, while
reversing in periods of recession. Wherever one starts in the cycle, the economy is
observed to go through four periods – expansion, peak, contraction and trough.
Recession is typically used to mean a downturn in economic activity, but most
economists use a specific definition of "two consecutive quarters of declining real GDP"
for recession. By comparison, there is no formal definition of depression. While
recessions have averaged around 10 months in length since the 1950s, the
recovery/expansion phases have a much wider range of lengths, though around three
years is relatively common.
The movement of the economy through business cycles also highlights certain economic
relationships. While growth will rise and fall with cycles, there is a long-term trend line
for growth; when economic growth is above the trend line, unemployment usually falls.
One expression of this relationship is Okun's Law, an equation that holds that every 1%
of GDP above trend equates to 0.5% less unemployment.
A talk from Federal Reserve Chairman, Ben Bernanke, perhaps most succinctly summarizes Okun's law
basic concepts:
"That rule of thumb describes the observed relationship between changes in the unemployment rate and the
growth rate of real gross domestic product (GDP). Okun noted that, because of ongoing increases in the
size of the labor force and in the level of productivity, real GDP growth close to the rate of growth of its
potential is normally required, just to hold the unemployment rate steady. To reduce the unemployment
rate, therefore, the economy must grow at a pace above its potential.
More specifically, according to [the] currently accepted versions of Okun's law, to achieve a 1 percentage
point decline in the unemployment rate in the course of a year, real GDP must grow approximately 2
percentage points faster than the rate of growth of potential GDP over that period. So, for illustration, if the
potential rate of GDP growth is 2%, Okun's law says that GDP must grow at about a 4% rate for one year to
achieve a 1 percentage point reduction in the rate of unemployment."
The law has indeed "evolved," or changed over time to fit the current economic
climate and employment trends at the time. One version of Okun's law has stated
very simply that when unemployment falls by 1%, GNP rises by 3%. Another
version of Okun's Law focuses on a relationship between unemployment and GDP,
whereby a percentage increase in unemployment causes a 2% fall in GDP.
http://www.investopedia.com/articles/economics/12/okuns-law.asp graph
6. What do the changes in the unemployment rates of the northern border states during
the period 2000–2010, show when compared to the national average?
They showed important regional characteristics. In the first place, both the
unemployment rate of the northern border states of Mexico and the national average
showed an increasing unemployment rate during the period. There also was a greater
negative effect of the US economic recession on unemployment in the northern border
region of Mexico
7. Why is the Mexican economy and labour dependent on the dynamics of the US
economy?
Given the intense flows of capital and trade between the two countries, economic
integration derives mainly from FDI and export transmission channels, and implies the
dependence of the Mexican labor market on the dynamics of the US economy. Therefore,
increasing economic integration between the US and Mexico is indirectly affecting the
labor market of the Mexican economy.
Additionally, the value of exports from Mexico to the US that cross the border ports
between the US and Mexico also presented a negative correlation with the unemployment
rate, therefore economic integration has affected the Mexican economy and, as a result,
the labor markets, particularly at the border region