Expert Interview | Exploring Income Inequality in the U.S. and Mexico

Pia Orrenius presents her research at the SMU Mission Foods Texas-Mexico Center’s Annual Symposium in 2017.

Texas-Mexico Center Research Fellow Pia Orrenius, vice president and senior economist at the Federal Reserve Bank of Dallas, conducted a study looking at the relationship between migration and income inequality in the United States and Mexico. We asked her a few questions about her work.

T-MC: What was the most important or interesting finding from your research?

PO: I thought it was fascinating to see that Mexico didn’t follow the trend in terms of inequality that we saw in the U.S. and really in most of the rest of the world. It turns out that income inequality since the 1990s has actually been falling in Mexico and rising in the United States.

This was particularly interesting because there has been mass migration from Mexico to the United States over the last four decades or so. Therefore the question was: Has the migration from Mexico to the U.S. contributed to the trends we’re seeing in income inequality in Mexico and the U.S.? Given that they’re moving in opposite directions we thought maybe there was a story here.

So that’s why you decided to focus on the U.S. and Mexico?

It’s a good case to study because it’s somewhere where, not recently but until the last 10 years or so, there’s been relatively free migration. Obviously we had a border and it was controlled, but despite that we had hundreds of thousands of people who were able to cross it every year. That allows you to see migration in real-time and in response to economic conditions as well as other factors.

You don’t have a lot of illegal immigration in other cases but across the U.S.-Mexico border we’ve had a lot of illegal immigration, and from an economist’s perspective it’s interesting not because it’s illegal but because it actually more mimics what market-driven migration would look like.

Your paper says that the outflow of Mexican workers to the U.S. increased wages in Mexico by 8 percent. Tell us about that.

We surveyed the literature that’s out there and we found two high quality studies that showed that all this out migration from Mexico has actually increased wages in Mexico. That is consistent with economic theory. If there’s fewer workers they should command a higher return.

Now that Mexican immigrants in the U.S. are returning to Mexico on a large scale, what will happen with Mexican labor wages?

That’s a challenge for Mexico. Not only does the labor market have to accommodate all of the natural growth in the population and the labor force, but then also has to accommodate the returning migrants from the U.S. One thing that helps Mexico adjust to this new scenario is the pace of demographic change. We’ve seen really over the last two decades or so a decline in the number of children being born to women in Mexico, and so we will see smaller and smaller cohorts coming of age.

Basically the population of young people has peaked in Mexico. This helps them in terms of accommodating a new inflow to the labor market. It helps that there’s not as many people coming into the labor market as there was in the ’70s and ’80s.

Transitioning to the U.S. side, your study says that migration had very little impact on wages. Why is that?

You might think that if migration raises wages in Mexico, it should lower them in the U.S. But what the surveys of literature say is that there’s actually only a very small impact on the wages of native workers in terms of the competition with immigrants, and there’s many reasons for that. The main reason is that there really aren’t a lot of low-skilled workers in the U.S. who compete with immigrants. You’re looking at a small and shrinking group of workers and so there’s not a lot of effect there.

Where we did see an impact is on the income distribution. When Mexican immigrants come in, for example, they have very low levels of education and so they come into the U.S. and they initially earn very low wages. So just by virtue of them coming into the country they’re actually broadening the income distribution by coming into the low end. So just mechanically there’s more income inequality because they’re coming in at very low wage jobs that generally Americans are not filling.

So there’s a mechanical reasoning for the increase in income inequality that’s partly related to migration, but generally we found in looking at the literature the bigger reasons are what’s called routine bias technological change and the hollowing out of the middle of the income distribution. And that’s due to technological change and the replacement of workers and routine-based occupations. We call that labor market polarization.

Labor market polarization or the hollowing out of the middle class is not consistent with migration from Mexico because again immigration from Mexico is coming in at the very low end of the distribution. So that’s how we concluded that there’s a lot going on here, but generally the main driver for income inequality in the U.S. and other countries is not low-skilled immigration.

That’s why your policy recommendations suggest things like job training programs as a remedy to inequality versus any limitation to migration?

We wanted to make a point that if you want to address the core drivers of income inequality you want to focus more on workforce training and education, things like access to credit, other ways in which workers can adjust to changing labor market conditions.

The other thing that we noted, and this is actually really important, is that if we’re looking at income inequality in the United States or in western Europe, yes you do see increasing income inequality. We’re unhappy with that—obviously that isn’t something that people want to see. But what we urge people to do in the paper is to look at the global income inequality. Thanks to globalization, we’ve actually seen falling income inequality in the world. So the world as a whole is better and better and better off. We’re richer as a world; we’re less unequal as a world, thanks to all of these trends that are going on. So what’s going on in the world globally is not the same as what’s going on in these individual countries.

It’s very important to remember that some of these trends that we see as negative in the U.S. are actually positive globally because they’ve allowed the poorest people in the world, like the people in India, the people in China to come out of abject poverty and actually join at least the lower middle class or the middle class.

This research was part of the 2017-2018 project grants funded by the SMU Mission Foods Texas-Mexico Center. You can read the policy brief of Orrenius’ work here.

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