Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills?

In the mid-1980s, Mexico undertook major trade reform, privatization and deregulation. This coincided with a rapid expansion in wages and employment that led to a rise in wage dispersion. This paper examines the role of industry- and occupation-specific effects in explaining the growing dispersion. We find that despite the magnitude and pace of the reforms, industry-specific effects explain little of the rising wage dispersion. In contrast occupation-specific effects can explain almost half of the growing wage dispersion. Finally, we find that the economy became more skill-intensive and that this effect was larger for the traded sector because this sector experienced much smaller low-skilled employment growth. We therefore suggest that competition from imports had an important role in the fall of the relative demand for less-skilled workers.