Spending by Mexican shoppers is well documented, but Mexico also affects the size of the government sector in the Valley. Many Mexican students attend school on the U.S. side of the border, boosting the education segment. The region, moreover, serves as a base for an extensive U.S. Customs and Border Protection presence. The agency is an important source of income because its jobs are relatively high paying. In 2003, average annual earnings for civilian federal workers in the Valley were $83,562, up 11 percent from 1998 when adjusted for inflation. By contrast, the area's overall average earnings were $26,874 in 2003, a gain of 4 percent.

With Mexico's low-wage workers so near, the Valley's manufacturing sector has been limited. It accounts for 6 percent of employment, less than the state's 9 percent and the nation's 11 percent. The manufacturing across the border, however, beefs up transport, warehousing and other business services that supply maquiladoras. Research by Dallas Fed economists Bill Gilmer and Jesus Cañas finds that maquiladoras and their supporting industries play a key role in allocating employment across sectors in four pairs of border cities.

The Valley's Prospects
Overall, the Valley's short-term outlook is positive. Employment gains are likely to continue at a relatively strong pace, especially in health care, now the largest private-sector employer. Key drivers of employment will probably remain strong, and agriculture can benefit from more exports. Because the health care and federal government sectors pay above-average wages, the growth of these industries is good for the Valley economy.

Rising maquiladora employment, especially in Reynosa, should also boost the economy over the next year or so. Steady job and population growth will continue to fuel commercial and residential construction, resulting in an optimistic forecast for this otherwise volatile sector.

Although Mexico's July presidential election may create some uncertainty, floating exchange rates and relatively stable currency-market fundamentals reduce the likelihood of a peso shock. With its strength sustained, Mexico's currency should continue to stimulate the Valley's retail and leisure sectors.

Longer term, the Valley faces challenges. Consistent and rapid job growth since the early 1990s has helped the region shed its reputation for high unemployment, but the economy hasn't been catching up with national and state levels of per capita income.

Most likely, low educational attainment lies at the heart of this. The region has been unable to improve the education level of its workforce relative to the state since the 1970s. In 2000, the percentage of the labor force with less than a high school education averaged 52 percent in the Valley and 24 percent in Texas, according to the Census Bureau. If the Valley were to reduce its high school dropout rate to the state average, income would go up an estimated $2 billion a year.

Some trends are encouraging. Local university enrollment has been rising for the past four years, perhaps a sign the Valley is responding to an economic environment that rewards higher skills. In addition, increased state funding for public education during the 1990s may start having a positive impact on education, and thus, on per capita income.

In summary, fast convergence toward state and national levels of per capita income will depend mainly on the Valley's ability to improve the education of its workforce, a long-term commitment that can only succeed through the combined efforts of households, businesses and government..