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Others then began to seek similar advantages. The Caribbean Basin Economic Recovery Act in 2000 provided Caribbean countries with duty-free entry into the U.S. market. By joining the World Trade Organization in 2001, China gained U.S. access, with tariffs low enough to make its wage advantage decisive. These post-NAFTA changes in trade policy led to a collapse of Mexican textile and apparel employment. The sector's job losses haven't been reversed by the recovery of U.S. manufacturing.

The textile and apparel sector hasn't been a bellwether for the maquiladora industry as a whole. Low-wage job losses haven't been widespread, with textile and apparel's sustained decline shared only by the relatively small leather and toy industries. Other maquiladora sectors have responded positively to the upturn in U.S. manufacturing that began in 2004.

How does Mexico manage to hold its own in other industries if competition based on wages isn't feasible?3* The answer probably lies in a combination of factors related to its geography and experienced labor force:

• Proximity to the U.S. market offers huge advantages. This works for large, bulky items, such as big-screen TVs, freezers and water heaters.
  
  
• Proximity also is important when supply chains require quick turnarounds, when changes are frequent or when there's little time to wait for shipments from overseas. Auto parts are one example. For high fashion jeans, the latest styles can be passé before containers arrive from Asia.
  
  
• Goods with high value added relative to labor content, such as medical instruments, are often made in Mexico. The country's skilled and experienced labor force becomes an important advantage.
  
  
• Intellectual property used in the production process can be at risk overseas, and Mexico offers better protections than many other countries.
  
  

Cyclical or Structural?

Are Mexico's advantages enough to matter for the maquiladoras? To find out, we need to separate cyclical effects from longer-term structural declines or gains. Maquiladora data cover broad industry categories. Each of them may contain a mix of sectors subject to either cyclical effects or structural factors, such as low-wage competition. To determine which dominates, we examine data from the recent downturn and recovery.

We assume U.S. manufacturing output defines the maquiladora industry's decline and recovery. We track the fall in maquiladora jobs during the decline in U.S. industrial production from June 2000 to November 2001 and during its long recovery from November 2001 to May 2004.

To display how recession and recovery affected each sector, we use a four-quadrant graph that separates the maquiladora sectors into groups based on how they performed over the business cycle.4* Gains and losses are shown as percentage changes in employment.

Quadrant I (positive, positive): Sectors with structural gains, in which employment grows in recession and recovery.

Quadrant II (negative, positive): Cyclical sectors, which shed jobs in recession and add them in recovery.5*

Quadrant III (negative, negative): Sectors with structural losses, in which employment declines in both recession and recovery.

Quadrant IV (positive, negative): Countercyclical sectors, which see job counts rise in recession and fall in recovery.

For 2000-04, we find structural gains in only two small sectors-machinery and food (Chart 2). Structural losses took place in furniture and three industries we had already anticipated-toys, leather and textiles. The large electronics sector and the transportation industry, which includes automobiles, fall into the cyclical quadrant.

Let's look at similar data for maquiladora employment during the 1990-92 decline and recovery of U.S. manufacturing (Chart 3).6* In contrast to the recent business cycle, every industry falls into the structural gains or cyclical quadrants. The only industry that seems subject to a larger employment decline than recovery is toys. All told, the 1990-2004 period saw Mexico's maquiladoras move from an advantaged position in creating jobs (quadrants I and II) to a much more competitive one (quadrants II and III).

When we examine the corresponding U.S. industries for 2000-04, we see most of them clustering near the point of origin, with some bias toward a small decline in the downturn and less of an upturn in recovery (Chart 4). Between 1990 and 1992, the results are similar, though with larger declines in the downturn and more limited recovery in industries such as furniture, autos, leather and electronics.

Production Perspective

The unfolding trends in maquiladora employment don't lead to an optimistic view of the industry's future. Recovery from the 2000-03 downturn is still incomplete based on jobs, and it's apparent the easy structural gains of the past are gone.

The focus on jobs is important and conventional when looking at the maquiladora industry because structural displacement through trade is properly viewed as a key labor market issue and because the maquiladora industry historically has been regarded primarily as a jobs program.

Switching the focus to output rather than jobs, however, turns the story on its head. Measured by real value added, maquiladora production has held up surprisingly well in recent years, especially in light of what was happening to employment (Chart 5). After turning down briefly in 2001, output largely recovered and remained flat from mid-2001 to late 2004. It has been growing rapidly for nearly two years now, reaching new highs.

According to production data, the most recent recession was much less significant than the one in the early 1990s. If we return to the cyclical-versus-structural graphic and replace employment with real value added, we see six sectors in the structural gains quadrant over the 2000-04 decline and recovery-including furniture, textiles and leather (Chart 6). Other sectors are in the procyclical quadrant. Growth over the period was generally positive and widely spread among these industries.

As maquiladora recovery has moved forward, job growth has remained weak and below the prior peak, while output has surged to new highs. The result has been rapid gains in productivity as measured by output per worker, with increases of nearly 60 percent from 2000 to 2005 (Chart 7).

Productivity gains have also been a hallmark of recent U.S. manufacturing performance, outweighing either slack demand or foreign competition as a factor in recent job losses.7* In the maquiladora industry, we know that a substantial part of the gain in output per worker can be traced to the shift from less- to more-productive industries. The simplest jobs have been lost to foreign competition.8* We lack the data to determine how much of the productivity gain was due to industry mix and how much emerged from advances in skills, improved capital or new technology.

Higher productivity has been matched by rapid gains in maquiladoras' hourly wages and benefits. These gains have been shared across all industries, with an average increase of 46 percent between 2000 and 2005. Like rising productivity, higher wages can be traced in part to the loss of the lowest- paid and least-skilled jobs.

No matter what the source of improvements, we are seeing an industry that is rapidly modernizing, paying higher wages and ramping up production across all industries. This picture contrasts dramatically with the view of the maquiladora industry based on employment alone.

It's time to stop thinking of the maquiladora industry in terms of its origins as a 1960s-style jobs program. Today, the industry is successfully seeking a more sophisticated and better-paying niche in the ongoing restructuring of North American production sharing.

If maquiladoras generate fewer jobs than they did in the past, this has to be seen in light of labor shortages in northern Mexico, where the industry is primarily located. The maquiladoras are recruiting diligently throughout Mexico, offering bonuses and paying transportation costs to potential workers to persuade them to move north.


Stimulus to the Border Economy

What are the implications for the Texas-Mexico border economy? Maquiladoras have become a dominant force in the region. Keeping and adding maquiladora jobs has become the most important economic factor for cities on the Mexican side. In light of the industry's transitions, however, we need to distinguish between the raw number of jobs and total wages and benefits.

Real compensation per worker tracks an intermediate path between production and employment (Chart 8). The decline in jobs during the downturn was 21.8 percent, and the employment recovery still leaves the industry 8.3 percent below the prior peak in 2000. Total real wages and benefits declined 13.3 percent and are now only 2.7 percent short of the prior peak.

Overall, Mexican border cities probably suffered much less during the downturn than the decline in job numbers would suggest, and they're now benefiting more from the recovery.

For cities on the Texas side, maquiladora jobs and wages count to the extent that they affect retail sales. However, output has always been a better measure than employment of the benefits of maquiladora expansion. Inputs to maquiladora production, along with transportation, border security, real estate services and customs support services, are all more closely connected to output than jobs.

A well-known rule of thumb for how U.S. border cities and maquiladoras are linked also suggests that output is the key measure: Every 10 percent increase in maquiladora production drives a 1.1 to 2 per percent employment increase in the adjacent U.S. border city.9* It also helps explain the strong performance of Texas border cities in recent years-even in the face of a decline in maquiladora employment.

Cañas and Coronado are assistant economists in the Federal Reserve Bank of Dallas' El Paso and Houston offices, respectively. Gilmer is a vice president of the Federal Reserve Bank of Dallas.

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