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Abstract
This paper studies how the North American Free Trade Agreement (NAFTA) affected income distribution within
Mexico given internal migration. In low-skilled labor-abundant developing countries, trade liberalization should
theoretically increase the income of low-skilled workers, decreasing income disparity. However, anecdotal evidence
indicates that NAFTA increased the gap between rich and poor in Mexico, and empirical evidence is mixed
(Chiquiar, 2005; Nicita, 2009; Hanson, 2007). Because trade may affect wages differently across regions within the
country, accurate measures of wage effects must incorporate intra-national migration. We specifically consider rural
to urban migration and find that working age men with low incomes get a boost from the NAFTA in their wages
while NAFTA has a negative effect for those with high incomes. There is a slight increase in migration in the years
after NAFTA. We also find that, workers far away from the US-Mexico border earn significantly lower wages in
comparison to their counterparts in the border. But this effect diminishes after NAFTA, when tariffs decrease. As
a result, we find that in urban areas, trade liberalization has reduced income inequalities among working age men.