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Impact of Nafta on Unemployment and Its Pros and Cons

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A regression was run using GDP growth rate as a dependent variable and rate of unemployment as the independent variable, for both USA and Mexico. The analysis helps in determining the strength of the relationship between the dependent and independent variables. A time period ranging from 1980-2018 has been taken. This time period covers 15 years of unemployment and growth rates prior to the establishment of NAFTA and 24 years post the establishment of NAFTA.

In the case of USA, the resultant R^2 value of the regression equation was found to be a low value of 0.23. This means that 23% of the variance in GDP growth rate can be explained by unemployment rate in the USA. This means that the rate of unemployment and GDP share a very weak relationship since unemployment rate accounts for a very low percentage of variance in the GDP. From the regression equation given below, it can be said that as the unemployment rate in USA increases by 1 unit, the GDP growth rate decreases by 0.53 units.

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Another regression analysis was conducted using the same variables for Mexico. A low R^2 value was obtained here as well. The value being 0.28 indicated that a mere 28% of variance in the GDP growth rate in Mexico can be explained by or on account of the unemployment rate in Mexico. Here as well, it can be said that the relationship between the two variables in Mexico is weak since there is a very low percentage of variation in GDP that the unemployment rate can account for. From the regression equation given below, it can be said that as unemployment rate in Mexico increases by 1 unit, the GDP growth rate decreases by 1.42 units.

For the econometric analysis, to show whether or not NAFTA could be one of the many factors affecting employment in USA and Mexico, t-tests were conducted. Since we are trying to test if NAFTA impacted the employment in any way, the unemployment rates were divided into two periods for both countries. The first period was between 1980 and 1994 while the second period was between 1995 and 2009. Since NAFTA was established in the year 1994, the time period has been divided into two periods’ 15 years pre-NAFTA and 15 years post-NAFTA. Before conducting the t-tests, it was necessary to check for normality in the variable of unemployment rate for both countries. Since the number of observations are below 50, the Shapiro-Wilk test of normality was used for both pre-NAFTA and post-NAFTA unemployment rates, for both the countries. 

For USA, unemployment rates pre-NAFTA exhibited normal distribution. This can be said because the value of significance obtained from the Shapiro-Wilk test is 0.088. Since this value is above 0.05, we can accept the null hypothesis and conclude that the variable is normally distributed. Unemployment rate post-NAFTA, on the other hand, shows a significance value of 0.005. The value being less than 0.05, the null hypothesis is rejected and it is concluded that the variable is not normally distributed.

Since only the unemployment rate pre-NAFTA is normally distributed and there is no normal distribution in the unemployment rates post-NAFTA, the paired sample t-test cannot be carried out. But, the equivalent test for a paired sample t-test, under non-parametric tests, Wilcoxon Signed Rank Test, is conducted.

As the test indicates, the probability/significance value is 0.035. The value being less than 0.05, the null hypothesis is rejected in this case and it can be concluded that the median of differences between unemployment rates pre and post NAFTA are not equal to 0. This implies that there exists a significant level of difference between the means of unemployment rates pre and post NAFTA. Therefore, NAFTA can be said to be one amongst the other factors that has impacted the level of employment in USA by impacting the unemployment rate. But, it does not mean that NAFTA is the only reason for the variation in unemployment rates. This variation can be owed to other factors which shall be studied below.

Another set of normality tests were carried out for the unemployment rates pre and post NAFTA for Mexico. The variable unemployment rate pre NAFTA exhibits normal distribution since the value obtained from the Shapiro-Wilk test is 0.641, which is above 0.05 and hence the null hypothesis of normal distribution can be retained.

The unemployment rate post NAFTA has a value of 0.034, which being less than 0.05, means that the null hypothesis needs to be rejected. Thus, unemployment rate post-NAFTA is not normally distributed. Since one of the two variables to be used in the test is not normally distributed, a non-parametric test, the Wilcoxon Signed Rank Test, has to be used.

In this test, the value obtained is 0.820, which is greater than 0.05, and thus the null hypothesis cannot be rejected. This means that there is no significant difference that exists between the means of unemployment rates pre and post NAFTA and therefore NAFTA does not constitute one of the factors that has impacted the level of employment in Mexico. Again, this test is not the sole determinant of the fact that NAFTA is or is not one of the factors affecting employment levels in Mexico.

From the above tests, it is concluded that in USA, NAFTA has been one of the factors causing unemployment whereas the same could not be proved for Mexico. Hence, the below analysis will be focused on the situation in USA.

According to the Heckscher-Ohlin theory, trade is a resultant of the difference in prices of factors between countries. The differences in prices arise from the difference in availability of factors in the countries. According to the theory, a country having an abundance of a certain resource, must produce goods which make full use of that resource. Hence, the country that has an abundance of labour should produce and export labour-intensive goods while the country which is rich in capital must produce and export capital-intensive goods in exchange. Between USA and Mexico, USA being a capital-intensive nation and Mexico having an abundance of semi-skilled and unskilled labour, this theory can be applied. In some aspects, this theory is applicable in reality, however, in many ways, this theory is contradictory to what actually happened to trade after the establishment of NAFTA. As mentioned previously, Mexican farmers suffered from this deal because of the “agricultural dumping” by the USA. Farm produce from the USA was being exported to Mexico and sold at cheaper and subsidized rates. Thus, keeping the Mexican farmers out of occupation. Implying that labour-intensive goods were not only being traded from Mexico to USA but vice-versa.

According to the factor-price equalization theory, which is in corollary with the Heckscher-Ohlin theory, prices of factors being exchanged between two countries should equalize through the process of trade. If we take USA to be the capital-intensive nation and Mexico to be the labour-intensive nation, ideally, NAFTA should have helped in trading capital intensive commodities from USA to Mexico and labour-intensive commodities from Mexico to USA. In this process, the prices of the factors would have been equalized in both countries. Wages in both the nations would have been equal and so would the price of capital. But, on the contrary, factor prices did not equalize after NAFTA. In fact, wages in USA fell because of the availability of cheap labour in Mexico, as explained in Chapter II. Therefore, although wage inequality may have partially decreased in Mexico, it increased in the USA. Thus, it can be said that trade through NAFTA did not follow the theories mentioned above. Opposing effects of the theories were observed in the case of NAFTA’s impact on trade in both the countries.

According to the US Bureau of Labour Statistics, since 1980, the economy of USA has created around 60 million jobs, mostly owed to the service sector. While it is said that jobs lost due to NAFTA had crossed over 7 million, the net gain has been 53 million jobs. But, it cannot be said that NAFTA has been the only cause for this gain and loss in jobs. It is true that many manufacturing sector jobs have been “displaced” but there are many factors to be analyzed in respect to unemployment. One of the biggest factors having contributed to displacement of jobs and unemployment has been the problem of recession. During periods of recession, the economy experiences unfavourable growth wherein profits and revenues of firms fall, causing hindrance in the expansion of these firms; consumers start to demand less and in turn the working of the firms is impacted. When companies do not generate enough profits and are suffering losses, they do not have the financial capacity to keep employees engaged or encourage more employment.

USA has seen many periods of recession, the worst in its history being the “Great Depression” which lasted through the 1930s. But, the financial crisis of 2008 has been believed to have had severe negative effects, not only on the economy of America but also on the rest of the world. This crisis started due to the problem of increasing loan defaulting which in turn led to the decreased lending by the banks. Both consumers and firms now had lesser money to spend. Thus, creating a crisis in the economy. Since companies now had fewer funds, it was difficult to pay their current employees let alone hire new employees. During such financial crisis, it is important for the companies to reduce their spending and as a step to do so, they need to cut down on the number of employees in the company. Thus, causing the unemployment to increase. From 2008 to 2009, during the time of the crisis, the rate of unemployment in USA increased from 7.3% to 9.9%. While that of the manufacturing sector has been the highest in the last 20 years, at 12.6% in 2009. (U.S. Bureau of Labor Statistics, 2020)

Amongst other factors are the terrorist attacks of September, 2001. Terrorists had seized four airplanes mid-air to attack the most powerful structures in USA. Not only did the airline business suffer and have to lay-off its employees but the rest of the economy suffered major turmoil after this. These attacks caused a severe period of recession along with a rising government expenditure on defense, for security and to retaliate against the attacks. The government now had lesser funds to allocate to other activities such as employment generation.

USA was also faced with the problem of debt ceiling crisis, which costed more than 1 lakh employees their jobs, in 2013. Debt ceiling crisis is in itself a self-explanatory term, meaning that the borrowing by a country has reached it’s “ceiling” or maximum capacity. When the borrowing capacity has been reached, the government is either forced to raise tax rates or decrease expenditure and at times, when neither of these measures are able to generate the required amount of funds, there is a break or interruption in the working of the government. This, in turn, has an impact on the working of the economy, which includes increased rates of interest, fall in the value of the dollar, high costs of borrowing, etc. (Masters, 2013)

Economic factors such as recessions and financial crisis’ aren’t the only factors impacting level of employment. In fact, much change in the employment level over the years can be owed to the progressive technology and automation which has taken over humans. Manufacturing sector, which is said to have been impacted the most by NAFTA, has seen a constantly declining trend in employment levels but an opposite trend in terms of output. Today, the manufacturing sector is highly automated and this technology is turning out to be less expensive and time-taking than hiring workers to do the same work in more number of hours and higher wages. Right from taping boxes and assembling parts of a product to welding of cars and even creation of more machines, today’s technology can perform many functions at a much faster pace than humans can. It was found in a study that about 85% of unemployment in manufacturing sector in the USA, which has been blamed on NAFTA, is in fact a result of automation and change in technology. (Cocco, 2016)

While it is true that many jobs for the citizens of America were being shifted to Mexico due to reasons mentioned before, it is not true that Mexico is largely responsible for taking away American jobs. Jobs are being shifted to China as well, after it entered the world market. In the year 2018, USA’s imports from China were worth 557.9 million USD, making China its largest trading ally. (Office of The United States Trade Representative, n.d.)

A report also states that 2.7 million jobs, 2.1 out of which were from the manufacturing sector, were drained out of the USA, to China in about 10 years. (Kurtzleben, 2012) Chinese imports are cheaper than local goods made in the USA and therefore, making the consumers of America demand more of Chinese products. As in the case of Mexico, wherein cheaper labour was a threat to workers in the USA, Chinese workers, who were willing to take up jobs that pay lesser wages, too, became a competition for American workers.

Therefore, as stated above, NAFTA did, in fact, have a significant level of impact on the level of unemployment in USA. As stated above, reasons such as recessions, wars/attacks, trade with other countries, technology, etc. were also factors that contributed to this unemployment in USA. Although literature states that NAFTA had a similar yet smaller impact on Mexico, the same could not be seen in the t-test.

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