Wages and inflation in Mexican manufacturing. A two-period comparison: 1994-2003 and 2007-2016

Abstract

The effect of wages on price inflation has been a foremost subject in economics. This paper evaluates the aforementioned effect in Mexican manufacturing for two sets of periods. The first one, from 1994 to 2003, covers an initial period of the North American Free Trade Agreement (NAFTA). The second period encompass from 2007 to 2016, comprising the Great Recession. For both periods, data is available on a monthly frequency. A first equation deals with wages and bilateral nominal exchange rate impacts on the producer price inflation. A second equation measures the effect of this last variable, besides a bilateral nominal exchange rate and the wage effect on consumer price inflation. These equations follow Pujol and Griffiths (1997), using an error correction model and Granger causality tests. The results for the above mentioned periods expose that wages have an almost null effect in both the inflation of producer and consumer prices.