This paper examines how dollarization affects the internal wage structure in the Mexican labor market, and alters the incentives of Mexican nationals to emigrate to the United States. A simple model shows that by adopting a fixed rate regime tied directly to the U.S. dollar, Mexican policy makers are in effect giving up “a degree of freedom” in their toolkit of policy remedies. If there are imperfections in the Mexican economy, such as downward wage rigidity, an adverse economic shock would generate more unemployment in a dollarized economy, further increasing the propensity of Mexican workers to migrate to the United States. The adverse effects of dollarization could be reversed if the adoption of the dollar as a medium of exchange signals a more stable Mexican economy, reduces political inefficiency in the monetary system, and helps to attract more foreign capital. The paper also investigates how legal and illegal flows of Mexican immigrants respond to relative changes in economic conditions between the two countries. It turns out that the illegal flow is very sensitive to relative economic conditions, but that the flow of legal immigrants is not. Dollarization will then have a relatively weak impact on the total number of immigrants because legal immigrants make up a relatively large part of the total flow and their numbers are insensitive to economic variables.



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The definitive version is available at http://www.jstor.org/stable/2673920.

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