Down and Out in North America: Skills, Distribution, and the New Continental Divide.

This paper will tackle one deceptively simple question: Why, a decade after the launching of the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the U.S., are economists and policy analysts so hard pressed to explain the resistance of distributional trends to the pressures for greater equity that had been predicted as part of the integration process? For example, traditional theories of economic integration suggest that the liberalization of trade, investment and capital flows within the NAFTA bloc will trigger positive continuities at both the macro- and the microeconomic levels. Indeed, macroeconomic convergence is well underway, and the same can be said for emergent trends at the microeconomic level, where the elimination of barriers at the border has spurred a process of industrial restructuring based on dynamic productivity gains and greater technological specialization across North America. Yet, a widening gap in income distribution and real wages defies the dictates of economic integration theory, which holds that liberalization should mitigate, rather that exacerbate, the so-called hourglass pattern of unequal distribution that now characterizes the NAFTA bloc. This paper will explore this trend from two explanatory angles. First, it will analyze the negative interplay between economic integration and pre-existing weaknesses in human capital investment (education and health, in particular) that plague all three countries to varying degrees. Second, it will pinpoint the insufficiencies of short-term adjustment policies in the NAFTA bloc, where a disproportionate share of public expenditures have been allocated for passive income maintenance as opposed to active policies that facilitate adjustment, skills acquisition, and worker re-training. [ABSTRACT FROM AUTHOR]