Mexican wage disparity rose following Mexico’s accession to the General Agreement on Tariffs and Trade/World Trade Organization in 1986. Since the mid-1990s, however, wage disparity has been falling. Since most trade models suggest that output prices can affect factor prices, this paper explores the relationship between output prices and wage disparity. A Salter–Swan trade model with firm heterogeneity driven by variations in the relative price of tradable relative to non-tradable goods can explain the decline in wage disparity. The paper compares this model’s predictions with Mexican disparity statistics using data on output prices, census data, and quarterly household survey data. In spite of the model’s simplicity, the model’s predictions match Mexican variables reasonably well during the years when wage disparity fell.
