Abstract
We investigate how access to foreign technology embodied in imported inputs affects formalization in Mexico. Using household microdata, we exploit the significant reduction in Mexico’s tariffs on U.S. goods (both final and intermediate) across manufacturing industries between 1993 and 2001. We find that individuals working in manufacturing industries experiencing an average reduction in input tariffs (12 percentage points) are 4 percentage points more likely to be formally employed. The effect is particularly pronounced among high-skilled workers, consistent with an input-skill complementarity mechanism. In contrast, lower output tariffs, by inducing tougher import competition, increased the probability of informal employment by more than 1.5 percentage points. These findings enhance our understanding of the role that access to advanced technology, facilitated by trade liberalization, plays in promoting formal employment.