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BorderECONOMY
THE

FEDERAL RESERVE BANK OF DALLAS June 2001

Table of Contents
2 Texas Border Cities:
An Income Growth Perspective
Robert W. Gilmer, Matthew Gurch
and Thomas Wang
6 The Border:
Is It Really a Low-Wage Area?
Lori L. Taylor
9 Secondary Education:
Its Impact on Border Income
Thomas M. Fullerton, Jr.
11 Transportation Infrastructure
and the Border Economy
Keith Phillips and
Carlos Manzanares
The Texas – Mexico border region has boomed during the past decade, especially
in the second half under NAFTA. Texas border towns are among the fastest growing
in the nation, and their sister cities south of the border are growing even faster. Like
much of Texas, the border has been moving from a resource-based economy toward
a more knowledge-based one. We at the Dallas Fed have been watching the effects
of Tex –Mex border trends, and this publication reflects our long-standing interest in
this dynamic region.
Free trade and a better-skilled workforce will be the key to increased prosperity
along the border. One lesson is clear: As Adam Smith pointed out 225 years ago and
as Frédéric Bastiat reinforced some 70 years later, the wealth of nations and the standards of living of their citizens are enhanced by freer trade. Hopefully, in the current
decade, the benefits of free trade will be extended to the rest of this hemisphere.

Bob McTeer
President and CEO
Federal Reserve Bank of Dallas

15 Housing Affordability: Outlook
Improving Along the Border
Toby Cook
19 Texas Colonias: Housing
and Infrastructure Issues
Ariel Cisneros
22 NAFTA and Maquiladoras:
Is the Growth Connected?
William C. Gruben and
Sherry L. Kiser
25 Maquiladoras:
Impact on Texas Border Cities
Lucinda Vargas
30 Illegal Immigration and
Enforcement Along the
Southwest Border
Pia M. Orrenius
35 Border Statistics

THE
BORDER
ECONOMY
Introduction
by Mine Yücel

The Texas border community is a
complex blend of U.S. and Mexican cultures, languages and customs, with a
dynamic economy that flourishes amid
the diversity. The Rio Grande defines the
border, stretching 1,254 miles from El
Paso in the west to Brownsville on the
Gulf Coast (see map on page 35). Nearly
10 percent of the Texas population lives
in the border communities of Brownsville, Del Rio, Eagle Pass, El Paso, Laredo
and McAllen.
The border region’s economy has followed the ups and downs of the Mexican
and U.S. economies. Benefiting greatly
from the decade-long U.S. expansion,
the region witnessed tremendous growth
in the 1990s, aided by NAFTA and despite the peso devaluation. Many challenges remain, however. This study details some of those challenges, examines
how the area has fared in the current
economic expansion and raises issues
relevant to its economic development.
Historically, the border region has
been the most economically disadvantaged area of Texas. Unemployment rates
have hovered in the teens, with McAllen’s
joblessness running above 20 percent
until recently. Per capita incomes are
among the lowest in the nation, ranging
from 38 percent of the U.S. per capita
income in Eagle Pass to 60 percent in El
Paso, compared with a state average of
94 percent. Government transfers account for a large share of border income,
ranging from a fifth to a third of total per
capita personal income. Educational

attainment is low: 32 percent of the adult
population has less than a ninth-grade
education and only 13 percent has completed college, compared with 13 percent and 20 percent, respectively, for the
state. A high birth rate and immigration
push population growth in border cities
to 1.5 to 2.5 times the state average.
During the past several years, however,
the border region has benefited from a
14-year expansion of the Texas economy, increased trade with a fast-growing
Mexican economy and the maquiladora
boom across the border. Unemployment
rates in all border cities have fallen below
10 percent except in McAllen, which
nonetheless saw a dramatic 10 percentage point decline in joblessness. The
region’s strong job growth has surpassed
Texas’ growth since 1999. This growth
has brought better-paying jobs but also
increased demands on infrastructure,
housing and services. It also has brought
into focus the need for a better-educated, higher-skilled workforce.
The articles presented here explore
issues important to the border region’s
economy. Bill Gilmer documents job
growth in the region and shows that
wage gains have come from an improved
industrial mix—a shift to higher-wage
industries. However, he notes that wage
growth, diluted by higher population
growth, has only managed to keep up
with the nation and hasn’t been able to
close the gap.
Taking a different view, Lori Taylor
notes that wages along the border are

significantly lower than elsewhere in
Texas. However, looking only at teachers
and correcting for education and experience, she finds that border area
wages are anything but low, reflecting
skill scarcity. Tom Fullerton studies the
effect of education on per capita income
and shows that the high rate of high
school dropouts depresses wages by
about one-fourth of border area per
capita income.
Keith Phillips, Toby Cook and Ariel
Cisneros document the increased demands on infrastructure. Phillips looks
at strains on roads and bridges and suggests that before more money is invested
in transportation infrastructure, border
policies and procedures need to be
closely scrutinized to ensure the current
infrastructure is used efficiently. Cook
finds that housing has become more
affordable in border cities because
incomes have risen faster than home
prices. Cisneros looks at a different
housing market: colonias. He shows that
although additional resources have improved the colonias, increased population growth has sustained their demand.
Bill Gruben and Lucinda Vargas look
at the impact of maquiladoras and
NAFTA. The fast-growing Mexican and
U.S. economies have led to a maquiladora plant boom that coincided with
NAFTA’s passage. Gruben maintains that
this timing was purely coincidental,
while Vargas shows that the growth in
maquiladora plants across the border
has created better-than-average-paying
jobs on the Texas side.
Growth on both sides of the border
has not lessened illegal immigration.
Although illegal immigration continues,
Pia Orrenius shows that tougher enforcement is having a deterrent effect while
bringing relatively high-paying jobs and
lower crime rates to border cities.
The Texas border region is a unique,
vibrant bicultural area that has grown and
changed dramatically. These changes
have come with many benefits and challenges. This research sheds light on some
of these challenges to help us better
understand the border region’s path to
future prosperity.
Yücel is a senior economist and assistant
vice president at the Federal Reserve Bank
of Dallas.

June 2001 | Federal Reserve Bank of Dallas

1

TEXAS
BORDER
CITIES
An Income Growth Perspective
Robert W. Gilmer, Matthew Gurch and Thomas Wang
Texas border cities are characterized
by certain economic features: more
transportation and distribution activity
than in other U.S. cities, a relatively
large retail sector and a large government sector. The six cities of Brownsville, Del Rio, Eagle Pass, El Paso, Laredo
and McAllen fit this description. However, these cities also have differences
that make it difficult to generalize about
their future or the outcome of various
policy proposals based solely on border
location.
In this article, we track the progress
of these cities from 1969 to 1997, focusing on their income growth compared
with the rest of Texas and the nation.1
We use per capita personal income to
draw our comparisons because it offers
the advantage of spotlighting the essential economic problem on the border —
poverty.2 The picture is not encouraging; it shows limited and selective
progress over 28 years in raising per
capita income relative to the nation as
well as Texas.

What Is a Border City?
What the six cities have in common
are a Texas border location and a sister
city in Mexico (Table 1). To see how
common geography shapes the local
economy, we compared the border
cities with the United States and with
Texas as a whole. The dominant factors
are (1) a large transportation and distribution sector serving international traffic, (2) a retail sector inflated by serving
two cities and (3) a government sector
swollen by border enforcement and by
public programs that address the high
poverty levels.
To make these comparisons, we used
1997 employment data from County
Business Patterns to compute location
quotients.3 Location quotients allow us
to identify an unusual concentration of
economic activity in a city or county
relative to some standard for a highly
2

diversified place. In this case, we compared Texas and the six border cities
with the United States, which is highly
diversified to the extent that unusual
concentrations of economic activity,
such as autos in Detroit or oil in Houston, average out across the country.
The combined group of industries in
County Business Patterns accounts for
all private employment in a county.
Government employment was added
using data from the Bureau of Economic Analysis for the same year.4
If a sector’s location quotient is 1, the
sector has the same concentration as
the diversified U.S. standard and its
representation within the county or
state is typical of what would be found
across the country. If the location quotient is greater than 1, the sector is
overrepresented, suggesting the region
has a comparative advantage that
allows it to export the overrepresented
goods or services.
When we looked for a pattern of
consistent industry overrepresentation
in the location quotients for the six border cities and Texas, it was clear that
border geography shapes these local
economies. Table 2 highlights location
quotients greater than 1.1, a figure we
chose as a simple standard for overrepresentation. Note that except for high
levels of transportation services and
military employment, Texas as a whole
has a smaller concentration of employment in typical border sectors.

Table 1
Texas Border Cities
City

County

1998 county
population

Mexican
neighbor

Brownsville
Del Rio
Eagle Pass
El Paso
Laredo
McAllen

Cameron
Val Verde
Maverick
El Paso
Webb
Hidalgo

318,737
42,813
45,763
688,626
189,037
518,878

Matamoros
Ciudad Acuña
Piedras Negras
Ciudad Juárez
Nuevo Laredo
Reynosa

Federal Reserve Bank of Dallas | June 2001

The high concentration of trucking
and transportation services is due to
international bridges and checkpoints
that cause delays and require special
handling of goods moving across the
border. Laredo has by far the largest concentration of transportation activity, a
product of its strategic location on the
shortest truck route from the United
States to Monterrey, Mexico’s major industrial center.
The strength of border retail sales
results from the throngs of Mexican
shoppers who flock to the U.S. side.
Brownsville and El Paso have large
neighboring cities in Mexico. Laredo
draws shoppers from nearby Nuevo
Laredo but is best known as a destination for shoppers from the Mexican
interior, particularly Monterrey.
Various sources contribute to the
high government employment. Major
military installations in El Paso and Del
Rio provide both civilian government
and military jobs. The border itself
generates public sector jobs in immigration, naturalization, customs and
border security. Finally, state and local
governments provide unusually high
levels of public assistance for income
maintenance, medical care, education
and training, and housing.
Transfer payments not only shape
local employment patterns but also
have played a large role in regional
income growth since 1969. A closer look
at the size and kind of transfers that
flow through these communities aids
understanding of their economies.
Table 3 summarizes government payments made to Texas and the six cities
in 1997.
The most striking feature of Table 3
is the high percentage of personal in-

Table 2
Key Border City Characteristics
Location quotient
Industry

Texas

Brownsville

Del Rio

Eagle Pass

El Paso

Laredo

McAllen

TCPU
Trucking/warehousing
Transportation services

1.11
.98
1.36

.97
1.17
2.50

.59
.95
NR

1.65
NR
5.31

.92
1.11
1.63

3.26
3.52
26.03

.69
.94
1.42

Retail
Building materials
General merchandise
Food stores
Auto dealers
Apparel
Furniture
Eating and drinking places

1.01
.93
1.08
.96
1.04
.98
.96
1.04

1.16
NR
1.70
1.29
1.11
1.89
.92
1.13

1.12
NR
1.45
1.72
1.38
NR
NR
1.04

1.28
NR
1.57
1.97
.91
4.31
NR
.95

1.03
NR
1.80
1.30
1.14
2.67
1.57
1.04

1.26
NR
1.80
1.30
1.14
2.67
1.57
1.04

1.32
1.38
1.78
1.37
1.50
2.23
1.22
1.18

Government
Federal
Military
State/local government

.97
.88
1.19
.95

1.37
.73
.56
1.59

2.49
4.95
5.86
1.64

1.96
1.45
.74
2.20

1.47
1.56
2.72
1.60

1.44
1.19
.51
1.60

1.61
.87
.61
1.86

NOTES: TCPU is transportation, communication and public utilities; NR is not reported. Quotients in boldface signify overrepresentation.
SOURCES: U.S. Census Bureau, County Business Patterns; authors’ calculations.

come made up by government payments in all these cities. In Texas, 14.3
percent of personal income comes
from government payments to individuals, while the shares for the six cities
range from 22.2 percent in El Paso to
39.2 percent in Eagle Pass. We grouped
the government payments into three
broad categories that reflect features
of border communities: poverty (P),
military presence (M) and retirement
benefits (R).5
Poverty-related payments include
public assistance, income maintenance,
unemployment insurance, and federal
education and training programs. In
terms of the share of such payments in
personal income, all the border cities
stand well above the statewide standard
of 4.2 percent.
Military-related payments include
military retirement, medical services
(CHAMPUS), and retirements and medical payments to veterans. El Paso and
Del Rio, the two cities with active military bases, are the primary beneficiaries
of these payments, as significant numbers of military personnel retire in the
area. The other cities have a smaller
share than the state as a whole.
Retirement-related payments include
civil service retirement, Social Security
and Medicare for older recipients at the
end of their working careers. Again, the

border cities all have a higher share of
personal income stemming from this
retirement income than does Texas.
However, the higher share in most of
these counties is probably related more
to lower income levels than to a large
aged population.
In addition to similarities, many differences also arise in the economic
structure of these cities. Several have
other important industrial niches.
For example, retailing in Brownsville,

already active from border shopping,
gets an additional boost from Padre
Island tourism. Brownsville is the only
one of the six cities with port activity
and a fishing industry. It shares with
McAllen a large agriculture sector
(cotton, sugar cane, grain sorghum) as
well as food processing and apparel
factories. Some oil and gas activity is
found near McAllen.
Laredo is primarily a transportation
center, with several large banks that
finance and complement the high volume of trade moving through the city.
Substantial oil and gas extraction is
associated with the South Texas oil and
gas fields. Compared with the other
cities, Laredo has little manufacturing
or other export-related activity.
El Paso, in contrast, shows strength
in a number of manufacturing sectors — apparel, leather, primary metals,
and rubber and plastic. Of the six cities,
it is the only one with a location quotient greater than 1 for overall manufacturing employment. El Paso also has a
large personal-service sector, probably
a companion to the city’s vigorous retail
activity. The large military presence at
Fort Bliss adds 20,000 active-duty military and civilian jobs.
Del Rio is home to Laughlin Air Force
Base, an air training facility providing
more than 2,000 active-duty and civil-

Table 3
Government Payments as a Share of Personal Income in Border City Economies, 1997
Percent of income
Industry

Category

Texas Brownsville

Del Rio

Eagle Pass

El Paso

Laredo

McAllen

All government payments

14.3

27.7

25.5

39.2

22.2

22.7

28.3

Retirement and disability
Military
All other

M
R

6.7
.7
6.0

8.4
.5
7.9

10.0
2.1
7.9

9.3
.1
9.2

9.4
1.2
8.2

6.1
.2
5.9

7.7
.3
7.4

Medical
Medicare
Public assistance
CHAMPUS

R
P
M

5.3
3.1
2.2
0

12.3
5.2
7.1
0

8.6
3.4
5.1
.1

18.6
8.2
10.4
0

7.7
4.0
3.6
.1

9.0
4.5
4.5
0

13.0
5.4
7.6
0

Income maintenance
Unemployment insurance
Veteran’s benefits
Federal education and training

P
P
M
P

1.5
.3
.4
.2

5.6
.5
.4
.5

5.3
.5
.7
.1

9.9
.8
.4
.2

3.5
.2
1.1
.5

5.2
.4
.3
.4

6.3
.6
.3
.4

4.2
1.1
9.1

13.7
.9
13.1

11.0
2.9
11.3

21.3
.5
17.4

7.8
2.4
12.2

10.5
.5
10.4

14.9
.6
12.8

Poverty-related (P)
Military and veterans (M)
Retirement and Medicare (R)

NOTE: Dollar amounts of personal income and transfer payments from Bureau of Economic Analysis, Regional Economic Information System, 1969–97.

June 2001 | Federal Reserve Bank of Dallas

3

Table 4
Per Capita Income in Texas
and Six Border Cities

United States
Texas
Brownsville
Del Rio
Eagle Pass
El Paso
Laredo
McAllen

Percent of U.S. per capita income
1969
1979
1989
1997
100.0
100.0
100.0
100.0
87.7
96.7
87.9
92.6
51.9
66.6
35.1
73.1
51.8
46.1

56.3
62.7
41.6
65.1
51.8
51.7

49.0
57.9
36.2
62.9
46.8
47.0

51.0
55.3
37.7
60.8
52.1
47.6

SOURCE: Bureau of Economic Analysis, Regional Economic Information
System, 1969–97.

ian jobs. Del Rio lacks a strong transportation sector — a key trait of a typical
border city — because the city center is
four miles from the border, and Mexican and U.S. road networks favor other
border crossings. Eagle Pass has a typical border city profile and little else to
set it apart.

Border City Income Levels
The six border cities are poor. Table 4
compares Texas and the six border cities
(using county data) with the United
States. Per capita personal income for
Texas averaged 92.6 percent of the U.S.
level in 1997, for example, while among
the six cities only El Paso achieved as
much as 60 percent of that level.
Texas and U.S. income levels converged rapidly in the 1970s, largely
because of a major boom in oil and
other natural resources. The 1980s bust
virtually erased this gain, however.
Since 1989, Texas has grown without
interruption, gaining about 4.7 percentage points through 1997.
The picture is less encouraging for
the six cities. Eagle Pass and McAllen
are the only two posting gains of even 1
percent, and they have remained the
poorest cities on our list since 1969. The
two cities with a military presence show
large relative losses over the period: El
Paso, 12.3 percent, and Del Rio, 11.3
percent. Their long-term losses may
result partly from the Vietnam War
under way in 1969 and the post– Cold
War military cutbacks in recent years.
Whatever the reasons, little progress is
evident relative to the state or nation.
4

Even in the 1990s — when NAFTA
pushed these cities to prominence
and maquila construction boomed in
northern Mexico — the evidence remains mixed on relative improvement.
The lack of progress relative to the
state or nation is disturbing because we
might expect relatively low-income
regions to make the most rapid gains.
The long-term convergence of per capita income among the states and regions
of the United States, for example, has
been widely documented and studied.6
To see the poorest regions of Texas fail
to share in the state’s relative gains
points to deep-seated problems.

What Made Income Grow?
To look more carefully at the sources
of regional income growth, we divided
the sources of per capita income growth
into a number of categories and then
asked what percentage-point contributions they had made to each city.

The categories listed in Table 5 follow
standard conventions of accounting
for regional income.7 The first three
categories — industry mix, differential
regional earnings and jobs per capita—
together account for total nonagricultural wage and salary income per
capita. Industry mix refers to income
gains from a shift of local industry to
higher-wage jobs, and jobs per capita
measures the local economy’s ability
to create jobs for local workers. The
third component, differential regional
earnings, is a residual that measures
such advantages as location, unique
resources, labor quality or institutional
stability. The other-labor-income category is a companion to these wage and
salary data and is primarily the value of
the benefits that private employers offer
their workers.
The rest of the categories are selfexplanatory: agricultural wages and
salaries; farm and nonfarm proprietor’s

Table 5
Three Top Factors in Income Growth for U.S., Texas and Six Border Cities, 1969–97
U.S. Texas Brownsville
1969–79
Industry mix
Differential regional earnings
Jobs per capita
Other labor income
Agricultural wages and salaries
Farm proprietor’s income
Nonfarm proprietor’s income
Property income
Transfer payments
1979–89
Industry mix
Differential regional earnings
Jobs per capita
Other labor income
Agricultural wages and salaries
Farm proprietor’s income
Nonfarm proprietor’s income
Property income
Transfer payments
1989–97
Industry mix
Differential regional earnings
Jobs per capita
Other labor income
Agricultural wages and salaries
Farm proprietor’s income
Nonfarm proprietor’s income
Property income
Transfer payments
SOURCE: Authors’ calculations.

Federal Reserve Bank of Dallas | June 2001

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Del Rio

Eagle Pass

El Paso

Laredo

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McAllen

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income earned by sole proprietorships,
partnerships and tax-exempt corporations; property income from dividends,
rent and interest; and transfer payments for no current service rendered.
Table 5 illustrates, for each region
and period, which three factors were
most important (which made the largest
percentage-point contribution) to income growth. For all three periods,
most of the action was centered on
rising wages and salaries, including
other labor income. Some combination
of a shift to high-wage industry that
improved job mix and an increased
number of jobs was dominant in raising
income levels.
The contribution of income growth
relative to employment is a good news/
bad news story. The good news is the
rapid job growth, and the bad news is
the rapid population growth that has
offset the ability of job growth to raise
per capita income. High population
growth is the source of the seeming
paradox between a booming job market
and continued stagnation of income.
Table 6 compares job growth, population growth and the ratio of jobs per
worker in the six border cities with the
United States and Texas. Employment
growth in the six cities is generally
strong by national or Texas standards
for 1969 –79, mixed for 1979 – 89 and
then strong again after 1989. The problem comes when we look at population
growth in these cities. In every period,
in every city, population growth always
exceeds that in the United States and
almost always exceeds that in Texas.
The result is that the contribution of job
growth to per capita income is quickly
watered down. This probably explains
why the ratio of jobs to population, the
factor used to translate employment
into a contributor to per capita income
growth, typically lags the United States
and Texas. Legal and illegal immigration
and a high birth rate make it difficult
to raise incomes in these six cities,
despite what — at least from a labor
market perspective — looks like solid
economic progress.
The persistence of transfer payments
as a major source of income growth in
the 1990s, a period when the job market

Table 6
Employment and Population
in Six Border Cities
Annualized
percent change 1969–97
1969–79 1979–89 1989–97
Job growth
United States
Texas

2.21
3.73

1.94
2.30

1.95
3.22

Brownsville
Del Rio
Eagle Pass
El Paso
Laredo
McAllen

5.00
2.15
5.10
2.99
3.26
5.22

1.89
.81
1.46
2.46
3.40
3.51

4.08
1.65
4.74
1.49
5.15
4.50

Population growth
United States
Texas

1.10
2.31

.95
1.93

1.14
2.01

Brownsville
Del Rio
Eagle Pass
El Paso
Laredo
McAllen

4.00
2.78
4.56
2.59
2.50
2.60

2.23
1.15
1.82
2.09
2.98
3.19

2.96
1.25
3.71
2.25
4.64
4.09

Jobs per worker
United States
Texas

1.11
1.42

.99
.37

.81
1.21

Brownsville
Del Rio
Eagle Pass
El Paso
Laredo
McAllen

1.00
–.63
.54
.40
.76
2.62

–.34
–.34
–.36
.37
.42
.32

1.12
.40
1.03
–.76
.51
.41

to raise the region’s standards — in labor
quality, infrastructure, housing, environmental conditions, public health
and other key areas — and to integrate
the cities’ economies more fully into
the high-wage U.S. labor market.
Although NAFTA and free trade have
moved these cities to center stage in
recent years, the most direct path to
significant gains for these cities still
lies in broad and full participation in
the economy to the north.
Gilmer is a senior economist and vice
president in the Houston Branch of the
Federal Reserve Bank of Dallas. Gurch
and Wang worked in Houston as interns
and research assistants at the time the
article was written.

Notes
1

Del Rio and Eagle Pass are cities located in Val
Verde and Maverick counties, respectively. Brownsville, El Paso, Laredo and McAllen are one-county
metropolitan statistical areas (MSAs). In all cases,
we have examined county data, and the city and
metro area names are used as shorthand for the
reader. For a more detailed version of this article,
contact the lead author.

2

Although per capita income has many shortcomings as a measure of social welfare, we broke it into
enough components to give specific insight into
how income growth is affected by regional wage
levels, job growth and the locational advantages
offered by these cities.

3

U.S., Texas and county-level data from various volumes of Department of Commerce, Bureau of the
Census, County Business Patterns, 1996 and 1997.

4

Department of Commerce, Bureau of Economic
Analysis, Regional Economic Information System,
1969–98.

5

The data shown are selected from much more
detailed information available in Bureau of Economic Analysis, Regional Economic Information
System, 1969–98.

6

Daniel H. Garnick, “Accounting for Regional Differences in Per Capita Personal Income Growth,
1929–79,” Survey of Current Business 62 (September 1982): 24–34.

7

Methodology used follows that of Garnick as cited
in footnote 6 and Daniel H. Garnick and Howard L.
Friedenberg, “Accounting for Regional Differences
in Per Capita Income Growth: An Update and Extension,” Survey of Current Business 70 (January
1990): 29–40.

8

John Sharp, Bordering the Future (Austin: Texas
Comptroller of Public Accounts, 1998).

SOURCE: Bureau of Economic Analysis, Regional Economic Information
System, 1969–97.

was booming, is one more sign of the
paradox of growth without progress.

Outlook
If history is a guide, the magnitude of
problems facing the border region can
be discouraging. A 1998 report from the
Texas Comptroller of Public Accounts
details a long list of regional ills: a poorly
trained and uneducated workforce, inadequate educational and workforce
development programs, substandard
health and environmental conditions,
and the continuing battle against illegal
immigration.8
The comptroller’s report also details
dozens of specific recommendations to
deal with the region’s economic performance. Education tops the list, but
there is no magic bullet, no one program that could turn the region around.
Most of the proposals, however, strive

June 2001 | Federal Reserve Bank of Dallas

5

THE
BORDER
Is It Really a Low-Wage Area?
Lori L. Taylor

Arbitrage is a basic tenet of economics: If prices are relatively low in one
location, buyers move in and bid prices
up until parity with other areas is
achieved. In labor markets, arbitrage
implies that firms should be drawn to
low-wage areas, causing job growth to
be highest where pay is lowest, as long
as all other things — taxes, public services, rents, access to customers and so
forth — are equal.
One interesting puzzle of the Texas
border economy is the apparent disconnection between wages and job
growth. Average wages are sharply
lower on the border than elsewhere in
Texas, yet until recently the region’s job
growth lagged the rest of the state.
Only in 1999, when most labor markets
became painfully tight, did we see the
border’s job growth outpacing the rest
of Texas (Chart 1).
A possible solution to the puzzle is
that the border might not be a lowwage area after all. This article explores
strategies for measuring the border’s
labor cost and demonstrates that from
various perspectives the border cannot
be considered a low-wage area.
6

Local Wage Variations
From a labor supply perspective,
average wages might vary across Texas
for two reasons. First, all types of workers may demand higher wages in some
regions to make up for a higher cost of
living or fewer amenities. Second, some
workers, such as doctors and lawyers,
expect to be paid more than other types
of workers throughout the state, so
areas with lots of doctors and lawyers

will have higher average wages than
regions with relatively few, all else being
equal.
The first local wage variation is common to all types of workers and would
be reflected in the wages companies
would have to pay; the second is limited
to specific types of workers and is unlikely to be reflected in the general labor
cost.1
Properly estimating the local wage
level requires excluding the second
source of wage variation. If all types of
workers were represented uniformly
across the state, such adjustments
could be straightforward. First, calculate the average wage for each type,
then use it to figure the local deviation
from the comparable state wage. Finally, determine the local price level as the
average of the local deviations from the
state wage. For example, if Austin construction workers, engineers, nurses
and so on were each paid 10 percent
more than the average state wage for
their professions, the wage level in
Austin would be 10 percent above the
state average.
However, some types of workers are
found in only a few Texas communities.
For instance, there are no rig workers
where there is no oil. Therefore, the
state average wage for those occupations would be a biased standard from
which to compare local deviations.
After all, if a particular kind of worker is
found only in Austin, the city’s deviation
from the state average for that industry

Chart 1
Border Versus Texas Job Growth
(Total Nonfarm Employment)
Annual growth rate (percent)
6

Border metropolitan areas

Rest of Texas

5
4
3
2
1
0

1996

Federal Reserve Bank of Dallas | June 2001

1997

1998

1999

2000

would be zero — making the city’s wage
level appear artificially low.2
One strategy for dealing with this
problem is to pare down the sample to
only the occupations found throughout
Texas. Another strategy is to use regression analysis to estimate the local wage
level, with indicator variables for each
occupation, year and market.3 I pursue
both approaches.

The Data
Data for this analysis come from
two sources. First, the Bureau of Labor
Statistics’ Occupational Employment
Statistics Survey provides average
annual salaries by metropolitan area
for 670 nonagricultural occupations,
ranging from purchasing managers to
musicians. Although many occupations are reported for only a handful
of cities, each Texas city has information on at least 143 occupations. The
data were constructed by blending
survey responses from 1996 through
1998. Data for 1996 and 1997 were
adjusted for inflation using the national
inflation rate.
Second, I focus on a benchmark
occupation richly represented in all
metropolitan areas: teaching. I use
1998 – 99 compensation rates of slightly
more than 200,000 public school teachers to estimate the profession’s local
wages. The data allow me to strip away
wage variations that arise from local
differences in teacher characteristics,
such as experience, educational attainChart 2
Educational Attainment in Texas Border
and Nonborder Metropolitan Areas
Shares of population over 25 years old (percent)
100
80
60
40
20
0

Texas nonborder
< High school
High school grad

SOURCE: 1990 U.S. Census.

Texas border
Some college
College grad

ment, gender and ethnicity. I also remove variations in working conditions,
such as the proportion of students who
have limited English proficiency.4 The
resulting wage index represents the predicted cost of hiring a teacher to do the
same job in each of the metropolitan
areas and, therefore, should reasonably
measure the local compensation level.
Each approach has strengths and
weaknesses. Because teacher data allow
me to control for individual characteristics, estimates of the local wage level
are independent of the workers’ experience and education. Given the relatively low educational attainment on
the border (Chart 2) and the strong relationship between wages and worker
education, controlling for the distribution of educational attainment is particularly desirable. In addition, the teacher
data represent the population of public
school teachers, making those data less
subject to sampling error and other
problems that may affect the Bureau of
Labor Statistics data. On the other
hand, teachers are a select group whose
tastes and preferences may not generalize to other types of workers. Therefore,
indexes based on broader data may
more appropriately measure general
labor cost.

The Results
The first cut at the data is to look
at average wages, unadjusted for the
mix of occupations. For easier comparisons, I divide the wage level in
each metropolitan area by the wage
level in the metro area with the lowest
pay to yield an index value for that
metro area.5 An index value of 1.1 indicates that the wage level in that metropolitan area is 10 percent higher than in
the low-wage area.
Chart 3 presents the index of average
wages, ranging from 1 in Brownsville,
Laredo and McAllen to more than 1.35
in Dallas. Average wages in El Paso are
more than 5 percent higher than in the
other border cities but remain among
the lowest in the state.
Chart 3 also shows the index as
adjusted for occupational mix. The
adjusted series has a much narrower
range than the unadjusted, suggesting

Chart 3
Occupational Wage Index for Texas Cities
Brownsville
Laredo
McAllen
San Angelo
Victoria
Lubbock
Abilene
Texarkana
El Paso
Killeen
Wichita Falls
Waco
Bryan–College Station
Amarillo
Sherman
Corpus Christi
Longview
San Antonio
Galveston
Tyler
Midland–Odessa
Beaumont
Fort Worth
Brazoria
Austin
Houston
Dallas
.9

1

1.1

1.2

1.3

1.4

Index
Adjusted for occupational mix

Unadjusted

SOURCES: Occupational Employment Statistics Survey, Bureau of
Labor Statistics; author’s calculations.

that part of the high average wage in
Dallas, Houston and Austin arises from
concentrations of high-wage occupations.
In contrast, the adjustments don’t
change the border’s index values that
much, suggesting that low average
wages in that area arise from low wages
across many occupations, not from
a general concentration of low-wage
occupations.
Notably, the adjustments for occupational mix widen the gap between the
border and the rest of metropolitan
Texas. Average wages in many cities are
very close to those for Brownsville,
Laredo and McAllen prior to adjustments. But after accounting for occupational mix, wages in these border cities
are at least 4.5 percent lower than in any
other Texas metropolitan area. Furthermore, only Brownsville, McAllen and
Laredo have significantly lower wages
than El Paso.
This analytic approach assumes that
people from all walks of life have similar

June 2001 | Federal Reserve Bank of Dallas

7

Chart 4
Professional and Technical
Wage Index for Texas Cities

workers. As Chart 5 illustrates, the border is a relatively high-wage area for
teachers. Only Houston and Brazoria
have local teacher wage levels that significantly exceed those in McAllen and
Laredo.
To the extent that other professional
and technical workers share similar
tastes with teachers, this evidence suggests that border employers must pay a
premium to hire these workers. From
this perspective, border wages are anything but low.

Abilene
Laredo
San Angelo
Texarkana
Victoria
Waco
Lubbock
Wichita Falls
Killeen
Amarillo
McAllen
Brownsville
Bryan–College Station
Tyler
Longview
Corpus Christi
San Antonio
El Paso
Austin
Sherman
Midland–Odessa
Beaumont
Galveston
Fort Worth
Dallas
Houston
Brazoria
.9

Taylor is a senior economist and
policy advisor at the Federal Reserve
Bank of Dallas.

Notes

This research was conducted while Taylor was principal researcher for the Cost-of-Education Study at
the Charles A. Dana Center, University of Texas at
Austin. She thanks all involved for assistance. The
article’s conclusions do not necessarily reflect the
positions of the center, UT or any study participant.

Conclusion

1

1.1

1.2

1.3

Index
SOURCES: Occupational Employment Statistics Survey, Bureau of
Labor Statistics; author’s calculations.

tastes for local characteristics. If nurses,
bank tellers and construction workers
would demand a 10 percent premium
to work in a particular community, so
would other types of workers. However,
anecdotal evidence suggests professionals and other highly skilled workers
might be drawn to the bright lights of
the big city more so than other types of
workers.
Therefore, I estimated average local
wages for professionals and technical
workers, adjusting for variations in the
mix of professional and technical occupations. Chart 4, which presents the
index for professional, paraprofessional
and technical workers, illustrates that
these wages are not unusually low
along the border. For example, professional wages in Brownsville and McAllen
are 5 percent higher than in Waco,
Texarkana and Abilene. So when we
consider some of the fastest growing
occupations in Texas, the border region
is not a low-wage area.
In Texas, teachers make up the lion’s
share of professional and technical
8

Given that much of Texas’ recent growth
has been in industries that rely heavily
on professional and technical workers,
it is not surprising that job growth on
the border is only keeping pace with job
growth in the rest of Texas.

Conventional wisdom says that
wages are low on the Texas border with
Mexico. However, the evidence suggests
that highly skilled workers are relatively
scarce in the region and that, unlike
other worker types, professional and
technical workers are unwilling to
accept less from border employers than
from employers in other parts of the
state.
Indeed, the border can be an expensive place to hire professional workers.

1

Arguably, some individuals care about the local
income distribution and are sensitive to a concentration of highly paid individuals, regardless of their
occupations. If this is a widespread perspective, the
income distribution will be a local (dis)amenity and
will be capitalized into the wages paid to all types
of workers.

2

In this example, the “true” Austin wage level is presumed to be higher than the state average.

3

Implicitly, this discussion assumes that worker
types can be indexed by occupation.

4

Metropolitan-area fixed effects are estimated following the framework in “A Study of Uncontrollable
Variations in the Costs of Texas Public Education,” a
report to the Texas Legislature by the Charles A.
Dana Center at the University of Texas (October
2000), www.utdanacenter.org. This analysis deviates from the center’s study by substituting metropolitan-area fixed effects for the community characteristics in the center’s study.

5

To reflect measurement error in the estimated
wage levels, I use the following strategy for constructing occupational indexes. The low-wage market is determined by adding two standard errors of
the estimate to the estimated wage level for each
metropolitan area and then using the minimum of
this sum as the reference wage in constructing the
index. No market’s estimated local wage is significantly lower than this reference wage. Markets with
an estimated wage below the reference wage are
assigned an index value of 1.

Chart 5
Teacher Wage Index for Texas Cities
Waco
Longview
Texarkana
Abilene
Lubbock
Tyler
San Angelo
Victoria
Bryan–College Station
Killeen
Wichita Falls
Sherman
Midland–Odessa
Amarillo
Austin
Corpus Christi
Beaumont
El Paso
Brownsville
Galveston
San Antonio
McAllen
Laredo
Fort Worth
Dallas
Houston
Brazoria
.9

1

1.1

1.2

1.3

Index
SOURCES: “A Study of Uncontrollable Variations in the Costs of Texas
Public Education,” a report by the Charles A. Dana Center,
University of Texas; author’s calculations.

Federal Reserve Bank of Dallas | June 2001

SECONDARY
EDUCATION
Its Impact on Border Income
Thomas M. Fullerton, Jr.
Many immigrants from Mexico and
Central America are coming to Texas
without high school degrees. What they,
and native-born Texans who fail to
complete high school, are finding as
they settle along the border are emerging service sectors that offer high-salary
jobs but generally require an advanced
education. This situation sets up a
potentially debilitating mismatch with
important income impacts. Texas border counties adjacent to Mexico conceivably lost as much as $3.6 billion in
earnings in 1990 because so many area
residents did not graduate from high
school, according to our study of
socioeconomic data for that year.1
Given the limited tax bases of nearly
all border counties, the benefits of
improving educational attainment are
quite clear. Our study shows that reducing the high school dropout rate to
a level equal to the rest of Texas would
have potentially increased income per
border resident by more than $2,600 in
1990.
The discrepancy between educational and income levels becomes even
more apparent as Texas enters the new
millennium more ethnically diverse,
with more immigrants from Mexico and
Central America who have not graduated from high school. Simultaneously,
the state’s economy enters the new age
with expanding service segments. In
fact, earnings loss estimates would likely
be much higher had we been able to
perform the study using 2000 census
data.

Data and Methodology
Econometric estimates conducted at
the University of Texas at El Paso measure the relationships between education and regional earnings across Texas
and help examine how changes in educational attainment affect an area. Our
central hypothesis is that Texas border
county income is affected by educa-

tional attainment in a way similar to
other regions of the United States. To
test it, we collected figures for formal
years of schooling, types of degrees
completed and 1990 per capita income
levels for all 254 counties. The figures
come from the Department of Commerce’s 1990 census and the Bureau of
Economic Analysis’ Regional Economic
Information System. Using this information, we simulated what would have
happened to per capita income in the
border counties in 1990 if their high
school completion rates had met the
state average.
As in similar studies, our variables
included the percentage of high school
dropouts aged 25 or older in each
county, high school graduates 25 or
older with some college and college
graduates 25 or older. Other variables
included the participation rate of
females in the labor force, percentage of
the population 65 or older and percentage of residents 18 or younger. We also
included language skills. Generally, per

capita income is higher if more residents of a county speak fluent English
and have bilingual skills, while Spanishonly skills are likely to be associated
with lower earnings.
Increases in the percentage of high
school dropouts are expected to reduce
a county’s income level, and increases
in the percentages of both categories of
graduates are likely to improve it. Similarly, increases in female labor force
participation should raise a county’s income level. As the percentage of youth
increases in a county, per capita income
likely declines because individuals 18 or
younger generally do not work or hold
part-time positions. The effect of the
number of retirees on a county’s income is unclear because many drop out
of the labor force but simultaneously
begin receiving sizable transfer payments.
Variables of geography and industry mix also can play important roles
in determining income performance.
Large counties with 1990 populations of

June 2001 | Federal Reserve Bank of Dallas

9

more than 600,000 are expected to have
higher earnings levels, while more rural
border counties likely will have lower
earnings. Geographic estimates also
can be calculated for other regions of
the state, but the border region is especially interesting because of its economic and demographic differences
from Texas as a whole.

Empirical Results
Our study shows that improving secondary school completion rates yields
striking results. The single largest gain
— $5,760 a year per resident — would
come in Starr County in the Rio Grande
Valley. Raising its high school graduation rate to the state average would permit Starr County to more than double
its 1990 per capita income, a yearly total
of more than $210 million. In nearby
Hidalgo County, income per person
would rise by more than $3,600 annually,
or a total of more than $1.26 billion.
Personal incomes in Cameron, El Paso
and Webb counties also would rise by
more than $400 million if their cumulative graduation rates were brought
to the state average. For all border
counties, nearly $3.6 billion in forgone
income results from a dropout rate that
exceeds the state average.
Table 1 shows implied income losses
due to high school noncompletion in
13 border counties and the region
overall. Column 2 calculates the effect
on per capita income of raising each
county’s high school graduation rate
to the 1990 Texas state average of 72.1
percent. Column 3 calculates the aggregate economic impact of these lost
earnings.
Furthermore, our study found that
increases in the percentage of the population over 65 are associated with income gains throughout Texas. According to our findings, residency in urban
areas is associated with higher per
capita incomes, while the border region
is linked to lower incomes. Presumably,
the latter result partially reflects language and other skill shortfalls often
observed in areas where recent immigrants have settled. Infrastructure gaps
relative to the rest of Texas also contribute to that finding.
10

Table 1
Implied Income Losses Due to
High School Noncompletion
County
Brewster
Cameron
El Paso
Hidalgo
Hudspeth
Jeff Davis
Kinney
Maverick
Presidio
Starr
Terrell
Val Verde
Webb
Zapata
Border zone

Per capita
impact

Aggregate impact
(in millions)

Not calculated
$3,143
1,195
3,627
3,413
370
2,261
5,177
4,011
5,760
825
2,276
3,456
3,129
$2,620

Not calculated
$ ,744.7
643.8
1,262.5
9.2
.7
6.6
170.4
24.5
210.2
1.1
80.1
413.8
26.3
$3,593.9

NOTES: All impacts calculated in dollars for 1990 relative to the Texas
state average. Border zone estimate is a weighted average net
of Brewster County. Brewster County impacts are not calculated
because its high school graduation rate exceeds the Texas
state average.

As state and national labor markets
change, the implied costs of high school
noncompletion may fall below their
true level. Namely, service sector or
education positions account for the
majority of new jobs in Texas, and many
of these jobs require training beyond a
high school degree. Failure to graduate
from high school is thus likely to
impose a more severe financial penalty
today than in 1990.

Conclusion
Regional economic research has
attempted to quantify the relationships
between per capita incomes and socioeconomic factors. Our study, which
focused on the state’s 254 counties, simulated how education affects per capita
income and underscored the importance of high school graduation for
people in border counties. Reducing the
high school dropout rate to a level commensurate with the rest of the state
would have potentially increased income
per border resident by more than $2,600
annually in 1990. Collectively, that figure
implies nearly a $3.6 billion earnings
loss for border county economies. Data
from the 2000 census are likely to indicate an even larger income loss linked
to the lack of educational attainment.

Federal Reserve Bank of Dallas | June 2001

From a public policy perspective,
border counties and other regions within the state will realize direct financial
benefit by reducing high school dropout rates. Furthermore, border counties
also may increase income performance
by improving public infrastructure.
More advanced transportation and
communication networks with the rest
of Texas will help offset the income
decline partially attributable to geographic isolation and distance from
other regional markets.
Fullerton is an assistant professor
and Fulbright Border Scholar in the
Department of Economics and Finance
at the University of Texas at El Paso.

Notes

The Federal Reserve Bank of Dallas provided financial support for this research. El Paso Electric Co.
and the Center for Inter-American and Border Studies at the University of Texas at El Paso provided
additional funding. Helpful comments were provided by Mine Yücel, Pia Orrenius and Jim Peach.
David Torres and Roberto Tinajero provided econometric research assistance.

1

For an in-depth discussion of the study, see Thomas
M. Fullerton, Jr., “Educational Attainment and Border
Income Performance,” Federal Reserve Bank of Dallas Economic and Financial Review, forthcoming.

TRANSPORTATION
Infrastructure and the Border Economy
On a typical day, about 205,000 vehicles and 97,000 pedestrians cross the
Texas – Mexico border.1 The 15,000 commercial trucks and 1,220 railcars that
traverse the border daily highlight the
importance of international trade to
this region. In addition, the many shopping malls, grocery stores and discount
supercenters attest to the numbers of
Mexican nationals crossing the border
to buy goods ranging from pasteurized
milk to expensive clothes and jewelry.
The costs of building and maintaining infrastructure to service international trade, however, remain a challenge. The increased auto and truck
traffic stimulated by Mexico’s entry into
the General Agreement on Tariffs and
Trade (GATT) in 1986 and the start of
NAFTA in 1994 have placed pressure on
border infrastructure. This article
describes some of the costs and benefits international trade poses for Texas
border counties.2

Retail Sales a Boon to Border
While relative per capita income
along the border has stagnated at low
levels, job growth has surged, particularly since Mexico entered GATT in 1986
(Chart 1). Although some measures,

Chart 1
Border Job Growth
Total employment index, 1980 = 100
170
Border

160
150
140

Texas

130
120
110
100
90

’80

’82

’84

’86

’88

’90

’92

’94

’96

NOTE: Border is defined as the counties that include Brownsville,
Del Rio, Eagle Pass, El Paso, Laredo and McAllen.
SOURCE: Bureau of Labor Statistics.

’98

such as earnings per job, have shown
relative gains in the 1990s, significant
relative income gains are unlikely until
educational attainment increases.3
The retail trade industry highlights
the strong job growth and low income
typical of the border. Retail sector
growth in the 1990s has created many
new jobs well suited for the average
education level of border workers. However, because the retail industry generally pays at or near minimum wage,
growth in this sector suppresses average wage growth.4
In general, the retail sector is not perceived as a major economic driver
because retail goods are purchased
mainly by local citizens. This is not true
along the border, however, since Mexican nationals purchase a significant
amount of retail goods and services.
One way to estimate Mexicans’ retail
spending in border cities is to estimate,
based on border income levels, the part
of retail spending that likely comes
from local citizens. This local spending
can be subtracted from total retail
spending to determine retail sales to
individuals from outside the local area.
To estimate local retail spending, we
use average retail sales as a percentage
of personal income for the state as a
whole — in other words, the fraction of
their incomes average Texans spend on
retail products. From 1986 to 1998, they
spent 46 percent. Using this figure as
the likely amount of personal income
border residents spend on retail goods,
we find that exported retail sales are a
substantial portion of overall retail sales
on the border. Exported retail sales in
1998 ranged from $20 million (6 percent
of all retail sales) in Del Rio to $901 million (22 percent) in McAllen (Chart 2).
Laredo’s $643 million in exported retail
sales represented the highest share of
retail spending, 35 percent, of all the
areas. For the six border counties in
our study, exported retail sales totaled

Michael Short

Keith Phillips and Carlos Manzanares

about $2.2 billion in 1998 and $3.4 billion in 1994, the year before the peso
devaluation.

Benefits of International Trade
The benefits of border retail exports
are obvious; the advantages of numerous trucks and trains rumbling through
border towns are less clear. One direct
benefit from international trade is the
federal jobs created in the U.S. Customs
Service, the Immigration and Naturalization Service and various federal law
enforcement agencies.
The presence of federal jobs along
the border is easily measured using a
location quotient, defined as the local
share of jobs in an industry divided by
the national share of jobs in the same
industry. A location quotient greater
than 1 implies that this industry is producing for consumers outside the local
Chart 2
Exported Retail Sales and
Total Retail Sales, 1998
Millions of dollars
6,000
5,000

Exported retail sales
Total retail sales

4,000
3,000
2,000
1,000
0

Brownsville Del Rio Eagle Pass El Paso

Laredo

McAllen

SOURCES: Texas Comptroller of Public Accounts; Bureau of Economic
Analysis; authors’ calculations.

June 2001 | Federal Reserve Bank of Dallas

11

Chart 3
Border Share of Federal Civilian Jobs
(County Job Share/U.S. Job Share, 1997)
Location quotient
6
4.95

5
4
3
2
1
0

1.45

1.56

.73
Brownsville

Del Rio

Eagle Pass

El Paso

1.19

Laredo

.87
McAllen

NOTE: Data are for each county that includes the listed city.
SOURCE: Census Bureau, County Business Patterns.

area. As shown in Chart 3, federal civilian government accounts for a greater
share of jobs in border counties than
the U.S. average. (The values for Del Rio
and El Paso are also influenced by the
military presence at Laughlin Air Force
Base and Fort Bliss, respectively.)
While the overall share of federal
civilian jobs along the border remains
low —about 2.3 percent in 1998 — these
jobs pay relatively high wages, especially
when the value of employee benefits is
taken into consideration. Chart 4 illustrates the large and growing disparity
between border earnings per job for
federal civilian workers and average
border earnings per job. In 1998, average annual earnings for federal civilian
workers on the border was $62,351,
while the average border worker earned
$24,427.
Another benefit of international
trade is its creation of transportation
and warehousing jobs. Once again,
this is measured by a location quotient
(Chart 5). Transportation services (which
include freight-forwarding) and trucking and warehousing are important
border industries. Although the large
border counties all had location quotients greater than 1, Laredo far exceeded the other areas in this industry. In
1997, Laredo’s employment share in
transportation services was 26 times the
U.S. average.
One reason for the extraordinary size
of the transportation services industry
in Laredo is the extensive truck traffic
12

through this city. In 1999, $30 billion in
U.S. exports and $35 billion in U.S.
imports flowed through Laredo. The
city accounted for about 39 percent of
the volume and 50 percent of the value
of all land-transported trade between
the United States and Mexico in 1999.
The volume was twice that of the second-largest port, El Paso, which accommodated 19 percent of land-shipped
trade.
The destination of southbound shipments through Laredo also has
increased the size of its transportation
services industry. Nonmaquiladora
shipments — which represent a greater
share of the Laredo traffic than at other
border ports — are subject to greater
tariff restrictions and thus require more
paperwork and inspection. This delay at
the border creates a market for shorthaulers, as it is not efficient for longhaul truckers to wait for the extra
inspections and paperwork to be completed. Many maquiladora plants close
to the border use their own trucks to
haul products to and from warehouses
on the U.S. side.
Additional freight-forwarding and
transportation services jobs in Laredo
result from the practices of Mexican
customs brokers, who must preclear
all truck cargo before it crosses into
Mexico. Trucks are cleared on the U.S.
side partly because warehouse and
truck terminal space is lacking in Nuevo
Laredo, on the Mexican side. U.S. longhaul carriers typically drop their cargo
Chart 4
Federal Civilian Earnings Versus
Average Border Earnings Per Job
Border county annual earnings (thousands of dollars)
70
Federal civilian jobs

60
50
40
30

Average border jobs

20
10

’80

’82

’84

’86

’88

’90

’92

’94

’96

NOTE: Border is defined as the six counties that include Brownsville,
Del Rio, Eagle Pass, El Paso, Laredo and McAllen.
SOURCE: Bureau of Economic Analysis.

Federal Reserve Bank of Dallas | June 2001

’98

Chart 5
Border Share of Transportation Services Jobs
(County Job Share/U.S. Job Share, 1997)
Location quotient
30

26.03

25
20
15
10
5
0

5.31
2.50
Brownsville Eagle Pass

1.63
El Paso

1.42
Laredo

McAllen

NOTES: Data are for each county that includes the listed city. Data for
Del Rio not reported.
SOURCE: Census Bureau, County Business Patterns.

at a company warehouse in Laredo. A
freight-forwarding company picks up
the cargo and takes it to a Mexican
customs broker’s warehouse in Laredo.
The customs broker inspects it, collects
duties and arranges for another freightforwarding truck to transport the load
across the bridge. The freight-forwarder
then returns to Laredo, usually empty.
Thus, the abundance of trucks passing
through Laredo, their inability to legally
reach the interior of Mexico, and their
inspection and clearance on the U.S.
side of the border by Mexican customs
brokers all work together to create a
large demand for warehousing and
freight-forwarding in this city.
Border earnings in transportation
services grew strongly in the 1990s
(Chart 6 ). This was especially true in
Laredo, where transportation services
accounted for 59 percent of total border
earnings from this sector in 1998.
Growth in border transportation services has lifted average border earnings
because this sector pays better-thanaverage earnings. In 1998, transportation services workers earned an average
of $29,662, versus an average of $24,427
for all border jobs. As shown in Chart 7,
Laredo topped all other border cities
in earnings growth in the 1990s, most
likely on the strength of its transportation services industry.
Besides producing jobs and earnings, international trade creates direct
revenue for border cities through bridge
tolls. Local governments own most of

the 26 motor vehicle crossings on the
Texas – Mexico border, although several
are owned by the state and federal
government and several are privately
owned.5 Southbound fees collected at
the bridges accrue to U.S. public and
private bridge owners and can be substantial. In 1999, the three bridges in
Laredo collected $27.2 million in tolls.
City officials say about half that amount
goes to direct costs associated with the
bridges and the rest to the city’s general
fund.

Chart 6
Border Transportation Services
Earnings Growth
Millions of dollars
300
250
200
150
100
50
’80

’82

’84

’86

’88

’90

’92

’94

’96

McAllen
Brownsville
El Paso
Del Rio
Texas
United States
0

1

2

3

4

5

6

Annual average percent change, 1989–98
Number of jobs

SOURCE: Bureau of Economic Analysis.

The number of vehicles crossing the
Texas–Mexico border has increased dramatically since the early 1990s (Chart 8).
This is especially true in Laredo, which
has seen truck crossings rise 116 percent, from 1.3 million in 1993 to 2.8
million in 1999, and overall vehicle
crossings increase 21 percent, from
14.1 million in 1993 to 17.1 million in
1999. With the influx of traffic passing
through the border come infrastructure
and social costs. From 1993 through
2000, the Texas Department of Transportation (TXDOT) spent $388 million
on roads and highways in Laredo and is
projecting to spend another $298 million from 2001 through 2005. An important congestion cost, air pollution, is
increasing in border cities, especially in
El Paso, which exceeds air quality standards in many categories.
Because international bridges create
a revenue stream that generally pays
for their costs, border communities

SOURCE: Bureau of Economic Analysis.

Laredo
Eagle Pass

Earnings per job

Border Traffic Imposes Costs

0

Chart 7
Border Job Growth Versus
Earnings Per Job Growth

’98

invested heavily in bridges during the
1990s. In the busy port of Laredo, the
modern Colombia – Solidarity Bridge
was built in 1991 and the World Trade
Bridge was finished in the summer of
2000. To complete the bridge quickly,
the city built the U.S. Customs inspection station and leases it to the General
Services Administration on a 12-year
lease-to-own arrangement. The city is
currently in the planning stages for a
fifth bridge. Other bridges built in the
1990s include the Free Trade Bridge
(Los Indios, 1992), the Pharr – Reynosa
International Bridge on the Rise (Pharr,
1995), the Camino Real International
Bridge (Eagle Pass, 1999) and Veterans
International Bridge at Los Tomates
(Brownsville, 1999). Most existing
bridges along the border have been
improved or expanded, including the
four separate structures of the Bridge of
the Americas in El Paso, which were
rebuilt in 1998. In addition, as of May
2001, Presidential Permit applications
were pending for four new bridges.
Although border cities are investing
in bridges, there seems to be less incentive to build highways and interchanges. For example, although the
Colombia – Solidarity Bridge was built
in 1991, the roads on either side of it
remained inadequate for years. The
road on the U.S. side was improved in
2000 with completion of a privately
built toll road connecting the bridge to
Interstate 35. TXDOT is still constructing the overpass connecting I-35 to the
World Trade Bridge and won’t complete

this project until August 2002. The
TXDOT border districts of El Paso, Laredo and Pharr have all received higherthan-average funding per daily vehicle
mile traveled. However, because of the
rapid growth in truck traffic and its concentration on major arteries, the border
may need even greater spending to
reduce congestion and the associated
social costs.
A projected funding shortfall for
infrastructure is slowing progress on
border roadways. While TXDOT is gaining ground in acquiring federal highway dollars to improve border infrastructure, the agency estimates it has
funding for only about 36 percent of
the state’s transportation needs. Texas
finances highway construction with
the pay-as-you-go method. Hence, a
sudden increase in demand for infrastructure—such as that brought on by
accelerating trade with Mexico in the
1990s — puts a strain on funding.
In a review of TXDOT in January
2001, the Texas Comptroller of Public
Accounts suggested several changes to
speed up funding of border infrastructure projects.6 Several federal programs
enacted since 1995 would allow quicker
access to funds for border projects.
Grant Anticipation Revenue Vehicles
backed by future federal funds, called
GARVEE bonds, and federal credit assistance from the Transportation Infrastructure Finance and Innovation Act
of 1998 could be used to fund border

Chart 8
Border Vehicle Crossings in the 1990s
Millions of crossings
85
80
75
70
65
60
55
50

’93

’94

’95

’96

’97

’98

’99

’00

NOTE: Crossings through Brownsville, Del Rio, Eagle Pass, El Paso,
Harlingen, Laredo, McAllen–Hidalgo, Presidio, Progreso,
Rio Grande City and Roma.
SOURCE: Texas A&M International University.

June 2001 | Federal Reserve Bank of Dallas

13

projects. In addition, the comptroller
recommends that TXDOT take steps to
improve its success rate in obtaining
discretionary federal funds, increase
the use of toll roads and expand the use
of TXDOT’s Texas State Infrastructure
Bank. The bank was developed in 1997
to allow TXDOT to lend money at
below-market interest rates for public
and private investment in infrastructure.

Improving Transport Efficiency
The extensive use of the short-haul
trucking industry has stimulated relative earnings growth in Laredo and
added to the city’s toll revenues. However, this system raises costs to firms
shipping goods to Mexico because it
delays cargo from one to several days
and imposes storage and freight-forwarding costs. Also, about 43 percent of
cargo trucks crossing Laredo’s international bridges in 1999 had either no
trailer or an empty one, intensifying
congestion costs and infrastructure
demand. Under NAFTA’s trucking provision, which by now would have
allowed trucks to travel freely between
countries, some of these costs could be
eliminated, enhancing the efficiency of
border transport but also reducing the
demand for trucking and warehousing
along the border.7 In early 2001, President Bush announced the United States
would comply with the trucking provision by January 1, 2002.
While the trucking provision’s implementation may reduce the demand for
new border transportation infrastructure, other measures also can improve
transport efficiency. One example is a
fee structure or agreement with shipping companies that encourages trucks
to avoid the peak travel times of 11 a.m.
to 2 p.m. and 4 p.m. to 8 p.m. Often the
bridges have excess capacity during
off-peak times. Border officials and
groups such as the Mexico – Texas
Bridge Owners Association have voiced
concerns that the federal agencies that
inspect border traffic have not increased staffing to keep up with the
large increase in trade and the growing
concern about illegal drugs and immigration.8 Recent actions that have eased
14

the flow of commuters who cross the
border daily to work and shop include
dedicated commuter toll-tag lanes at
the Stanton Bridge in El Paso and the
rerouting of truck traffic in Laredo to
the new World Trade Bridge.
The October 2000 completion of
Laredo’s Camino Colombia toll road,
the first private toll road in Texas, signals that the private sector is acting to
improve border transport efficiency.
The road provides a direct route from
I-35 to the Colombia – Solidarity Bridge,
which can save time and money associated with bottlenecks and congestion.
By paying a toll to use the road, the
manufacturers and transporters who
receive the benefits of this infrastructure also pay for its construction and
maintenance. Despite light traffic on
the toll road in the first several months,
bridge owners say that under Mexican
President Vicente Fox’s administration,
a new highway may be built on the
Mexican side of the Colombia – Solidarity Bridge. This would likely spur use of
the state-of-the-art bridge and the
Camino Colombia toll road.

Notes

The authors would like to thank Daniel Hastings,
Pia Orrenius, Lucinda Vargas and Mine Yücel for
helpful comments and guidance.

1

Border-crossing data are from the Texas Center for
Border Economic and Enterprise Development at
Texas A&M International University. Truck crossing
data for El Paso, which are not recorded, were estimated using trucks as a percentage of total vehicle
crossings at the other border ports. For raw data,
see http://tamiu.edu/coba/bti/.

2

In this article we use county data for the six major
cities along the border—Brownsville, Del Rio, Eagle
Pass, El Paso, Laredo and McAllen.

3

See “Border Region Makes Progress in the 1990s,”
Federal Reserve Bank of Dallas San Antonio Branch
Vista, December 1999.

4

It is interesting to note, however, that because minimum wages in the United States are about 10 times
higher than in Mexico, border retail wages are high
in comparison with many jobs in neighboring Mexico. Since many border residents immigrated from
Mexico, have relatives in Mexico and may compare
their wages with the lower pay in Mexico, they may
believe their wages are above average.

5

Twenty-three of the crossings are bridges, two are
dams and one is a hand-drawn ferry. The two dams
and three of the bridges are owned by the U.S. government, the ferry and three bridges are privately
owned, one bridge is owned by the state of Texas
and the remainder are owned by a local governmental entity such as a city or county. The Mexican
federal government typically owns the Mexican
portion of an international bridge.

6

See Paving the Way: A Review of the Texas Department of Transportation, January 2001, Texas Comptroller of Public Accounts, www.window.state.tx.us/
txdot/.

7

President Clinton, responding to perceived safety
issues, delayed indefinitely the trucking provision,
which would have allowed trucks access to border
states by December 1995 and throughout both
countries by 2000. The current restrictions barring
U.S. trucks from Mexico and vice versa are not the
only source of transportation delays at the border,
however. The Mexican customs brokers’ practice of
requiring inspection on the Texas side of the border
is also a factor, as it stimulates short-haul freightforwarding and warehousing of goods. Thus, it is
unclear what impact the trucking provision, when
implemented, will have on the movement of goods
across the border. For a more detailed discussion of
border transportation inefficiencies, see “Texas to
Mexico: A Border to Avoid,” by James Giermanski,
Journal of Borderlands Studies, vol. 10, no. 2, 1995,
pp. 33–53.

8

For example, see “More Agents for Customs Are
Sought,” Wall Street Journal, July 12, 2000, p. T1.

Summary
The border receives many benefits
from increased trade with Mexico. The
expense of maintaining infrastructure
to accommodate international trade,
however, poses a challenge. Before significantly more dollars are spent on
border infrastructure, the efficiency
of the current system needs to be
addressed. The implementation of the
NAFTA trucking provision is a step in
the right direction. Other issues to consider are peak travel times, customs
manpower and Mexican customs brokers’ policies. Border cities, particularly
Laredo, have benefited from the strong
growth in the short-haul trucking
industry, however, and efforts to improve border transport efficiency may
result in reduced job growth in this
industry.
Phillips is a senior economist in the San
Antonio Branch of the Federal Reserve
Bank of Dallas. Manzanares was a
research assistant at the time the article
was written.

Federal Reserve Bank of Dallas | June 2001

HOUSING
AFFORDABILITY
Outlook Improving Along the Border
Toby Cook

In recent years the U.S. homeownership rate has reached historic
levels. The 66.8 percent recorded in
1999 is the highest since the statistic
was first collected in 1965. Texas experienced a similar trend in 1999, posting the highest home-ownership rate
since 1984. The most recent statistics
available for Texas – Mexico border
communities show home-ownership
rates comparable to those of Texas as
a whole. In 1990, Texas’ 60.9 percent
rate was only slightly above El Paso’s
58.7 percent and several points below
Brownsville’s 64.4 percent.
However, studies suggest that a substantial percentage of border residents
spend an excessive proportion of income on housing (30 percent of income is widely considered acceptable).
According to a 1998 report from the
Texas Comptroller of Public Accounts,
housing is considered affordable to
only one in three residents along the
Texas – Mexico border. A study by Jorge
Chapa of the University of Texas reported that from 1980 to 1990 the percentage of households paying excessive
housing costs rose sharply in several
border counties. Cameron County saw

an increase of 42 percent and El Paso
County 23 percent. The study projected
the number of households paying excessive housing costs would continue
increasing through 2000 and beyond.
This article discusses trends in
housing affordability along the Texas–
Mexico border during the 1990s, compares affordability levels among four
border communities and suggests possible reasons for any variation.

Affordability Analysis
To determine the level of housing
affordability along the border, we compare the monthly mortgage payment
on the median-priced home with the
monthly payment affordable to a household earning the area median income.
We perform this comparison for the
Brownsville, El Paso, Harlingen and
McAllen metropolitan statistical areas
(MSAs) for the years 1992– 99.1 In accordance with industrywide standards, we
assume 30 percent of monthly gross
income to be an affordable housing
payment. We calculate monthly gross
income from annual median incomes
established by the Department of Housing and Urban Development.

Using the annual median sales price
for a single-family residence, we calculate the mortgage payment for a medianpriced residence. We assume a 30-year
term, the average annual mortgage interest rate, the average annual homeowner’s
insurance premium rate and the average
statewide property tax rate. For comparative purposes, we make two calculations
for each MSA for each year. One assumes
a 20 percent down payment and the other
5 percent. When the latter is assumed,
we add a calculation for private mortgage insurance to the formula.2

Housing Affordability
In recent years, purchasing a house
along the border has generally become
more affordable (Chart 1 ). In the early
1990s, buying the median-priced house
was impossible in three of the four markets examined unless a purchaser made
a significant down payment, roughly 20
percent or more. By the end of the
1990s, households earning the median
income could afford the mortgage payment on the median-priced house
when making only a 5 percent down
payment in two markets and were just a
few dollars short in the other two.

June 2001 | Federal Reserve Bank of Dallas

15

Chart 1
Housing Affordability in Border Cities
Brownsville

Harlingen

Mortgage payment (dollars)

Mortgage payment (dollars)

900

900

800

800

700

700

600

600

500

500

400

’92

’93

’94

’95

’96

’97

’98

400

’99

’95

’96

El Paso

’97

’98

’99

McAllen

In Brownsville, a household earning
the median income in 1999 could afford
more for a mortgage than was necessary
for the median-priced house. However,
as Table 1 shows, the median-priced
house was already affordable to medianincome households in 1992 and was
actually less affordable in 1999.
With the exception of Brownsville,
increases in housing affordability in the
MSAs examined exceeded the increase
in affordability for the entire state.
Clearly the border region has made
positive gains in this arena.

Mortgage payment (dollars)

Mortgage payment (dollars)

900

900

Determinants of Affordability

800

800

700

700

600

600

500

500

Many factors contribute to housing
affordability. Declining interest rates and
the 1997 increase in the Texas homestead property tax exemption both
boosted housing affordability throughout the state. However, the varying rates
of affordability among the border MSAs
suggest other factors are also in play.
This section explores possible reasons
for the changes in housing affordability
along the Texas – Mexico border and
looks at circumstances that may be
responsible for the differing affordability
rates in the four border MSAs.

400

’90

’91

’92

’93

’94

’95

’96

’97

Payment on median-priced house, 5% down

’98

’99

400

’92

’93

’94

Payment on median-priced house, 20% down

’95

’96

’97

’98

’99

Payment affordable to median income

SOURCES: See Note 2.

Table 1 shows affordability of a
median-priced home in 1992 and 1999
assuming a 5 percent down payment. In
1992, the mortgage payment on the
median-priced house in El Paso was
$682 — $22 above what was affordable
to a median-income household. By 1999,
the situation was very different: A medianincome household could afford $853 for
a mortgage—$145 more than the monthly
payment on the median-priced house.

In contrast, the mortgage on the
median-priced house in McAllen and
Harlingen was not affordable to households earning the median income in
1999. In both communities, the monthly
amount a household could afford to
spend on housing was about $15 below
the payment on the median-priced
home. However, like El Paso, both communities experienced an increase in
affordability.

Income
Much of the improvement in housing affordability along the border has
occurred because the increase in income levels has outpaced the rise in
home prices. As shown in Table 2, the
three MSAs that recorded greater housing affordability had income growth

Table 1
Affordability of Median-Priced Home, 1992 and 1999
1992

Brownsville
El Paso
Harlingen*
McAllen
Texas

1999

Mortgage
payment

Affordable
housing
payment

Affordable payment
as percentage of
mortgage payment

$497
682
659
605
751

$553
660
563
518
910

111
97
85
86
121

Mortgage
payment

Affordable
housing
payment

Affordable payment
as percentage of
mortgage payment

Percentage point
change in affordability
1992–99

$620
708
688
703
927

$ ,673
,853
,673
,685
1,145

109
120
98
97
124

–2
23
13
11
3

* Harlingen data begin in 1995.
NOTE: Calculations assume 5 percent down payment.
SOURCES: Department of Housing and Urban Development; author’s calculations. See Note 2 for mortgage payment calculation.

16

Federal Reserve Bank of Dallas | June 2001

Table 2
Median Home Sales Price and Median Income, 1992 and 1999
Median sales price
Brownsville
El Paso
Harlingen*
McAllen
Texas

Median income

1992

1999

Percent change

1992

1999

Percent change

$50,100
68,400
66,800
60,800
75,200

$ 68,600
77,900
75,800
77,800
101,000

37
14
13
28
34

$22,100
26,400
22,500
20,700
36,400

$26,900
34,100
26,900
27,400
45,800

22
29
20
32
26

* Harlingen data are for 1995 and 1999.
SOURCES: Texas Real Estate Center; Bureau of Economic Analysis.

larger than housing price increases. In
Brownsville, the only community that
did not see an increase in affordability,
income growth was slower than sales
price growth.
From 1992 to 1999, the median
household income in El Paso grew
29 percent, more than double the
14 percent increase in the median
house price. McAllen also posted a
large gain in median family income—
32 percent from 1992 to 1999. But
unlike in El Paso, the median house
price also rose dramatically, increasing 28 percent. In Brownsville, the 37
percent increase in median house
price significantly outpaced the 22 percent increase in income. Harlingen
experienced a 20 percent rise in income and a 13 percent rise in house
prices for 1995– 99.

Population Growth
The rapid income growth explains
much of the increased housing affordability. However, the equally rapid
Table 3
Single-Family Building Permits, 1992 –99
Metropolitan statistical area
Brownsville
El Paso
McAllen
1992
1993
1994
1995
1996
1997
1998
1999
Change 1992–99

1,308
1,486
1,694
1,642
1,729
1,602
1,926
2,017
54%

2,270
2,296
2,323
2,259
2,347
2,316
3,039
3,472
53%

3,230
5,565
3,955
3,761
4,287
4,155
5,219
5,069
57%

NOTE: Brownsville and Harlingen are in the same reporting area.
SOURCE: Texas Real Estate Center.

rise in housing prices has dampened
affordability in some communities. For
example, from 1992 to 1999 income
levels climbed dramatically in both El
Paso and McAllen; however, because of
McAllen’s large increase in median
home prices, its increase in housing
affordability significantly trailed El
Paso’s.
The faster increase in median house
prices in McAllen and Brownsville may
be partly caused by their population
boom. A 1998 Census Bureau report
ranks McAllen and Brownsville the
fourth and 14th fastest growing MSAs in
the country. Rapid population growth is
likely to increase demand for houses
and, hence, put upward pressure on
prices.

New Home Construction
The volume of new construction
also may affect affordability. In El Paso,
for example, greater housing affordability is due to not only income growth
but also the relatively minimal housing
cost increases resulting from greater
housing production. The number of
single-family building permits is increasing in all four MSAs (Table 3 ), but
the permit value has gone up only
slightly during the period analyzed.
This may indicate a proportional increase in the construction of less expensive homes.

Research Model

receive a building permit, a builder
must record the estimated cost of
improvements with the issuer. This
makes it possible to obtain the average
annual permit value, which is the
dependent variable. Permit values are
regressed on the annual number of
single-family building permits, annual
per capita income, population estimates and a trend line.4 We would
expect increases in both population
and income to result in higher average
permit values, while increases in the
number of permits would correlate
with decreases in permit values. We
would expect controlling for income
and population to result in a downward
trend in permit values.
To quantify the effect of construction volume on house prices, we perform a second regression analysis on
annual average single-family home
sales price.5 We expect the number of
permits to correlate negatively with
home sales price but to a lesser degree.
This is because the economies of
building on a larger scale should lower
the price of new home construction,
which, in turn, would lower existing
home prices through expanded competition.

Results
The first regression analysis tests the
relationship between the volume of
new construction and the cost of new
homes. An increase in the number of
single-family building permits is associated with a decrease in permit values
(Table 4 ). For each additional building
permit issued, the permit value declines by 0.35 percent. As expected, an
increase in personal income leads to an
increase in permit value. However,
when accounting for personal income
and population, the declining trend line

Table 4
Permit Value Regression
Standard
error
.068
.145
.303
.035

t statistic
–5.14
–1.031
3.485
–4.655

June 2001 | Federal Reserve Bank of Dallas

17

To quantify the effects of income,
population growth and new home construction on new home prices, we
perform a regression analysis using
data for each of the four MSAs.3 To

Number of permits
Population
Personal income
Trend

Coefficient
–.352
–.15
1.056
–.165

Table 5
Home Sales Price Regression

Number of permits
Population
Personal income
Trend

Standard
Coefficient
error
–.009
.026
.273
.055
–.238
.115
–.118
.013

t statistic
–.358
4.907
–2.062
–8.72

indicates an overall decrease in permit
values.
The second regression analysis tests
the relationship between new home
construction and housing prices while
controlling for population and income.
A greater supply of housing, reflected as
an increase in building permits, should
result in lower prices. However, rising
income and population should raise the
demand for homes and push prices
higher.
Table 5 shows that population correlates positively with house price, as
predicted. This supports the earlier
finding that housing prices are rising
faster in communities with dramatic
population growth, such as Brownsville and McAllen, than in border cities
with slower population growth. Nick
Mitchell-Bennett of Brownsville Community Development Corp., the city’s
largest homebuilder, confirms this conclusion: “The issue is no longer finding
buyers; the problem is building to keep
up with demand.”
Unexpectedly, the coefficient for personal income is negative. For an additional dollar of personal income, the
average house price decreases by 0.24
percent. However, by removing El Paso
from the model, the coefficient for personal income becomes positive. El Paso
dominates the results because of its
relatively large size. In addition, the city
has had one of the largest increases in
income but the lowest increase in housing price.
The coefficient for permits is not statistically significant in this model. However, removing the trend line from the
model results in a statistically significant coefficient. For every single-family
building permit issued, the average
sales price falls by 0.1 percent, less
than a third of the decrease associated
18

with permit volume and permit value.
This indicates that the rapid rise in
housing construction is having a
greater impact on the prices of new
homes than on existing ones.
This finding may be a result of greater
supply of starter homes. According to
Bob Bowlen, chief executive officer of
Tropicana Homes in El Paso, developers
are building to an emerging niche. “We
shifted to the starter market three to
four years ago,” he says. Pam Rodriguez,
vice president of community lending
at Texas State Bank in McAllen, adds,
“Developers have realized there is a
great need for this type of housing.”
Our econometric findings are consistent with the housing affordability
picture presented in Chart 1. The negative trend in both regressions supports
the prediction that housing is becoming
more affordable. The increased capacity
of developers has led to a less expensive housing stock. “The building industry in El Paso has been capable of
meeting increased demand and delivering more affordable homes,” says
Tropicana Homes’ Bowlen.

Conclusion
With the exception of Brownsville,
housing in the border communities
studied became more affordable during
the 1990s. Of the three communities in
which housing affordability improved,
all outpaced the increase in affordability for the state as a whole. Additionally, house prices along the border grew
more slowly than in Texas as a whole.
The rapid rise in single-family construction contributed to the relatively slow
increase in border housing prices as
developers began focusing on the
starter-home market. Rapid increases
in income also explain much of the gain
in housing affordability. With income
growth outpacing housing price increases, border residents have relatively
more income available for housing.
Cook is a community affairs specialist
at the Federal Reserve Bank of Dallas.

Federal Reserve Bank of Dallas | June 2001

Notes
The author would like to thank Pia Orrenius for help
with research.
1

Data for Harlingen are only available beginning in
1995. Data for El Paso begin in 1990, but comparisons begin with 1992 data. Laredo is not included
in the analysis because the median single-family
home sales price is not available.

2

Annual median sales price from Texas Real Estate
Center; average annual mortgage interest rate from
Federal Housing Finance Board Monthly Interest
Rate Survey; average annual homeowner’s insurance premium rate from Texas Department of
Insurance; statewide average property tax rate
from Texas Comptroller of Public Accounts; private
mortgage insurance from FHA Premium Reconciliation Group Procedures Manual: FHA Risk-Based
Monthly Premium. Property tax rate is a statewide
average for state and local governments and school
districts in 1998; historical data are unavailable.

3

For data used in regression, Brownsville and Harlingen are in the same reporting area.

4

Average annual permit value and annual number of
single-family building permits from Texas Real
Estate Center; annual per capita income from
Bureau of Economic Analysis; population estimates
from Census Bureau.

5

Average single-family home sales price from Texas
Real Estate Center.

TEXAS
COLONIAS
Housing and Infrastructure Issues
Ariel Cisneros

The Texas colonias are unincorporated and impoverished subdivisions that
flourish along the state’s border with
Mexico. More than 1,400 colonias dot
the 1,248-mile stretch from Cameron
County on the Gulf of Mexico to El Paso
County in the west. The 400,000 residents of these subdivisions struggle
daily with living conditions that resemble a Third World country’s — ramshackle dwellings, open sewage, lack of
sanitary water and drainage, dusty
unpaved roads, no plumbing.
Although numerous improvements
in housing and infrastructure have been
made since colonias were first established 50 years ago, bettering the lives of
colonia inhabitants is an ongoing — and
probably never-ending—process involving people, governments and organizations working together.
This article looks at some of these
conditions and what has been done
during the past 10 years to improve life
in the colonias, with special emphasis
on Cameron County colonias, home to
nearly 27,000 residents.

Vexing Problems
In the early 1950s, colonias became a
way of life for thousands of people
when developers began creating sub-

divisions in unincorporated, isolated
rural areas on land that had no agricultural value or that was located in a
floodplain. The developers divided the
property into small lots with little or no
infrastructure, then sold them on contract for deed to low-income people.
The residents often built their homes
piecemeal with whatever materials they
could find or afford.
These areas became known as colonias, Spanish for neighborhood or com-

munity. Even today, for many of the Texans who live in them, the colonias are
the only housing option. The residents
are predominately Hispanic, nearly 65
percent of them born in the United
States.
According to a random survey in
June 2000 by the Texas Department of
Health in 96 colonias in six border
counties, almost half of the colonia
households make less than $834 a
month (Chart 1). Nearly 70 percent of
the residents never graduated from
high school. The unemployment rate
stands at 18 percent for colonia residents, compared with 11 percent for
their border neighbors.
Compounding these problems is a
border population that, in some counties, is growing at a rate nearly double
the state average, easily outpacing the
availability of safe and affordable housing. Cameron County — 165 miles south
of Corpus Christi—is no exception. During the 1990s, Cameron County’s population grew by 25.5 percent, compared
with the state average of 16.3 percent.
Inadequate or nonexistent infrastructure has long been a problem for
the colonias. Of 99 colonias in Cameron County, 26 are without adequate
water service and 70 lack wastewater
treatment. County officials estimate
they would need $3.3 million to provide
necessary water and sewer service, $26
million for wastewater service, $6 mil-

Chart 1
Monthly Household Income, 2000
Percent of households
60
Countywide

Colonia

Noncolonia

50
40
30
20
10
0

<$834

$834–$1,666

$1,667–$2,083

>$2,083

NOTE: Households were surveyed in six Texas border counties: Cameron, El Paso, Hidalgo, Maverick, Val Verde and Webb.
SOURCE: Survey of Health and Environmental Conditions in Texas Border Counties and Colonias, Texas Department of Health Office of Border Health
and Public Policy Research Institute, Texas A&M University, June 2000 (draft).

June 2001 | Federal Reserve Bank of Dallas

19

lion for flood control and drainage,
and $10 million for road improvements.
But those figures pale in comparison
with what’s needed for housing: $72
million for repairs to 3,000 substandard
units, nearly half categorized as unsuitable for repair.
Given these costs, burgeoning populations and inadequate infrastructure,
cities adjacent to the colonias are reluctant to annex them and assume the
large financial burden of providing
services in exchange for such limited
tax bases.
Throughout the colonias, housing
problems have historically fallen into
three groups:
• Contracts for deed
• Inadequate infrastructure
• Substandard housing

Contract for Deed
Many colonia inhabitants bought
land on contract for deed because they
had neither the credit history nor
the resources to qualify for traditional
financing. A contract for deed is a
financing arrangement in which land
ownership remains with the seller until
the total purchase price is paid.
To protect the interest of people who
rely on such arrangements, the state’s
Colonias Fair Land Sales Act of 1995
requires developers to record and counties to keep track of contracts for deed.
It also requires developers to provide a

Chart 2
Households with a Sewer Connection, 2000
Percent of households
100
80
60
40
20
0

Countywide

Colonia

Noncolonia

NOTE: Households were surveyed in six Texas border counties:
Cameron, El Paso, Hidalgo, Maverick, Val Verde and Webb.
SOURCE: Survey of Health and Environmental Conditions in Texas Border Counties and Colonias, Texas Department of Health Office
of Border Health and Public Policy Research Institute, Texas
A&M University, June 2000 (draft).

20

Chart 3
Main Source of Drinking Water, 2000
Percent of households
70
Countywide

60

Colonia

Noncolonia

50
40
30
20
10
0

Tap in house from water line

Bottled

Machine dispenser

Home filtration

Other

NOTE: Households were surveyed in six Texas border counties: Cameron, El Paso, Hidalgo, Maverick, Val Verde and Webb.
SOURCE: Survey of Health and Environmental Conditions in Texas Border Counties and Colonias, Texas Department of Health Office of Border Health
and Public Policy Research Institute, Texas A&M University, June 2000 (draft).

statement of available services, such as
water, wastewater and electricity, and
an annual statement of the buyer’s
account.
David Arizmendi, executive director
of Proyecto Azteca, a nonprofit housing
development organization in San Juan,
Texas, says contract-for-deed sales continue in the colonias, but the properties
now have infrastructure. The contracts
generally carry about 14 percent interest. The sales continue because buyers
can get a half-acre tract in a colonia
versus a smaller lot in a city, and they
aren’t required to follow city building
codes and restrictions. The buyers can
also build and get financing as their
incomes allow.
To address some of the problematic
contracts for deed put in place before
1995, the Texas Department of Housing and Community Affairs’ (TDHCA)
Office of Colonia Initiatives has converted more than 350 into lower interest
mortgages since 1998. The $4,000 to
$30,000 loans have five- to 30-year terms
at 5 percent fixed interest rates. For
2000 – 01, TDHCA has committed $4.4
million for contract-for-deed conversion.

Infrastructure
As they did 50 years ago, many of
today’s colonia residents still use septic
tanks and cesspools. They buy water
by the bucket and drum or use potentially contaminated wells. As recently

Federal Reserve Bank of Dallas | June 2001

as June 2000, only 54 percent of Texas
colonia residents surveyed had sewer
service and more than 50 percent drank
water from sources other than taps
(Charts 2 and 3 ).
Even with water and sewer systems
in place, many colonias residents do
not have hookups because their houses
can’t pass inspections to qualify and
the owners can’t afford repairs or
improvements to meet codes.
Gradually, however, infrastructure
improvements are coming to the colonias. In 1989, Texas passed the first of
two bond authorizations totaling $250
million to provide water and wastewater service to colonias. Between
August 1991 and March 2000, the Texas
Water Development Board committed
$343 million in grants and loans for 57
infrastructure projects affecting more
than 179,000 colonia residents.
In the 1,000-home Cameron Park
colonia in Cameron County outside
Brownsville, nearly all dwellings now
have water and sewer hookups. Since
June 1997, county officials have paved
more than 9.5 miles of the colonia’s
11 miles of roads and built a park in
partnership with TDHCA, the Texas
Wildlife Department and Texas A&M
University.
Also during the past 10 years, the
state has taken steps to improve colonia
living conditions through litigation and
to halt proliferation of colonias with

little or no infrastructure. The Colonia
Legislation passed in 1995 prohibits
developers from selling lots in existing
colonias without water and wastewater
treatment services, although some cities
and counties lack staffing to enforce the
complex law.

Housing
Colonia houses are primarily built
by residents little by little, using available materials. The houses often begin
as tents or makeshift structures of
wood, cardboard or other material. As
their sparse finances allow, the owners
add improvements; they rarely use
professional builders. Houses in older
colonias tends to be better developed
because residents have had more time
to improve them.
Cameron County is an example of
where substandard dwellings flourish.
A county consultant’s study in January
2000 shows that nearly 1,600 substandard houses are suitable for repair—
at a cost of $28.8 million — but another
1,463 dwellings are beyond repair. The
county would need $44 million to upgrade these homes.
The housing situation, however, isn’t
as bleak as in previous years. For example, the nonprofit Community Development Corp. of Brownsville (CDCB)
is tearing down and rebuilding homes
in five colonias around Brownsville,
including 100 homes in Cameron Park.
The CDCB requires the colonias to have
full water and sewer service and paved
roads.
To offer families an alternative to
colonia living, the CDCB also developed
Windwood, an $11.5 million affordablehousing development outside the colonias where the CDCB has built and sold
180 single-family units. Windwood’s
household income averages $19,325; its
lowest income is $12,000. The project
was financed in part by the Greater
Brownsville Community Development
Corp., a multibank CDC. Wells Fargo,
Chase Bank of Texas, Fannie Mae and
the Federal Home Loan Bank of Dallas
are participating in the project.
In partnership with local lending institutions, the CDCB is currently developing another 33 acres for 150 single-

family houses. This project will have
a self-help equity component in which
homeowners participate in the construction. Don Currie, the executive
director, says the CDCB will also buy
out the homes of 30 families in a nearby
colonia and move them to new homes
in the new subdivision.

Initiatives
As with the CDCB’s self-help equity,
the initiative and leadership to improve
living conditions often come from colonia residents and programs like the Texas
Natural Resource Conservation Commission’s Small Towns Environment Program (STEP). STEP uses local volunteers, materials and financial resources
to solve a community’s water and wastewater problems. Since 1995, Texas STEP
has completed nine colonia projects.
In Hidalgo County, where more than
4,000 colonia families are on a housing
waiting list with Proyecto Azteca, Arizmendi plans to develop, as an alternative, $6,000 houses with limited interior
finish-out. Arizmendi says owners will
put 30 percent down, get five-year loans
at zero interest and make monthly payments of $75 to $100. They can finish
the interiors as their finances allow.
To further the financing for colonia
housing, regional coalitions are being
established. For example, the CDCB in
Brownsville helped create the Rural
and Colonia Loan Program from a
$600,000 Department of Housing and
Urban Development grant. The award
was tied to a $1.15 million lending commitment to the CDCB from Chase Bank
of Texas, Wells Fargo, International Bank
of Commerce and Texas State Bank. The
grant will serve as a loan-loss reserve
for the banks, allowing them to make
loans to customers unable to qualify for
traditional financing. The loan product
will be a 20-year, 3.5 percent fixed
loan with monthly payments averaging
$246, including taxes and insurance.
The homes developed by participating
nonprofits will sell for approximately
$30,000.
Other organizations and agencies
are joining the battle to improve life
in the colonias. Fannie Mae recently
announced a five-year, $1.5 billion in-

vestment plan for border communities.
In addition, the Department of Agriculture/Rural Development’s Water and
Waste Disposal Loans and Grants Program provides 1 percent interest loans
for home improvements.
In 1995, the Texas Legislature allocated 2.5 percent of the state’s annual
share of federal community development block grants to operate five selfhelp centers in five counties. The centers help colonia residents with repairs,
maintenance, health care, education,
employment training and counseling.
The centers lend homeowners tools and
offer technical assistance for home repairs and maintenance.

Conclusion
Low incomes, high unemployment,
dilapidated housing and lack of infrastructure are some of the challenges to
solving colonia housing problems. Significant resources have been devoted to
the colonias, and new laws protect current and future residents. Partnerships
among financial institutions, nonprofit
organizations, the private sector, foundations and residents have improved
housing and infrastructure. Outside the
colonias, new affordable-housing developments are being established as
an alternative for families who would
otherwise live in colonias.
However, even with significant resources, colonia housing continues to
be some of the poorest in the country.
For a majority of families, the question
of choice is moot; housing is a necessity,
and the only option they see is the colonia. With no end in sight for population
growth and housing demand along the
border, continued efforts are necessary
to wrestle with the colonias’ problems.
Formerly with the Federal Reserve
Bank of Dallas, Cisneros is a senior
community affairs advisor at the
Federal Reserve Bank of Kansas City’s
Denver Office.

June 2001 | Federal Reserve Bank of Dallas

21

NAFTA
AND
MAQUILADORAS
Is the Growth Connected?
William C. Gruben and Sherry L. Kiser
on maquiladoras, declares, “Without
doubt, NAFTA has resulted in a dramatic increase in activity in the maquiladora industry.” 4

Examining the Evidence

Courtesy of Twin Plant News

After Canada, Mexico and the United
States adopted NAFTA in 1994, the
growth of Mexican maquiladora plants
soared. These plants typically import
U.S. inputs, process them and ship
them back to the United States. Because maquiladoras involve U.S.–Mexico
trade and their growth acceleration
coincided with NAFTA’s inception,
many concluded that the trade agreement caused this growth. However,
after examining the relationship, we
find that what explains maquiladora
growth before NAFTA can also explain it
after NAFTA.
There is no doubt maquiladoras are
an important part of Mexico’s international trade picture. Year in and year
out, maquila plants are responsible
for more than 40 percent of Mexico’s
exports.1 Over the years, with or without NAFTA, the maquiladora industry
has grown substantially, but a superficial examination could suggest NAFTA
made a difference. During the five years
prior to NAFTA, maquiladora employ22

ment grew 47 percent. But over the first
five years after NAFTA, employment
growth soared 86 percent (Chart 1). This
growth was not simply a matter of
existing plants taking on more workers
but of rapid expansion in the number
of plants. The 1,789 in-bond plants at
the end of 1990 grew to 2,143 at the end
of 1993 — just before NAFTA— and to
3,703 by the end of 2000.
The commentators who concluded
that NAFTA made maquiladoras grow
represent a broad spectrum: university
professors to journalists to businesspeople. Professor Francisco CarradaBravo argues, “The acceleration of foreign direct investment under NAFTA
also contributed to the creation of more
than a half-million new employment
opportunities in the U.S.– Mexico border region…tied to the expansion of
the maquiladora industry.” 2 Journalist
Nancy San Martin maintains, “NAFTA
continues to drive the growth of the
maquiladora industry.” 3 And John Balla,
writing in a trade magazine focusing

Federal Reserve Bank of Dallas | June 2001

Despite all that has been written
supporting a direct correlation between
maquiladora growth and NAFTA, technical literature proving a connection
one way or the other is scarce. Moreover, NAFTA might have discouraged
maquiladora operations in general. For
example, NAFTA allows U.S.–Mexican
production-sharing operations in the
maquiladora mode but without the
maquiladora program.
By 1999, the majority of imports that
earlier had been processed under the
maquiladora program for entry into the
United States could enter duty-free
without any connection to maquila
plants. The options other than the maquiladora program include (1) NAFTA’s
regular and accelerated phase-ins of
tariff eliminations, (2) duty-free treatment of certain products from all mostfavored-nation suppliers and (3) the
Automotive Products Trade Act.5 To the
extent that membership in the maquiladora program involved additional
paperwork, such membership in the
age of NAFTA might have seemed
unnecessarily costly.
Chart 1
Maquiladora Employment
Number of workers (in thousands)
1,200
1,000
800
600
400
200
0

’90

’91

’92

’93

’94

’95

’96

’97

’98

SOURCE: Instituto Nacional de Estadística, Geographía e Informática.

Environmental restrictions may have
created another disincentive to operate
under the maquiladora program. In
some cases, waste-handling and treatment regulations were stricter for maquiladoras than for other Mexican
plants making the same products and
exporting to the United States. Manufacturing firms’ ability to obtain dutyfree benefits under NAFTA without
additional cost or environmental restrictions — which maquila industry
membership would impose — could
have encouraged such firms to operate
outside the maquiladora program postNAFTA.
On the other hand, NAFTA may have
encouraged maquiladora expansion by
eliminating all Mexican programs that
favored specific industries. When these
programs disappeared, some firms had
to switch to the maquiladora program
to continue importing inputs duty-free
to Mexico.6
By allowing duty-free treatment of
textile and apparel products, NAFTA may
have caused maquila growth in that
sector.7 More generally, some processed
products — including inputs that enter
Mexico under the maquiladora program post-NAFTA — are able to reenter
the United States more cheaply in
NAFTA’s wake.8 Pre-NAFTA, duties had
to be paid on components not of U.S.
origin that were used in the assembly of
the maquila product. After NAFTA, products could contain foreign components
as long as the products were classified
as having a designated percentage of
components of North American origin.
NAFTA also eliminated quotas, which
especially impacted the textile industry.
With no constraints on the amount of
textiles that could be exported back to
the United States, textile firms may have
had an incentive to construct maquila
operations in Mexico. Many observers
have concluded that NAFTA’s treatment
of the textile/apparel sector has significantly affected the maquila growth in
that industry.

Why Maquiladora Growth?
Some factors suggest NAFTA may
substantially encourage maquiladora
growth. Others indicate NAFTA may

What Is a Maquiladora?
A maquiladora is a labor-intensive assembly operation. In its simplest organizational
form, a Mexican maquiladora plant imports
inputs from a foreign country—most typically the United States—processes these
inputs and ships them back to the country of
origin, sometimes for more processing and
almost surely for marketing.
The maquiladora program itself permits
the inputs and the machinery used to process
them to enter Mexico without payment of
import tariffs. On the return to the country of
origin, again most typically the United States,
the shipper pays only such return import
duties as are applicable to the value added by
the manufacturing process in Mexico. The
return trip is not under the jurisdiction of the
maquiladora program. The tariff arrangements
involve the law of the country to which the
processed product is reshipped. Even though
most Mexican maquiladora activity entails
shipments from and to the United States, it
is important to emphasize that other nations
are permitted to operate under the maquiladora program.

have little impact. Still others suggest
NAFTA may actually discourage maquiladora growth. If indeed NAFTA discourages growth, what factors could
have driven such significant expansion?
In fact, recent econometric testing
shows that the same factors long known
to explain the ups and downs of
maquiladora growth can explain postNAFTA maquiladora employment
growth as well.9 If NAFTA has any influence, it is negative, not positive. Both
before and after NAFTA, three factors
account for the majority of fluctuations
in maquiladora employment in either
direction.
The first factor is the growth rate of
U.S. industrial production. Maquiladoras
can be seen as part of the U.S. industrial

production process: When production
grows faster, maquiladora employment
goes up in the same year. The effect is
not only positive but also relatively
quick. Rising manufacturing activity in
the United States quickly results in new
orders for the maquiladoras.
The last two factors that explain
maquiladora employment fluctuations
are Mexican-to-U.S. and Mexican-toAsian manufacturing wage ratios. While
the relationship between U.S. industrial
production growth and maquiladora
growth is positive, the relationship between these wage ratios and maquiladora growth is negative. In other words,
when Mexican wages increase relative
to foreign wages, maquila employment
growth declines.
And these wage impacts occur with
a lag. Maquiladora owners respond
quickly to changes in U.S. industrial
production, usually within a year. In
contrast, it takes two years for maquiladora owners to adjust employment in
response to changes in wage ratios.
Devaluations play an important role in
shifting the ratio of Mexican to U.S. or
Asian wages. Owners wait to see how
permanent the new exchange rates will
be in real terms (after adjustment for
inflation differences between the two
countries) before they make decisions
about hiring or firing. Devaluations or
currency appreciations are important
because U.S. firms, which dominate
Mexican maquiladora activity, make
cost decisions in dollar terms since
their bottom lines are expressed in
dollars. A long-lived change in the
buying power of a dollar in Mexico—
especially when the dollar is used to
hire a worker — will affect a factory
owner’s decision to locate his operation
in Mexico, the United States or Asia.
These variables have strong explanatory power for changes in maquiladora
employment. However, when a variable is included to account for NAFTA’s
role, it has a negative, albeit insignificant, effect. Certainly NAFTA has had
an important impact on Mexico – U.S.
trade. But NAFTA is not responsible for
the portion of such trade coming
through maquiladoras, despite what so
many analysts have concluded.

June 2001 | Federal Reserve Bank of Dallas

23

Bad Predictions Make Bad Policy
Why is it relevant that these analysts
have not proved their claims? The
answer perhaps lies in future trade
agreements. The next time the United
States enters into a free trade agreement, it will be useful to have an idea
of the real — rather than the alleged —
impact of the last one. Likewise, when
other nations enter into free trade
agreements, we may want to know the
impact such agreements will have on
their trade. We may especially want to
assess the impact if we are concerned
that a new agreement to which the
United States is not a party may divert
trade from our nation as other countries buy more from each other. In fact,
an assessment of the real impact in that
case might be a motivation for trying to
enter the agreement.
In any case, if maquiladora production and trade were linked to NAFTA,
their importance for modeling NAFTA’s
impacts would be markedly different
than if NAFTA did not influence a
large portion of U.S.– Mexico trade. For
example, if maquiladora activity is not
affected by NAFTA, perhaps estimates
of NAFTA’s impact on U.S. – Mexico
trade ought to use data that doesn’t
include maquiladora trade.
Also, even though as of January 1,
2001, maquiladoras have been phased
out as a phenomenon separate from
NAFTA, they may deserve quite different modeling and policy consideration if they are indeed linked to the
agreement. We can only measure these
Chart 2
Mexican Maquiladora Exports as a
Percentage of Total Mexican Exports
Percent
50
40
30
20
10
0

’90

’91

’92

’93

’94

’95

’96

’97

’98

SOURCE: Instituto Nacional de Estadística, Geographía e Informática.

24

links while it is still statistically possible
to consider maquiladoras as separate
entities. Chart 2, which shows the ratio
of maquiladora exports to total Mexican
exports, demonstrates how important
these implications may be. Trade is a
complicated process. So are changes in
trade policy.

8

Three general categories of U.S. tariff policy historically applied to imports of maquiladora products.
The first (Harmonization Tariff Schedule 9802.00.60)
permits the importation of “fabricated” but unfinished metal products processed abroad. Duties are
assessed on the value added in Mexico rather than
by levying an import tariff on the product’s total
value. The products are required to have been
processed in the United States before being sent
abroad. Products in this category must be further
processed in the United States upon their return.
The second of the three categories (Harmonization Tariff Schedule 9802.00.80) allows an article
assembled in Mexico from U.S.-made components
to be exempt from import duties on the value of
these components. These products need not involve
metal components. The third category is the most
generous. If the goods assembled or manufactured
in Mexico contain at least 35 percent Mexican content upon import into the United States, they are
eligible for treatment under the U.S. Generalized
System of Preferences, or GSP. Mexican GSP-eligible items may enter the United States duty-free.

9

See William C. Gruben, “Do Maquiladoras Take
American Jobs?: Some Tentative Econometric Results,” Journal of Borderlands Studies, Spring 1990,
pp. 31–45; William C. Gruben, “Did NAFTA Really
Cause Mexico’s Explosive Maquiladora Growth?”
Federal Reserve Bank of Dallas Economic and
Financial Review, forthcoming; and Jose Luis Hernandez and Rodolfo Navarrete Vargas, “Determinantes del crecimiento del empleo en la industria maquiladora de exportación en México,” in
Maquiladoras: Primera Reunión Nacional Sobre
Asuntos Fronterizos, ed. Arturo Garcia Espinosa
(Monterrey: Asociación Nacional de Universidades e
Institutos de Enseñanza Superior and the Universidad Autónoma de Nuevo Leon, 1987), pp. 221–47.

Gruben is a vice president and director
of the Center for Latin American
Economics, and Kiser is an associate
economist and coordinator of the
center at the Federal Reserve Bank
of Dallas.

Notes
1

Within the maquiladora industry and more generally
along the U.S.–Mexico border, the terms in-bond
plant, maquila, maquiladora, maquiladora de exportación and twin plant are treated as synonymous. We accordingly use these terms interchangeably. For a brief description of the industry,
see the box titled “What Is a Maquiladora?”

2

Francisco Carrada-Bravo, “Business Education and
Joint Enterprise in the NAFTA Countries,” Working
Paper, Department of World Business, Thunderbird—The American Graduate School of International Management (Glendale, Ariz., 1998).

3

Nancy San Martin, “Overworked and Underage,”
Dallas Morning News, March 5, 2000, pp. A1,
A31–A33.

4

John A. Balla, “Data Transfer: What’s New?” Twin
Plant News, November 1998, pp. 55–56.

5

Ralph J. Watkins, “Implications of the North American Free Trade Agreement for Mexico’s Maquiladora Industry and the Use of the Production Sharing Tariff Provision,” in Production Sharing: U.S.
Imports Under Harmonized Provisions 9802.00.60
and 9802.00.80, 1989–1992 (Washington, D.C.:
U.S. International Trade Commission, 1994).

6

Elsie L. Echeverri-Carroll, “Industrial Restructuring
of the Electronics Industry in Guadalajara, Mexico:
From Protectionism to Free Trade,” Bureau of Business Research, University of Texas (Austin, 1999).

7

Textile and apparel products historically entered
the United States under special trade restrictions.
Liberalization of such trade has also had to be
specific to such products. For apparel that had
entered under 9802.00.80, only the value of U.S.cut fabric pieces and U.S.-made fasteners, such as
buttons and zippers, came in free of duty. Under
9802.00.90, the value added in Mexico, including
labor and overhead, also enters the United States
duty-free. For additional discussion, see Production
Sharing: Use of U.S. Components and Materials in
Foreign Assembly Operations, 1995–1998, USITC
Publication 3265 (Washington, D.C.: U.S. International Trade Commission, December 1999).

Federal Reserve Bank of Dallas | June 2001

MAQUILADORAS
Impact on Texas Border Cities

Before the maquiladora program’s
implementation, cities along Mexico’s
northern border had among the highest
unemployment rates in the country,
typically in double digits. Because of the
industry’s settlement in these cities
and its consistent record of employment growth, these locations now have
among the nation’s lowest unemployment rates. In fact, maquiladoras have
become so important to the border that
in Ciudad Juárez, for example, the
majority of all jobs in 2000— 60 percent — came from the maquiladora sector. Moreover, the overwhelming majority of the city’s manufacturing jobs — 87
percent — were attributable to maquiladora companies last year.

Lucinda Vargas

Technology and Human Capital

Mexico’s maquiladora industry has
become an increasingly significant component of the Mexican economy as well
as an important part of U.S. corporate
strategy in achieving competitively
priced goods in the world marketplace.1
Maquiladoras are largely concentrated
in Mexican cities that border the United
States. Since Texas encompasses about
half the U.S. –Mexico border, maquiladoras are especially relevant to the
state’s economy.
To assess the maquiladoras’ importance to the border economy, we must
first understand how maquiladoras
affect Mexico. This article looks at the
maquiladora industry’s performance in
Mexico and then the industry’s significance for Texas border cities.

Mexico’s Northern Border
The maquiladora industry has boosted job creation, exports and foreign
exchange in Mexico. During 1983– 2000,
annual growth in maquiladora employment and exports averaged almost
14 percent and 21 percent, respectively.
At about 1.3 million workers, maquiladora employment represented 29 percent of Mexico’s manufacturing jobs
in 2000, up from slightly more than 7

percent in 1983. Further, maquiladora
exports, at $79.4 billion in 2000, made
up almost half Mexico’s total exports
(47.7 percent) and the majority of its
manufacturing exports (54.7 percent).
Maquiladoras are Mexico’s top source
of foreign exchange, netting almost $18
billion last year. Table 1 summarizes the
maquiladora industry’s key indicators
for 2000.
The maquiladora industry also has
contributed significantly to Mexico’s regional, technological, human capital and
infrastructure development, as illustrated by what is happening at the border.

Regional Development
In 2000, Mexican border cities represented 62 percent of overall maquiladora employment (nearly 797,000 workers) and 70 percent of production ($50
billion). The two locations with the
highest concentration of maquiladora
investment are Ciudad Juárez (across
from El Paso) and Tijuana (across from
San Diego). Together, these two cities in
2000 represented 34 percent of Mexico’s
total maquiladora employment, with
more than 249,500 workers in Ciudad
Juárez and over 187,300 workers in
Tijuana.

When Mexico’s maquiladora program began in 1965, most companies
were basically assembly operations requiring unskilled labor. The industry
has evolved, and factories now use
more sophisticated production techniques and require more skilled labor.
For example, in 2000, technicians represented 12 percent of maquiladora employment, compared with 8.8 percent in
1975. In addition, the skill level of the
maquiladoras’ largest labor component
— direct line workers— has been upgraded to suit newer technologies.2
Mexico’s maquiladora companies
today boast state-of-the-art production
technology. Research and design centers are now part of the maquiladora
landscape as well. A key example is the

Table 1
Maquiladora Industry Key Indicators, 2000

Plants
Employment
Raw materials (billions)
Imported
Domestic
Total
Value added (billions)
Exports (billions)

2000

Change from
1999

3,590
1,285,007

8.9%
12.7%

$53.5
$ 1.8
$55.3
$17.8
$79.4

19.8%
38.5%
20.3%
32.4%
24.3%

SOURCES: Federal Reserve Bank of Dallas El Paso Branch, with data
from Instituto Nacional de Estadística, Geografía e
Informática; export data are from Banco de México.

June 2001 | Federal Reserve Bank of Dallas

25

Delphi Mexico Technical Center in Ciudad Juárez. This center, which until
April 1999 was part of the General
Motors Corp. maquiladora production
infrastructure, is dedicated to the research and design of auto parts used by
the world’s top auto producers. Considered the most advanced of 31 such
Delphi centers around the world, it
employs almost 2,000 workers, most
of whom are engineers. The center
opened in April 1995 and within four
years had doubled capacity.
The technological evolution of the
maquiladora industry would not have
been possible without the required
professional and skilled personnel.
This increasingly skilled workforce
comes, in large part, from the maquiladoras themselves through training and
development at all levels. Typically,
training includes in-house programs
as well as visits to the company’s manufacturing facilities outside Mexico.
Maquiladoras also sponsor vocational
programs at local technical centers
and trade schools to ensure that workers’ skills match those in demand by
the industry.
A recent example of the maquiladora
industry’s efforts at educating its workforce is the Center for High Technology
Training (Centro de Educación en Alta
Tecnología, or CENALTEC), established
in Ciudad Juárez in March 2000. This
center, created through a collaborative
effort between maquiladora companies

in the area and the state and federal
governments, incorporates state-of-theart infrastructure in training highly
skilled technicians in manufacturing
specialties. Companies award scholarships to the center’s two-year training
programs.

Infrastructure Development
Though the maquiladora industry is
growing at more dynamic rates in the
interior of Mexico, the border’s appeal is
still high among new investors, and,
thus, growth at the border has been sustained. For example, border employment growth averaged 7.8 percent per
year during the 1990s, while the corresponding figure for the interior was
17 percent. However, since the border’s
employment base (nearly 797,000 workers) is higher than the interior’s (488,200
workers), job growth of almost 8 percent on the border is still impressive.
Moreover, during the second half of
the 1990s, when the entire maquiladora industry rebounded as a result of
the peso devaluation, border employment averaged double-digit growth on
a yearly basis (11.1 percent).3
One outcome of the border’s dynamic
maquiladora growth has been infrastructure bottlenecks in the region,
which have been only partly alleviated
by the industry’s movement to the interior. The border’s growth has led to
such problems as insufficient or inadequate housing for maquiladora workers.

Maquiladora companies are teaming
with the Mexican government to build
adequate and affordable housing for
workers and to assist them with financing. Delphi Automotive launched the
first such program in 1997. Other large
maquiladora companies have followed
with similar programs.
Maquiladoras also have participated in improving the infrastructure
of their border locations. For example,
in Ciudad Juárez, maquiladoras make
annual contributions to the city’s
budget that are targeted for different
purposes, such as city road improvements.4 Also, maquiladoras have financially supported improvements to certain commercial bridges, which are
critical to their daily production shipments across the border.5

Texas Border Cities
The Texas border is host to the
majority of the maquiladoras along the
U.S.–Mexico boundary. Table 2 lists the
cities across from Texas with a
maquiladora presence and outlines
their individual participation in the
industry. In 2000, these cities’ combined share of total maquiladora employment and production equaled 35.4
percent and 40.4 percent, respectively.
Within the border region, their combined share represented the majority—
57.1 percent in employment and 57.5
percent in production. This is equivalent to a maquiladora industry employ-

Table 2
Maquiladora Industry Along the Texas – Mexico Border, 2000
Ciudad Juárez
(El Paso)

Ojinaga
(Presidio)

Ciudad Acuña
(Del Rio)

Piedras Negras
(Eagle Pass)

Nuevo Laredo
(Laredo)

Reynosa
(McAllen)

Río Bravo
(McAllen)

Matamoros
(Brownsville)

Plants
Percent of total
Percent of border

308
8.6
14.3

8
.2
.4

56
1.6
2.6

38
1.1
1.8

54
1.5
2.5

117
3.3
5.4

13
.4
.6

119
3.3
5.5

Employment
Percent of total
Percent of border

249,509
19.4
31.3

967
.1
.1

32,130
2.5
4.0

14,546
1.1
1.8

22,603
1.8
2.8

66,091
5.1
8.3

3,287
.3
.4

66,023
5.1
8.3

Raw Material Imports (millions)
Percent of total
Percent of border

$12,785
23.9
32.6

$25
.0
.1

$1,099
2.1
2.8

$329
.6
.8

$1,253
2.3
3.2

$3,894
7.3
9.9

$104
.2
.3

$3,254
6.1
8.3

Gross Production (millions)
Percent of total
Percent of border

$16,191
22.7
32.4

$37
.1
.1

$1,386
1.9
2.8

$468
.7
.9

$1,648
2.3
3.3

$4,826
6.8
9.7

$145
.2
.3

$4,065
5.7
8.1

SOURCES: Federal Reserve Bank of Dallas El Paso Branch, with data from Instituto Nacional de Estadística, Geografía e Informática.

26

Federal Reserve Bank of Dallas | June 2001

Table 3
U.S.–Mexico Trade by Texas Border Port of Entry, 2000
(Millions of U.S. dollars)
Laredo
El Paso
Hidalgo
Brownsville–Cameron
Eagle Pass
Del Rio
Presidio
Rio Grande City
Progreso
Roma
Fabens
Total Texas ports
Total all border ports
Texas share

Exports to Mexico

Imports from Mexico

Total trade

39,283.6
17,520.4
6,221.9
6,374.1
4,283.5
1,156.1
112.8
118.8
129.0
92.4
.9
75,293
95,692
78.7%

45,536.3
22,810.6
6,888.5
6,049.5
3,041.1
1,282.6
153.0
116.6
15.6
16.1
.0
85,910
120,409
71.3%

84,819.9
40,331.0
13,110.4
12,423.6
7,324.6
2,438.7
265.8
235.4
144.6
108.5
.9
161,203
216,101
74.6%

SOURCES: Texas Center for Border Economic and Enterprise Development, Texas A&M International University, with data from U.S. Department of
Commerce.

ing more than 455,000 workers in 713
plants and with a total production value
of nearly $29 billion.
Texas border cities have reaped important benefits from their maquiladora neighbors. Transportation and
customs services have flourished on the
U.S. side of the border because of the
maquiladora industry’s large trade flows
through border ports of entry (Table 3).
These companies typically maintain
distribution facilities and administrative offices on the U.S. side, stimulating
the industrial real estate sector of Texas
border cities. Maquiladoras also create
jobs for the U.S. border in the legal,
accounting and financial professions.
Even the hotel, car rental and restaurant
industries profit from maquiladoras
because corporate personnel and other
maquiladora visitors usually stay and
eat on the U.S. side.6
Beyond the service industry, border
manufacturing is increasingly benefiting from maquiladoras. Industry suppliers have been expanding or relocating their operations to cities such as El
Paso to be close to their customer bases
across the border. For instance, in 1999,
there were 40 plastic injection molding
companies in El Paso, employing more
than 4,100 workers. These companies
mostly serve the maquiladora industry
in Ciudad Juárez in sectors that range
from automotive and computers to

medical and consumer goods. Moreover, employment in plastics manufacturing in El Paso— up 101 percent since
1990 — is highly skilled. From 1990
through 1999, for example, this sector’s
hourly compensation was, on average,
nearly 21 percent higher than that of the
apparel sector, El Paso’s largest and
most established manufacturing sector.
The success of plastic injection molding
in the area is also evidenced by the
impressive growth of plastic product
exports through El Paso, which equaled
$806 million in 1999, up more than 700
percent from the 1993 level.

The employment link between
maquiladoras and U.S. border cities is
not exclusive to El Paso. Research has
found a strong positive correlation
between U.S. border city employment
and export (maquiladora) production
in the neighboring Mexican border city.7
Further, results show that for larger
border cities, such as El Paso, the
employment effect is strongest in manufacturing, while for smaller border
cities, such as Laredo, the employment
effects are strongest for the transportation and wholesale trade industries.
Indeed, two of the three other major
border cities in Texas— Brownsville and
McAllen — are home to plastic injection molding suppliers that cater to
the maquiladora industry. In addition
to El Paso’s 40 plastic injection molding companies, Brownsville has 11 and
McAllen has 13.8 Laredo, which has a
minimal manufacturing presence, is
the exception, with no suppliers in this
category.9 Chart 1 shows the growth
trend of the rubber and miscellaneous
plastics manufacturing subsector in all
four cities for 1990 – 99. The only city
that shows a decline is Laredo.

Skilled-Labor Bottlenecks
Keeping El Paso from taking full
advantage of the maquiladora supplier
market is an insufficient pool of skilled
workers. Though plastics manufacturers in El Paso have used in-house train-

Chart 1
Rubber and Miscellaneous Plastics Employment for Major Border MSAs
Index, 1990 = 100
225
El Paso

200
175
150

Brownsville

125
100

McAllen

75
50
25
0

Laredo
’90

’91

’92

’93

’94

’95

’96

’97

’98

’99

NOTE: The rubber and miscellaneous plastics industry in Laredo reached such a small level in 1999 that data for that year were not made available.
SOURCE: Texas Workforce Commission.

June 2001 | Federal Reserve Bank of Dallas

27

El Paso, NAFTA and Worker Retraining
Between 1994 and 2000, a total of 330,107

new jobs—or growth of almost 14 percent

the largest of its kind ever awarded to a city

U.S. workers were certified to receive benefits

between 1993 and 2000.1 NAFTA reasonably

by the Labor Department. In 1998, project

under the NAFTA Transitional Adjustment Assis-

could be credited with some of this job growth

ARRIBA (Advanced Retraining and Redevelop-

tance (TAA) program. This program was created

in areas servicing the increased trade through

ment Initiative in Border Areas) was launched in

in 1994 through NAFTA to help workers affect-

the border resulting from NAFTA.2 This implies

El Paso with a state grant of $1 million. ARRIBA

ed by increased imports from Mexico and

new jobs in transportation and distribution serv-

secured additional funding totaling more than

Canada or by shifts in U.S. production to those

ices as well as in professional services such as

$1.5 million from the governor’s Discretionary

countries as a result of the agreement. El Paso

legal, accounting, financial and customs broker-

Fund ($600,000), the North American De-

has the largest number of workers certified

age. Finally, the unemployment rate has been

velopment Bank ($450,000), El Paso County

under this program—13,450 through 2000.

on a downward trend in El Paso since NAFTA

($250,000) and El Paso Empowerment Zone

Nearly 8,000 of these workers (more than 59

started, as it has for Texas’ other major border

Corp. ($211,297).

percent) were displaced from El Paso’s apparel

cities (see chart ).

industry.

Last year the El Paso Chamber of Com-

Interestingly, El Paso’s No. 1 position in

merce opened the Center for Worker Prepared-

While many point to the TAA figures as evi-

NAFTA TAA certifications in the United States

ness with a $1.4 million grant from the U.S.

dence of NAFTA’s negative impact on El Paso,

has placed the city in the national spotlight,

Department of Commerce and a $1 million

NAFTA also has created jobs for the city. Unfor-

attracting funding toward retraining programs

interest-free loan from the North American

tunately, because no accounting system equiv-

for trade-displaced workers. For example, the

Development Bank. In addition, local educa-

alent to the TAA tracks the job-growth side of

U.S. Department of Labor awarded El Paso,

tional and training institutions have received

the equation, an assessment of NAFTA’s net

through the city’s Proactive Reemployment

funding for programs such as the El Paso

impact on El Paso’s employment is not possible.

Project or PREP, a $45 million grant to retrain

Manufacturing Training Consortium at El Paso

Since NAFTA’s passage, however, El Paso has

some 4,000 workers, most of them former

Community College. Thus, if NAFTA is to be

registered a net gain in employment—30,733

garment industry employees. This grant is

cited as the cause of much worker displacement in El Paso, it also has contributed toward

Unemployment at the Texas Border
(Major MSAs)

an improved worker-training infrastructure.

Percent

Notes

25

1

If a broader definition of employment is used,
including jobs outside the Social Security system,
El Paso’s employment gain between 1993 and 2000
was larger, at 40,635 new jobs. See Borderplex
Economic Outlook: 2000–2002, Border Region
Modeling Project, The University of Texas at El
Paso, November 2000, Business Report SR00-1.

2

El Paso is the second-largest land port at the border
for U.S.–Mexico trade, after Laredo. During 1994–
2000, total U.S.–Mexico trade through El Paso grew
122 percent to $40.3 billion. The trade increase
was due to both maquiladora-specific and NAFTAspecific activity.

20
McAllen
Laredo

Brownsville

15

10

5

El Paso

’90

’91

’92

’93

’94

’95

’96

’97

’98

’99

’00

SOURCE: Texas Workforce Commission.

ing to develop their workers into skilled
technicians, a broader effort is required
to generate a continuous supply of
skilled labor. Recognizing this need, the
city has implemented various programs
to train workers not only in plastic28

injection-molding techniques but also
in metal stamping, tool and die, and
other areas that complement the manufacturing processes of maquiladora
suppliers. El Paso also has received
multiple worker retraining grants as a

Federal Reserve Bank of Dallas | June 2001

result of worker displacements in the
city’s apparel industry (see box titled “El
Paso, NAFTA and Worker Retraining”).
The goal is to transform an unskilled
labor pool into the skilled workers
sought by the industries coming to

town in pursuit of the maquiladora
market across the border.
The state’s other border cities face
similar situations. Research on maquiladora market opportunities for border
cities in South Texas shows that
maquiladoras are willing to enhance
their base of local suppliers. The companies’ savings in inventory and transportation costs are obvious. However,
one bottleneck is a workforce with inadequate skills.10

Vargas is a senior economist at the
El Paso Branch of the Federal Reserve
Bank of Dallas.

Brownsville Economic Development Council and
McAllen Economic Development Corp.

9

In 2000, for example, only 2.6 percent of Laredo’s
nonfarm employment—some 1,800 workers—was
working in manufacturing, compared with 15 percent in El Paso, 12 percent in Brownsville and 8
percent in McAllen.

10

See J. Michael Patrick, “Maquiladoras and South
Texas Border Economic Development,” Journal of
Borderlands Studies, Spring 1989, pp. 89–98. The
author suggests that the situation has not changed
much in the ensuing 12 years.

11

A 1988 survey of maquiladora companies in Ciudad
Juárez alone showed suppliers in every U.S. state
except Hawaii, with a large portion in Midwestern
and Northeastern states. See William L. Mitchell
and Lucinda Vargas, “The Economic Impact of the
Maquiladora Industry in Juárez on El Paso, Texas,
and Other Sections of the United States,” Grupo
Bermúdez Industrial Developers, Ciudad Juárez,
Chihuahua, 1989, photocopy. Current anecdotal
evidence shows that maquiladoras continue to
have close links with suppliers throughout the
United States.

12

In 2000, the weighted average unemployment rate of
Texas’ four major border cities was more than double
the national and state unemployment averages.

13

ADC Telecommunications offers an example of how
cities like El Paso are developing industrially in
response to the presence of maquiladoras across
the border. The company manufactures telecommunications equipment at two plants in Juárez and
one in Delicias, Chihuahua. Late last year, ADC
opened a metal fabrication plant in El Paso to feed
components to its Mexican facilities. ADC also has
a distribution center in Santa Teresa, N.M., just west
of El Paso.

Notes
1

For an overview of the maquiladora industry and its
importance for the U.S. and Mexican economies,
see “The Binational Importance of the Maquiladora
Industry,” Southwest Economy, Federal Reserve
Bank of Dallas, Issue 6, November/December 1999,
pp. 1–5.

2

Direct labor represented 80.9 percent of total
maquiladora employment in 2000. Although the
majority of these workers (55.2 percent) were
female, this share is down considerably from 78.3
percent in 1975. In fact, in the industry’s top two
locations—Ciudad Juárez and Tijuana—females
make up just under half (49.7 percent) of the directlabor workforce, putting them in the minority.

3

Because maquiladora companies have dollardenominated budgets but their costs are in pesos,
the overnight impact of any peso devaluation is
essentially a reduction in their peso-based costs.
Maquiladoras have therefore responded to devaluations in Mexico by substantially expanding their
operations.

Lucrative Market
El Paso has carved an important
niche in serving the maquiladora
industry, especially in plastic injection
molding. This demonstrates that border
cities such as El Paso — which have traditionally lacked a sophisticated industrial base — can nonetheless attract
investments using their formidable advantage with the lucrative maquiladora
market. The total maquiladora inputs or
components market in Ciudad Juárez
alone was worth nearly $13 billion
in 2000. The industry’s components
market along the Texas border — from
Juárez to Matamoros — was a massive
$23 billion in 2000, roughly 42 percent
of the maquiladora industry’s total
components market ($55.3 billion).
Maquiladoras import 97 percent of
the components they use. And 80 to 85
percent of these come from the United
States, mostly from states not bordering
Mexico.11 As more suppliers seek to
move closer to their maquiladora customer base, the border stands to benefit. The border’s traditionally high unemployment rate translates into an
available labor pool in the region.12
However, this workforce has to be
transformed into the skilled labor that
high-tech maquiladora suppliers need.
Should this happen, we could see industrialization of the border at a time
when the rest of the country is deindustrializing, precisely because of the
lack of available workers.13
For Texas border cities, the presence
of maquiladoras across the border
translates into more and better-paying
jobs. In short, maquiladoras help the
Texas border region move up the economic ladder.

8

4

According to the Treasury Department of the city of
Juárez, the voluntary contribution that each maquiladora in Juárez gives to the city each year, on a voluntary basis, is $15 per employee and is based
on each company’s employment base at year-end.
Not all maquiladoras contribute, but a majority (54
percent based on employment) do. Last year,
maquiladora contributions to the city of Juárez
equaled $1.6 million.

5

For the improvements to the Bridge of the Americas
between El Paso and Juárez in 1996–98, for example, various private-sector entities in Juárez—
including the maquiladora association—contributed
some $7 million.

6

Delphi Automotive, until April 1999 a part of General
Motors Corp., has conducted annual studies since
1996 on the total estimated economic impact on
El Paso of Delphi’s operations in Ciudad Juárez.
Beyond including elements such as what the company pays the city in property taxes for distribution
and warehousing facilities, the study also includes
expenditures in El Paso on hotels, restaurants and
rental cars by corporate visitors to Delphi plants. In
June 1999, Delphi’s total (direct and indirect) economic impact on El Paso was estimated at above
$285 million.

7

The overall elasticity—or responsiveness—of U.S.
border-city employment with respect to Mexican
export production is between 0.11 and 0.2. In other
words, a 10 percent rise in export manufacturing in
a Mexican border city leads to a 1.1 to 2 percent rise
in employment in the neighboring U.S. border city.
See Gordon H. Hanson, “U.S.–Mexico Integration
and Regional Economies: Evidence of Border-City
Pairs,” forthcoming in Journal of Urban Economics.

June 2001 | Federal Reserve Bank of Dallas

29

ILLEGAL
IMMIGRATION
and Enforcement Along the Southwest Border
Pia M. Orrenius

The U.S.–Mexico border region is
experiencing unparalleled trade and
exchange as cross-border flows of goods
and people continue to reach new
highs. The U.S. border economy thrives
on the daily influx of tourists, shoppers,
workers and immigrants from Mexico.
Approximately 700,000 Mexicans cross
legally into the United States every day
to shop and work, returning at night to
their homes in Mexico.
A much smaller number of border
crossers come illegally. Illegal immigrants represent only about 0.5 percent
of total south – north border crossings.
Still, the continuous flow of illegal aliens
over the past 35 years has contributed
to an illegal immigrant population
estimated at between 7 million and
9 million people — about 60 percent of
them from Mexico.
As illegal immigration has increased,
so has border enforcement. Between
1978 and 1999, the U.S. Border Patrol
quadrupled in size. The most rapid rise
came between 1992 and 1999, when the
number of agents more than doubled,
from 3,651 to 7,982. Not only is the
number of agents greater, but time
30

spent patrolling the border grew from
1.9 million hours in 1985 to 8.6 million
in 1999. And since 1970, as a percentage
of the federal budget, enforcement
funds have increased 338 percent.
Other agencies also have a heightened presence on the border. The U.S.
Customs Service and the Immigration
and Naturalization Service (INS) have
intensified their ports-of-entry inspections. And, with the increase in
drug trafficking, the Drug Enforcement Agency and the Bureau of Alcohol, Tobacco and Firearms maintain
an increased presence as well.
The expansion of federal government
agencies in Southwest border cities has
brought both social and economic benefits. Between 1983 and 1999, for example, federal government employment
increased 400 percent in Laredo and
over 200 percent in both Brownsville
and McAllen. The influx of federal
employees has been an economic boon
to areas often lacking what are
described as stable, high-paying jobs.
Heightened police presence also has
reduced crime rates in cities where
enforcement crackdowns are centered,

Federal Reserve Bank of Dallas | June 2001

such as El Paso and San Diego. Increased policing has some negative side
effects, however, and border residents
say these include agents being present
on private property and vehicle stops
becoming routine. Courts are also
clogged with an unprecedented number
of criminal cases because of tougher
penalties on illegal entrants and smugglers.
Despite the dramatic increase in
enforcement, the impact on the volume
of illegal immigration is not clear. The
number of illegal alien apprehensions
has not declined. Also, research shows
that the majority of illegal aliens deported to Mexico continue to attempt
crossings until they succeed. Some
observers have concluded that border
enforcement has not deterred illegal
immigration. Other research, however,
shows that increased enforcement traps
workers in Mexican border cities and
prevents them from entering the United
States.1
This article examines border enforcement’s effectiveness through developments in the smuggling industry.
All other things the same, if enforce-

Chart 1
Mexico–U.S. Migration Rate, 1965–95
Percent
12
11
10
9
8
7
6
5
4
3
2
1
0

’65

’67

’69

’71

’73

’75

’77

’79

’81

’83

’85

’87

’89

’91

’93

’95

SOURCE: Mexican Migration Project.

ment is having an impact, there should
be rising smuggler use rates and higher
smugglers’ fees, as well as changes in
border crossing points away from heavily enforced areas.

Rise in Illegal Immigration
Driving Mexico – U.S. migration are
the higher wages and job availability
prevailing in the United States. Underdeveloped capital markets in Mexico
are a contributing factor because they
make borrowing difficult for most
people. In surveys, migrants often cite
the need for capital to start businesses,
build houses, repay loans or pay for
medical procedures as a main reason
for migrating to the United States. The
policy backdrop in the receiving country also can be important. Laws that
exist but are not enforced, such as sanctions on employers who hire undocumented workers, signal acceptance of
illegal immigration.
Also key to migration is information,
which flows mainly through networks
of family members and friends with
prior migration experience. The Bracero
Program, a guest-worker program in
effect between 1942 and 1964, brought
in about 200,000 workers annually from
Mexico. Braceros established thousands of networks with U.S. recruiters
and employers.2 When the Bracero
agreement was abandoned, no legal
worker exchange was put in its place.
Hence, a new era of largely illegal immigration ensued.

The new era had a slow start, in part
because of the war in Vietnam and
strong economic growth in Mexico in
the 1960s. But by the early 1970s, Mexican migration to the United States was
accelerating again. Facilitating movement to the United States during this
period was the border region’s increased accessibility. Infrastructure development and the growth of twin cities
along the border, such as Tijuana/San
Diego and Ciudad Juárez/El Paso, made
the border more accessible to travelers
from central Mexico.
Before 1930, no major road connected the Mexican interior with any U.S.
border city. Most roads linking the interior to the border were built between
1940 and 1960. Similarly, commercial

air transportation during these years
expanded dramatically. With these
improvements, travel times were significantly shortened, thus lowering the
costs of Mexico – U.S. migration.
As a result of the factors mentioned
above — including higher relative U.S.
wages and the expansion of networks
and infrastructure — migration rates
more than doubled between 1965 and
1997. Chart 1 shows the Mexico– U.S.
migration rate constructed from the
Mexican Migration Project (MMP)3, a
household-based survey. The migration
rate, which is the ratio of migrants to
the total number of migrants and nonmigrants, includes both legal and illegal
trips by working-age household heads.
During the sample period, the likelihood of migrating rises from 3.7 percent
to above 9.6 percent. Sustained increases in migration occurred in the 1970s
and the mid-1980s, with an all-time
peak of nearly 10 percent in 1988.
Border Patrol apprehensions data
are also of interest, although changes
in apprehensions reflect changes in
both enforcement intensity and the
number of illegal border crossings.
Chart 2 shows the INS apprehensions
time series along with the illegal immigration rate from the MMP data. Apprehensions increased from about 21,000
in 1960 to more than 1.5 million in 1999,
with steep increases in the 1970s, in the
mid-1980s leading up to passage of the
Immigration Reform and Control Act

Chart 2
Border Patrol Apprehensions and Illegal Immigration, 1960 –99
Apprehensions (in thousands)

Migration rate (percent)

1,800

7
Rate of illegal immigration

1,600

Apprehensions

6

1,400
5

1,200
1,000

4

800

3

600

2

400
1

200
0

’60

’63

’66

’69

’72

’75

’78

’81

’84

’87

’90

’93

’96

’99

0

SOURCES: Immigration and Naturalization Service; Mexican Migration Project.

June 2001 | Federal Reserve Bank of Dallas

31

Chart 3
Border Patrol Linewatch Hours, 1964 – 99

The Illegal Immigration Reform and
Immigrant Responsibility Act (IIRIRA)
of 1996 followed up on some of IRCA’s
provisions by increasing penalties for
illegal entry, alien smuggling and document fraud. IIRIRA also mandated a
doubling of the Border Patrol by 2001,
imposed limited judicial review of
deportation orders and established an
income requirement on sponsors of
legal immigrants.

Hours (in millions)
9
8

Phase 1

Phase 2

Phase 3

7
6
5
4
3
2

Smuggler Use Rates and Fees

1
0

’64

’66

’68

’70

’72

’74

’76

’78

’80

’82

’84

’86

’88

’90

’92

’94

’96

’98

SOURCE: Immigration and Naturalization Service.

(IRCA) in 1986, and again in 1994– 96.
Meanwhile, the MMP rate of illegal
immigration dropped sharply after IRCA,
partly due to the IRCA amnesty that
legalized many migrants in the MMP
survey. Other data, such as those based
on the U.S. Census or Current Population Survey, do not show a drop in illegal immigration until around 1991.4

Evaluating Border Enforcement
U.S. authorities responded to rising
illegal immigration by increasing enforcement. As shown in Chart 3, border
enforcement — measured by the number of hours Border Patrol agents spend
on linewatch duty — grew in three phases between 1964 and 1999.5 For enforcement to deter illegal immigration, it
must raise the costs undocumented
migrants face. This is usually done by
increasing the probability of apprehension but also can occur if the migrant
faces other increased risks, such as the
chance of death or injury. Has
the probability of being apprehended,
and hence the cost and risk to the
migrant, increased during the enforcement periods under study?

Three Phases of Enforcement
In early enforcement efforts, up until
1986, linewatch hours lagged the influx of migrants. Hours rose in the late
1970s when the Carter administration
increased INS funding, but most new
resources went to hardware and equipment. During the Reagan administra32

tion, IRCA’s passage took INS expansion
to a new level. A large portion of the
33 percent increase in INS funding was
earmarked for the Border Patrol, and
the effect on linewatch hours is apparent in Chart 3.
At this time, Congress also strengthened penalties against migrant smugglers and imposed sanctions on employers of undocumented workers. Whereas
penalties on smugglers and increased
dollars for enforcement were intended
to curtail the supply of undocumented
workers, the employer sanctions were
intended to limit demand by imposing
fines on first offenses and criminal
penalties on repeat offenses.
The third phase of enforcement
started in 1993. The strategy was labor
intensive and marked the biggest
increase in linewatch hours. The objective was to make illegal immigration
costly by diverting illegal traffic out of
border cities and away from roads and
buildings. Agents took up fixed positions along commonly used paths
within urban areas, which, along with
fencing and surveillance equipment,
forced illegal entrants into the brush.
Once in remote areas, they were more
easily spotted and detained by the
Border Patrol. The strategy was first
implemented in El Paso in 1993 (Operation Hold-the-Line), then in 1994 in
San Diego (Operation Gatekeeper) and
Nogales, Ariz. (Operation Safeguard),
and last in 1997 in southeast Texas
(Operation Rio Grande).

Federal Reserve Bank of Dallas | June 2001

We cannot directly measure changes
in apprehension probability because
the total number of illegal immigrants
crossing the Southwest border is
unknown. Instead, we can look at illegal
immigrants’ tendency to hire smugglers, also known as “coyotes,” and the
evolution of coyote prices over time.
Migrants are more likely to hire coyotes
when they perceive a higher chance of
apprehension were they to attempt a
crossing on their own. If coyotes are
more in demand or if risks increase,
as is the case when criminal penalties
on smuggling are increased, then we
expect coyote use and prices to rise.
Coyote use rates provide some evidence that despite the increasing volume of illegal immigration, migrants’
costs were rising during the two earlier
enforcement phases. Chart 4 plots the
percentage of illegal immigrants hiring
coyotes in each year. Coyote use rates
increased in 1970 and trended upward
for the rest of that decade. By 1979, more
than 70 percent of illegal immigrants in
the sample were hiring coyotes. After
softening in the early 1980s, coyote use
rates leveled off at a high level during
the IRCA years (1986 – 90). New highs
were then hit throughout the 1990s.
Chart 4 also shows that despite increasing coyote use rates, coyote prices
were in steep decline until 1994. Median
reported smugglers’ fees fell from $941
in 1965 to $300 in 1994 (constant dollars), suggesting that increases in the
supply of smugglers outpaced the increase in demand. Several factors contributed to the rise in smuggler supply.
First, the border’s improved accessibility through the building of roads
and expansion of bus, rail and airway

Chart 4
Smuggler Use Rates and Fees, 1965– 97
Percent

1994 dollars
1,000

100
90

900

Smuggler fee
Use rate

80

800

70

700

60

600

50

500

40

400

30

300

20

200

10

100

0

fornia became more effective relative to
Texas. Border crossers responded by
shifting to Texas.
Intrastate Reallocation of Migrants.
Within Texas the changes are equally
striking. Chart 6 shows that the increase in Texas crossings beginning in
1990 was almost entirely concentrated
around El Paso. The resumption of
crossings in El Paso influenced the
decision to implement Operation Holdthe-Line in 1993. The crackdown resulted in a 75 percent decrease in the
number of El Paso apprehensions within one year. Consequently, apprehensions in McAllen, Laredo and Del Rio
rose steeply during 1995 – 97. This evidence suggests migrants switched from
heavily enforced crossing points like El
Paso to places farther south, where they
could cross with relative ease.
Border-Crossing Deaths. The new border enforcement strategy was intended
to eliminate illegal alien traffic from city
centers. The consequence has been to
divert migrants into more sparsely populated areas. Illegal immigrants today
cross through inhospitable terrain and
expose themselves to dangerous climatic extremes to a much larger extent
than they did 10 or 20 years ago. Critics
of the border offensives claim that
injuries and deaths along the border are
at an all-time high as a result. The number of crossing-related deaths in 1999
was an estimated 324, up from single
digits before 1995. Deaths in 2000 are

’65

’67

’69

’71

’73

’75

’77

’79

’81

’83

’85

’87

’89

’91

’93

’95

’97

0

SOURCE: Mexican Migration Project.

service significantly lowered transportation costs. Second, free entry into the
industry by experienced migrants also
increased supply. Third, the growth of
the illicit drug trade during the 1980s
attracted more smugglers as well.
As Chart 4 shows, not until the mid1990s did coyote prices reverse their
downward trend. This reversal coincides
with the third phase of border enforcement, seemingly the most successful
to date. Moreover, linewatch hours
(Chart 3 ) and coyote use rates (Chart 4)
are at record highs, and apprehensions
(Chart 2 ) are on the rise. For the first
time, widespread anecdotal evidence
reveals that border crossers are being
apprehended with such frequency that
they turn back, giving up on their
hopes of reaching the United States.
There is also evidence of migrants
trapped in Mexican border cities, unable to cross into the United States.

south through Laredo, McAllen, Brownsville and, most recently, Del Rio.
Interstate Reallocation of Migrants.
From the survey data in Chart 5, we can
see that one-half to three-fourths of all
border crossings between 1965 and
1990 were into California. Following
IRCA, the fraction of California crossings declined and the propensity to
cross into Texas increased. These trends
were intensified after Operation Gatekeeper’s 1994 implementation in San
Diego, which also led to increased
crossings into Arizona, although that
effect is not evident in the survey data
for these years. The trends suggest that
with the passing of IRCA and later the
implementation of Operation Gatekeeper, border enforcement in Cali-

The New Enforcement Strategy

Percent of crossings

Another telling sign that recent
border crackdowns are working is the
disruption of long-standing bordercrossing patterns. Today, immigrants
favor crossing points in Texas and Arizona rather than once-popular spots
in California. Within states, change is
also noticeable. In California, migrants
choose to cross the harsh deserts of El
Centro rather than risk a crossing near
San Diego. In Texas, migrants are less
likely to attempt an El Paso crossing, preferring to enter the United States farther

80

Chart 5
Border Crossings by State, 1965 –94

70

California

60
50
40

Texas

30
20
10
0

Arizona
’65

’67

’69

’71

’73

’75

’77

’79

’81

’83

’85

’87

’89

’91

’93

SOURCE: Mexican Migration Project.

June 2001 | Federal Reserve Bank of Dallas

33

immigration on wages in border states, found no
effect of border enforcement on U.S. wages but did
find an effect on wages of young males in Tijuana.
This finding suggests that border enforcement may
be having an impact, trapping would-be migrants
on the Mexican side.

Chart 6
Border Patrol Apprehensions by Texas Sectors, 1960 – 99
Apprehensions (in thousands)
450
400

McAllen–Laredo

350

2

Douglas S. Massey, Rafael Alarcón, Jorge Durand
and Humberto González (1987), Return to Aztlan:
The Social Process of International Migration from
Western Mexico (Berkeley: University of California
Press).

3

The Mexican Migration Project (MMP) interviewed
5,878 households in nine states in western Mexico
between 1987 and 1997. Family, job and migration histories were collected, including information
on all U.S. trips—network, legal status, mode and
location of border crossing, whether a smuggler
was hired and, if so, the smuggler’s fee. The data
are publicly available: Mexican Migration Project
(1999), Population Studies Center, University of
Pennsylvania, Philadelphia, www.pop.upenn.edu/
mexmig/welcome.html

4

For estimates of illegal immigration between 1987
and 1997, see the report titled “Annual Estimates of the Unauthorized Immigrant Population
Residing in the United States and Components of
Change: 1987–1997,” available on the Internet at
wwwa.house.gov/lamarsmith, as cited in the Oct.
12, 2000, press release on illegal immigration.

5

See also Timothy Dunn (1996), The Militarization
of the U.S.–Mexico Border, 1978–1992 (Austin:
CMAS Books, University of Texas Press).

El Paso

300
250
200
150
100
50
0

Del Rio–Marfa
’60

’63

’66

’69

’72

’75

’78

’81

’84

’87

’90

’93

’96

’99

SOURCE: Immigration and Naturalization Service.

believed to have numbered 388. The
Mexican estimate is 430.

Conclusion
In the post-World War II era, boundaries between Mexico and the United
States have diminished. A hundred
years ago, the wage differences were as
large as they are today, yet there was
little migration between the two countries. Exchange of people and goods
was limited by distance, the lack of
roads and transportation, a scarcity of
information, and language and cultural differences. After 50 years of largescale migration and settlement, today’s
scenario is vastly different. U.S.– Mexico
trade and migration have grown significantly. Illegal immigration and the
resultant border enforcement have
been the natural outcome of an integrated labor market divided by an
international boundary.
In the face of increasing illegal immigration, enforcement efforts have
had mixed results. Early efforts in the
1970s and 1980s were largely ineffectual. They succeeded in raising coyote use
rates among migrants, which created a
flourishing smuggling industry offering
steadily decreasing fees. The more recent
enforcement initiatives have been more
successful, driving up coyote prices and
possibly discouraging more migrants
from trying to cross the border. Additional evidence is the change in migrants’ crossing patterns. When the
Border Patrol has cracked down on
34

one area, migrants have responded by
crossing elsewhere. Unfortunately, as
border-crossing options have been reduced, migrants are risking more to
make it to the United States, resulting
in more crossing-related deaths than
ever before.
The controversy over illegal immigration and tougher border enforcement is being played out along the
Southwest border. While the national
economy benefits from the influx of
workers, the border economy deals
with many of the costs associated with
illegal immigration. Along with the
benefit from increased enforcement
through the influx of relatively highpaying government jobs and reduced
crime rates comes the price tag associated with detaining and prosecuting
large numbers of illegal immigrants and
smugglers. An agreement allowing the
temporary yet legal inflow of Mexican
labor would not end enforcement on
the border but would let authorities
concentrate more on drug interdiction
and less on undocumented workers.
Orrenius is an economist at the
Federal Reserve Bank of Dallas.

Notes
1

Gordon H. Hanson, Raymond Robertson and Antonio Spilimbergo (1999), “Does Border Enforcement
Protect U.S. Workers from Illegal Immigration?”
NBER Working Paper Series no. 7054 (Cambridge,
Mass.: National Bureau of Economic Research,
March). This paper, in studying the effects of illegal

Federal Reserve Bank of Dallas | June 2001

The Texas –Mexico Border Region

SOURCES: Texas Comptroller of Public Accounts; U.S. Census Bureau.

Population and Employment Statistics for Border Cities, 2000
Border Region Surpasses Texas and
U.S. in Population Growth in Past Decade
(Percent change, 1990 to 2000)
Percent
60
50
40
30
20

Workforce*

Employment*

Unemployment

679,622
1,218,817

278,083
483,469

198,967
479,771

8.2%
.8%

McAllen
Reynosa, Tamaulipas

569,463
420,463

203,900
168,926

116,550
167,138

13.6%
1.1%

Brownsville
Matamoros, Tamaulipas

335,227
418,141

130,083
165,214

84,267
163,280

8.7%
1.2%

Laredo
Nuevo Laredo,Tamaulipas

193,117
310,915

74,208
116,674

53,192
115,669

7.0%
.9%

* In Mexico, the data are derived from considering as employed anyone who may have worked at least one hour during the unemployment survey
week. However, even when considering broader definitions of unemployment, border cities have lower rates than the rest of the nation.

10
0

Population
El Paso
Ciudad Juárez, Chihuahua

McAllen

Laredo

Brownsville

SOURCE: U.S. Census Bureau.

Texas

El Paso United States

SOURCES: Texas population from U.S. Census Bureau (county data); all other Texas data from Bureau of Labor Statistics. Mexico numbers from
Federal Reserve Bank of Dallas El Paso Branch, with data from XII Censo General de Población y Vivienda 2000; Instituto Nacional
de Estadística, Geografía e Informática.

June 2001 | Federal Reserve Bank of Dallas

35

Sectoral Employment Shares in Border Cities Versus Texas and the United States, 2000
Brownsville
Mining
0%

El Paso
Mining
0%

Manufacturing
11%

Government
22%

Construction
4%

Manufacturing
15%

Government
22%

Construction
5%

TCPU
5%

TCPU
6%

Trade
24%
Services
31%

Services
24%

FIRE
3%

Trade
24%
FIRE
4%

Laredo
Mining
2%

McAllen
Manufacturing
3%
Construction
4%

Government
23%

Services
21%

Mining
1%

Manufacturing
8%

Government
26%

Construction
6%

TCPU
19%

TCPU
4%

Trade
24%

Trade
26%
Services
26%

FIRE
4%

Texas
Mining
2%
Government
16%

FIRE
3%

United States
Mining
0.4%

Manufacturing
11%
Construction
6%

Manufacturing
14%

Government
16%

Construction
5%
TCPU
5%

TCPU
6%

Services
29%

Services
31%

Trade
23%

Trade
24%
FIRE
6%
NOTE: TCPU is transportation, communication and public utilities; FIRE is finance, insurance and real estate.
SOURCE: Bureau of Labor Statistics.

36

Federal Reserve Bank of Dallas | June 2001

FIRE
6%

The Border Economy is published by
the Federal Reserve Bank of Dallas.
The views expressed are those of the
authors and should not be attributed to
the Federal Reserve Bank of Dallas or the
Federal Reserve System. Articles may be
reprinted on the condition that the
source is credited and a copy is provided
to the Research Department, Federal
Reserve Bank of Dallas, P.O. Box 655906,
Dallas, TX 75265-5906. This publication
is available on the Internet at
www.dallasfed.org.

Robert D. McTeer, Jr.
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Senior Vice President and
Director of Research
Managing Editor
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Research Department
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