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FEDERAL RESERVE BANK OF DALLAS

•

EL PASO BRANCH

ISSUE 2 • 2005

Crossroads

E C O N O M I C T R E N D S I N T H E D E S E RT S O U T H W E S T

Border Cities:
Unconventional
Economic
Natural Gas
Drive
Competitors
or
New Mexico
Complements?
Rig Count
Just as El Paso was among
the last to feel the effects of
this recession, it may be
among the last to pick back
up. Strong U.S. growth will
be the first and most
important step in getting El
Paso growing.

trong economic interaction exists between
communities on both sides of the U.S.–Mexico
border. Just count the number of Mexican license
plates on autos parked in U.S. malls, or note the
many service and goods suppliers in U.S. border
cities that support manufacturing in Mexico.
Casual observation reveals patterns of local specialization, where work is often divided between
the two cities on a sector-by-sector basis. But how
do these cities divide local production? Can we
measure the nature and strength of this economic
interaction and specialization and identify the
sectors where it occurs, such as manufacturing or
education?
This article looks at how four Texas border
city pairs—El Paso–Juárez, McAllen–Reynosa,
Laredo–Nuevo Laredo and Brownsville–Matamoros—compete with or complement each other
economically. We find significant economic complementarities among these adjacent cities. When
one city is strong in specific industries, the other
is often weak. Defining the economic base of the
combined cities, manufacturing is the single most
important factor that drives the economy of the
Texas–Mexico border.1

Sizing Up the Neighboring Cities
The economic base of a city or other region is
composed of the sector or sectors that export
from the local area to the rest of the world.
Exports are necessary to pay for imports and support inherently local activity such as laundries
and lawn services. Growth in the export sector is
seen as the primary route to greater local income
and wealth.
Table 1 shows the population and employment of the eight border cities in 2004. With an
estimated combined population of 2.2 million and
the largest employment base, El Paso and Juárez
are the largest of the four border cities in their
respective countries. Laredo–Nuevo Laredo is
the smallest pair, with a combined population
of 584,000.

Table 1

Population and Employment in Largest Texas–Mexico Border City Pairs
City

Population

El Paso
Ciudad Juárez, Chihuahua

732,613
1,420,262

Formal employment
255,700
331,623

Laredo
Nuevo Laredo, Tamaulipas

219,760
363,919

75,700
118,561

McAllen
Reynosa, Tamaulipas

642,776
504,748

179,200
175,495

Brownsville
Matamoros, Tamaulipas

370,268
486,941

114,700
167,362

SOURCES: Population estimates for U.S. cities are midyear estimates for 2004 from Texas county
population projections, 2000–2030, by Texas comptroller. Population estimates for Mexican
cities are midyear estimates for 2004 from Consejo Nacional de Población, Proyecciones
2000–2030. Employment for Mexican cities is from Tamaulipas State Government Office
(Matamoros, Laredo, Reynosa) and from Chihuahua State Office (Juárez), all for 2004.
Employment for U.S. cities is from the Federal Reserve Bank of Dallas.

The four U.S. border cities
are on the periphery of the Texas economy, accounting for only
8.6 percent of the state’s population, 6.4 percent of its jobs and
5.1 percent of its income in 2002.
In contrast, the Texas Triangle
metro areas of Dallas–Fort Worth,
Houston, San Antonio and Austin
are the state’s largest economies,
and in recent years these cities
have driven the state’s economic
growth.2 The Texas Triangle cities
accounted for 62.5 percent of
the state’s population in 2002,
66.3 percent of its jobs and 71.4
percent of its personal income.
Although Texas border cities enjoyed strong employment
growth in the 1990s, slightly outperforming even the rapid growth
of the state economy, this job
growth produced only a small
increase in border income levels. The increase does not approach convergence to U.S. or
statewide income levels. The
average per capita income of the
four cities in 2002 was $17,222,
compared with $29,039 in Texas
and $33,178 for the four Texas
Triangle metro areas.
By comparison, the cities
along Mexico’s northern border
have experienced high growth
rates accompanied by rising
income levels.3 The dominant
factor affecting the economic
Crossroads

growth and industrial structure
of Mexico’s border cities is the
maquiladora industry. Out of a
nationwide total of more than 1
million maquiladora jobs, approximately 32 percent are generated in these four border cities.
Numerous border economists have noted the importance
maquiladora employment growth
in Mexico represents for the
Texas border cities.4 This employment growth creates a
demand for transportation services, finance, legal and administrative support needed to move
goods across the border. More
maquiladora workers implies
greater retail sales by U.S. merchants. As a result of just-intime inventory needs, new U.S.
plants are acting as maquiladora
industry suppliers, a relatively
recent development among border city manufacturing. For instance, plastic injection molding
and metal stamping plants are
among the most common of the
new Texas-based suppliers to
maquiladoras.5
This apparent linkage between border cities, with the
growth of each city dependent on
the expansion of the other’s economic base, has long been recognized at an intuitive and anecdotal
level. The failure to deal with it at
an analytical level, however, is
2

largely due to differences in the
data collection systems. The
United States depends on data
from agencies such as the Bureau
of Labor Statistics (BLS) and the
Bureau of Economic Analysis
(BEA), while Mexico depends
on statistics collected by the
Mexican government. Until recently, the data have used different concepts and definitions,
making a comparison of the economic sectors between neighboring cities difficult or impossible.
The recent advent of the North
American Industry Classification
System (NAICS) now makes it
possible to classify the industrial
sectors of both U.S. and Mexican
cities on a common basis.6

An Analytical Look
Economists and economic
developers alike have used location quotients (LQ) as a quick
and easy means of identifying
dominant or prominent industries in an area. An LQ isolates an
industry—such as retail trade—
to identify the percentage of
employment (or earnings) it represents out of total employment (or earnings) in a state or
the nation.
Percent share of industry i in city j

LQij =
Percent share of industry i in
the national economy

Texas Border Cities. LQs for
Texas border cities were computed using employment in the
United States as the denominator (Table 2). An LQ greater
than 1 represents an employment concentration higher than
the national average in a given
city. The cities exhibit high concentrations of retail trade, and
with the exception of McAllen,
they also have particularly high
levels of transportation-related
services. Visiting Mexican nationals appear to bolster retail store
operations in Texas border cities
by shopping in downtown areas
Issue 2 • 2005

Table 2

Location Quotients for U.S. Cities on Texas–Mexico Border
NAICS code
11
21
22
23
31-33
42
44-45
48-49
51
52
53
54
55
56
61
62
71
72
81

Sector

El Paso

Agriculture, forestry, fishing and hunting
Mining
Utilities
Construction
Manufacturing
Wholesale trade
Retail trade
Transportation and warehousing
Information
Finance and insurance
Real estate and rental and leasing
Professional, scientific and technical services
Management of companies and enterprises
Administrative and support and waste management
and remediation services
Educational services
Health care and social assistance
Arts, entertainment and recreation
Accommodation and food services
Other services (except public administration)

Laredo

McAllen

Brownsville

.5
0
N.A.
1.1
.9
1.1
1.2
1.3
.4
.6
1.1
.5
.3

N.A.
3.7
N.A.
.9
.1
.9
1.5
5.3
.1
1.0
.9
.5
.1

2.2
1.7
.3
1.2
.2
.9
1.5
.8
0
.7
.8
.4
0

1.4
N.A.
.1
.9
.4
.8
1.4
1.1
.1
.6
1.3
.4
.1

1.2
1.5
.9
.4
1.2
.9

.6
1.9
.7
N.A.
1.2
.7

.5
2.3
1.6
.4
1.2
.8

.6
2.0
1.6
.5
1.4
1.0

NOTE: An LQ > 1 represents an employment concentration higher than the national average in a given city. For instance, agriculture, forestry,
fishing and hunting in El Paso has an LQ of 0.5, indicating half the employment level of the national average, while McAllen has an LQ
of 2.2 for the same sector, representing an employment level more than twice the national average.
SOURCES: Bureau of Labor Statistics; Bureau of Economic Analysis; authors’ calculations.

and regional malls. They often
have a positive impact on accommodation and food services
as well. Transportation services is
a function of moving goods across
the border, much of it closely tied
to the maquiladora industry.
As in the retail and manufacturing sectors, LQs serve as
macro-level indicators that are
further clarified by the firm- and
industry-specific activities within those cities. For instance, the
mining activity in Laredo and
McAllen results from natural gas
fields in South Texas. Electric
generation and a pipeline to transport natural gas out of South
Texas explain the large LQ for
the utilities sector in McAllen.
The burgeoning construction sectors in El Paso and McAllen
reflect the strengths of the local
business cycle in 1998.
The strength of real estate
on the Texas border is partly
the result of U.S. manufacturers
searching for industrial land or
buildings in Mexico. These companies will typically turn to U.S.based brokers, who then work
with the Mexican government to
locate a maquiladora in an industrial park. In addition, Mexican
Crossroads

land development, both residential and commercial, often relies on
U.S. advisors and capital. Furthermore, many Mexicans seeking to
hedge against the peso invest in
residential or commercial property in the United States, thus
expanding the market of U.S.
border cities.
With respect to the education sector, Texas border cities
exhibit surprising strength. This
is due to a variety of factors: (1)
For these mostly Hispanic and
Catholic cities, family size ranges
from 14 percent to 29 percent
larger than the average U.S. family. (2) Many upper- and middleclass Mexican families send their
children to private (often Catholic) primary and secondary schools
in the U.S. border cities. (3) A
large number of Mexican border
families unable to afford private
tuition send their children to
U.S. public schools, often using
the address of a relative or friend
on the U.S. side (a practice fostered by the “don’t ask, don’t tell”
policy that prevails generally
along the border). (4) Each of the
four Texas cities is home to a
state university that allows Mexican students from neighboring
3

states to matriculate at in-state
tuition rates. The result is that
U.S. border cities become significant suppliers of educational
services not only locally, but as
exporters of educational services to Mexico.7
Mexican Border Cities. As was
done for Texas border cities,
LQs were computed for Mexican border cities, this time
using employment in Mexico as
the denominator (Table 3). Not
surprisingly, maquiladoras are
responsible for a high concentration of manufacturing-related
activity along the Mexican border, as well as related transportation services. Nuevo Laredo
contains a particularly strong
concentration of transportation
services, as Laredo–Nuevo Laredo
forms the largest land-based port
between the United States and
Mexico. This traffic also creates
a strong demand for automotive
repair and truck maintenance
services. Both Nuevo Laredo and
Reynosa export personal services
to their northern neighbors in
Texas border cities. These services include beauty salons, diet
and weight-reducing centers,
one-hour photofinishing, home
Issue 2 • 2005

Table 3

Location Quotients for Mexican Cities on Texas–Mexico Border
NAICS code
11
21
22
23
31-33
42
44-45
48-49
51
52
53
54
55
56
61
62
71
72
81

Sector

Juárez

Nuevo Laredo

Reynosa

Matamoros

.1
.1
.3
.3
2.1
.5
.6
.5
1.9
.1
.7
.5
0

.1
0
.6
.5
1.3
.6
.8
3.3
.7
.2
.6
.6
N.A.

0
4.1
.4
.9
1.7
.5
.7
.6
.9
.1
.9
.7
0

1.1
.1
.3
.6
2.0
.5
.6
.6
.7
.1
.5
.3
N.A.

.4
.3
.6
.5
.7
.5

.5
.4
1.0
.7
1.1
1.0

.3
.5
.7
.4
.8
1.1

.4
.5
.6
.5
.7
.7

NOTE: An LQ > 1 represents an employment concentration higher than the national average in a given city.
SOURCES: Instituto Nacional de Estadística, Geografia e Informática; Censos Económicos 1999; authors’ calculations.

and garden equipment repair,
and automotive mechanical and
electrical repair and maintenance. (We identify these services by conducting an analysis
of specific NAICS subsectors.)
Economic Interaction and Integration. Tables 2 and 3 looked separately at the industrial structure
of the U.S and Mexican border
cities as part of their respective
economies. We now pair the border cities in the numerator and
include the sum of both countries’ employment base in the
denominator to capture the LQ
values for specific regions along
the U.S.–Mexico border.
Percent share of industry i in city pair j

LQij =
Percent share of industry i in
the U.S. and Mexican economies

The equation above implies
complementary roles for the
Texas and Mexico neighboring
cities. Using U.S. data from the
BLS and BEA and comparable
information from the 1999 Mexican economic census (both
using NAICS), we are able to
compare employment by industry sector in the four city pairs
along the Texas–Mexico border.
If any of these border city pairs
Crossroads

are complements, exports from
one will be matched by imports
in other cities in the same industry. Where one city has an LQ
value greater than 1, the others
have an LQ less than 1. If we
combine the city pairs by simply
adding them together, the variance of the computed LQs for
the combination should be smaller than an average of the variance of the individual cities.8
Using a standard statistical
test, we can be about 90 percent
certain that the variance has declined significantly. The citypair combinations of El Paso–
Juárez and Brownsville–Matamoros test positively for a complementary structure. The McAllen–
Reynosa city-pair combination is
quite close to the standard. The
Laredo–Nuevo Laredo combination appears weak, perhaps
implying a more competitive
relationship. However, the statistical shortfall may be more a
product of the level of data
aggregation, which can make it
difficult to pick up the specific
trade patterns for a given sector.9
We also conducted the same
calculations by subsector and at
the industry group level and
used nine sectors common to all
4

four cities. The standard test
showed, with a minimum probability of 90 percent, that manufacturing is highly complementary in
all cities. In addition, wholesale
trade; educational services; and
arts, entertainment and recreation are complementary in three
of the four city pairs, while accommodation and food services
is complementary in only two
cities. Unfortunately, due to the
limitations of the data sources, we
cannot reliably test for the interdependence of retail and other
service sectors where we would
most expect these complementary effects to exist.10 Hence,
from a statistical validation perspective, the results for these two
sectors are less robust.
The Role of Border Cities. How
do the border cities relate to the
rest of the world? By combining
the cities, we should have canceled out the interaction between
them, that is, the combined cities
are more self-sufficient. The remaining concentrations of excess
employment should reflect only
exports that move beyond the
city pair and into the rest of the
world (Table 4).
Retail trade, for example, remains significant in Laredo–
Issue 2 • 2005

Table 4

Location Quotients for Combined City Pairs
NAICS code
21
22
23
31-33
42
44-45
48-49
51
52
53
54
55
56
61
62
71
72
81

Sector

El Paso–Juárez

Mining
Utilities
Construction
Manufacturing
Wholesale trade
Retail trade
Transportation and warehousing
Information
Finance and insurance
Real estate and rental and leasing
Professional, scientific and technical services
Management of companies and enterprises
Administrative and support and waste management
and remediation services
Educational services
Health care and social assistance
Arts, entertainment and recreation
Accommodation and food services
Other services (except public administration)

Laredo–Nuevo Laredo

McAllen–Reynosa Brownsville–Matamoros

.1
.4
.6
2.8
.8
.9
.9
.8
.2
.6
.4
.1

1.5
.8
.6
1.3
.8
1.3
4.5
.2
.5
.6
.4
0

4.1
.5
1.0
1.5
.7
1.2
.7
.3
.4
.7
.4
0

.1
.5
.7
2.2
.7
1.1
.9
.2
.3
.7
.3
0

.6
.6
.4
.4
.8
.8

.5
1.0
.4
.2
1.1
1.2

.4
1.4
1.0
.3
1.0
1.2

.4
1.0
.8
.4
.9
1.1

NOTE: An LQ > 1 represents an employment concentration higher than the national average in a given city.
In this specific case, an LQ > 1 represents an employment concentration higher than the average of the U.S. and Mexico combined.
SOURCE: Authors’ calculations.

Nuevo Laredo, McAllen–Reynosa
and Brownsville–Matamoros, cities that draw large numbers of
shoppers from the interior of
Mexico. The three border pairs
sell personal and repair services
(subsectors of the “other services”
sector) beyond the local area as
well. Exports of educational services remain strong in McAllen–
Reynosa, which may imply that
local universities and private
and public schools are providing
educational services well beyond the boundary of the two
cities and into the interior of the
two countries.
Table 4 indicates that mining,
which includes oil and gas extraction, remains strong on both sides
of the border in Laredo–Nuevo
Laredo and McAllen–Reynosa.
Also dominant are the traditional
border industries of maquila-led
manufacturing and, in Laredo,
border transportation and warehousing. The shared feature in
all the city-pair combinations is
manufacturing. Excess manufacturing employment in all eight
cities is close to 413,000 jobs,
indicating that they are probably tied to exports. With the
exception of El Paso–Juárez,
employment in retail sales and
personal services (29,700 and
Crossroads

22,500 jobs, respectively) remains strong along both sides of
the border.
The simplest characterization of the entire border area is
that it is an important manufacturing region. Stages of development are typically separated into
three successive periods: (1) primary extraction and agriculture,
followed by (2) industrialization
and culminating in (3) services
and information. Our analysis suggests that the Texas–Mexico
border remains at the industrialization stage.

Conclusion
We have looked at what composes the economic base of each
city and whether border city pairs
are competitors or complements.
We conclude that the Texas–
Mexico border cities have, in
general, developed as complements, providing each other with
unique goods and services, acting as a single urban area and
spurring the growth of their
respective neighbors.
—Jesus Cañas
Ebetuel Pallares
Luis Bernardo Torres Ruiz

Cañas is an assistant economist at the El Paso Branch of
the Federal Reserve Bank of
Dallas. Pallares is an international business Ph.D. student
at the University of Texas at
El Paso. Torres Ruiz is an
economics Ph.D. student at
the University of Colorado at
Boulder.

Notes
1
The combined cities are defined on a
regional basis and by eliminating exports
from one city to the other.
2
“The Simple Economics of the Texas
Triangle,” by Robert W. Gilmer, Federal
Reserve Bank of Dallas Houston
Business, January 2004.
3
Problemas estructurales de la
economía mexicana, by Alejandro
Díaz-Bautista (ed.), Tijuana, B.C., Mexico: El Colegio de la Frontera Norte,
2003.
4
Several authors have made note of this
phenomenon. See “Project Link: An Investigation of Employment Linkages
Between Cd. Juárez and El Paso,” by
Richard Sprinkle, University of Texas at
El Paso, December 1986; “The Employment Impact of Maquiladoras Along the
U.S. Border,” by J. Michael Patrick, in
The Maquiladora Industry: Economic
Solution or Problem?, ed. Khosrow
Fatemi, New York: Praeger Publishers,
1990, pp. 31–35; “Maquiladora Industry
Impacts on the Spatial Redistribution of
Employment,” by Arthur L. Silvers and
Vera K. Pavlakovich, Journal of Borderlands Studies, vol. 9, December 1994,
pp. 47–64.
5
“Maquiladora Downturn: Structural
Change or Cyclical Factors?” by Jesus
Cañas, Roberto Coronado and Robert W.
Gilmer, Federal Reserve Bank of Dallas

Issue 2 • 2005

Business Frontier, Issue 2, 2004.
6
The Mexican data used are from the
1999 Censos Económicos, conducted by
Mexico’s chief statistical agency, the
Instituto Nacional de Estadística, Geografía
e Informática (INEGI). This census serves
as the backbone of all Mexican economic
data collection. It is currently conducted
on a five-year cycle, with 16 censuses
completed since 1930. The effort is
huge: 1.2 million blocks canvassed by
35,000 census takers, along with 23 million homes visited and 3.3 million small
businesses contacted. Data are tabulated for 974 NAICS sectors and 2,516
variables. For the U.S. data, we were
able to approximate a broad definition of
employment by using the sum of wage
and salary workers and the selfemployed. This omits unpaid family
members, but they constitute less than 1
percent of total jobs in all four cities.
7
To allow comparison between U.S. and
Mexico education-sector labor numbers,
we used both private and public employment figures for 1999 for the United
States obtained from the BLS and for
Mexico obtained from INEGI. Hence,
referring to both data collection agencies for raw figures, our analysis includes aggregate employment.
8
To illustrate the use of LQs in the
analysis of whether cities are competitors or complements, consider the following example. Three cities (A, B and
C) produce four kinds of widgets. City A
specializes in green widgets, B in white
and C in blue, with each city earning
$300. They divide production of yellow
widgets, a local good, equally among the
cities, to earn $100 each. If we combine
the three cities, there is equal income
earned of $300 from each kind of widget.

We can compute the location quotient
for each kind of widget. For example, for
green production in City A, the LQ is
(300/400)/(300/1,200) = 3. The other cells
can be filled out, and the average LQ for
each city is LQ' = (3 + 0 + 0 + 1)/4 =1.
This makes the computed variance for
each city: S2 = (1/N – 1) Sum (LQi – LQ')2
for 1 = 1, …, 4 = (1/3) [(3 – 1)2 + (0 – 1)2
+ (0 – 1)2 + (1 – 1)2] = 2. If we combine the
cities, however, the combination is selfsufficient in every kind of widget, and all
the LQs are equal to 1 for every industry.
Because they are all equal, variance of
the LQs falls to zero. Looked at separately, the cities have an average variance of 2; once combined, the cities’
variance falls to zero. So we have proven
that they are complements of each
other.
9
For more information, see “Industrial
Structure and Economic Complementarities in City Pairs on the Texas–
Mexico Border,” by Robert W. Gilmer
and Jesus Cañas, Federal Reserve Bank
of Dallas Working Paper no. 0503, March
2005.
10
Though NAICS provides a common
definition of the industry sectors, the
employment definition used by the
United States and Mexico can be compared mostly for broad industry categories and for some narrowly defined
sectors that do not contain large numbers of self-employed. Unfortunately,
retail and personal services in these
cities contain large numbers of proprietors and partnerships.

Crossroads

ECONOMIC TRENDS IN
T H E D E S E RT S O U T H W E S T

ISSUE 2 • 2005

Crossroads is published by the El Paso
Branch of the Federal Reserve Bank of
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web site at www.dallasfed.org.
Editor: Bill Gilmer
Copy Editor: Jennifer Afflerbach
Art Director: Gene Autry
Graphic Designer: Samantha Coplen

Cross-Border Shopping Activity
A One-Day Conference on the Border Retail Sector
Friday, January 13, 2006
Holiday Inn Select, 77 N.E. Loop 410, San Antonio, Texas
Retailing to Mexican nationals is big business in South Texas. The retail sector has provided many
job opportunities to low- and moderate-skill workers and has been an important reason why job
growth along the Texas–Mexico border has outperformed most areas of the country since the
1980s. Experts at this conference will discuss the size, drivers and future of border retailing, especially in light of increasing globalization and the threat of terrorism.

Hosted by
Federal Reserve Bank of Dallas, San Antonio and El Paso Branches
Federal Reserve Bank of Chicago, Detroit Branch
International Council of Shopping Centers
For more information or to register for this conference, visit our web site at www.dallasfed.org and click on “Events.”

Crossroads

Issue 2 • 2005

Full text of Crossroads : Economic Trends in the Desert Southwest : Issue 2, 2005

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