Firms and Labor in Times of Violence: Evidence from the Mexican Drug War

Available from: 
February 2020
Paper author(s): 
Hâle Utar
Topic: 
Conflict, Crime and Violence

I study how urban violence due to drug trafficking affects industrial development and employment in an emerging economy. Employing rich longitudinal plant-level data covering all of Mexico from 2005–2010, and exploiting plausibly exogenous spatiotemporal variation in homicide rates during the outbreak of drug-trade related violence in Mexico, commonly referred to as the Mexican Drug War, I show that a violent environment has a significant negative impact on manufacturing plants’ output, product scope, employment, and capacity utilization. Violence also generates a negative blue-collar labor supply shock, leading to a significant reduction in blue-collar employment and a significant increase in skill intensity within plants. The employment effect of violence is stronger on plants with higher shares of lower-wage and female workers. A violent environment also deters domestic, but not international, trade and the output elasticity of violence decreases with reliance on export and import. These results suggest that the rise of drug violence has significant distortive effects on domestic industrial development in Mexico.

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Research section: 
Working Papers