Third Quarter 2001
Federal Reserve Bank of Dallas

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Educational Attainment and Border Income Performance
Thomas M. Fullerton, Jr.

Texas border areas face a variety of economic challenges. In today’s labor markets, income performance depends increasingly on productivity, which is primarily a function of educational attainment. To examine the extent to which education influences border region incomes, a cross-section econometric model is estimated using county-level information. Data are drawn from the 1990 census for all 254 counties in Texas. Empirical results indicate that per capita income is influenced by educational, demographic, and geographic factors. Regression output is similar, but not identical, to estimates obtained for other regions of the country. Model simulation results indicate that border counties lost nearly $3.6 billion in personal income in 1990 due to below-average high school graduation rates.

Was NAFTA Behind Mexico's High Maquiladora Growth?
William C. Gruben

Although Mexico’s maquiladora system is an important and well-recognized component of Mexico–U.S. trade, the connection between the acceleration in maquiladora growth and NAFTA is less clearly understood. A broad cross section of observers—including journalists, political activists, industry analysts, and academics—argue that Mexico’s maquiladoras have been strongly influenced by NAFTA and have grown rapidly as a result. William C. Gruben finds no such connection when he tests for NAFTA’s contribution to fluctuations in maquiladora employment. Instead, he finds that maquiladoras’ post-NAFTA growth is connected to changes in Mexican wages relative to those in Asia and the United States and to fluctuations in U.S. industrial production. For every 1 percent change in U.S. industrial production, maquiladora employment changes between 1.2 percent and 1.3 percent. This connection is consistent with declining maquiladora employment in 2001, as U.S. industrial production has fallen, but is not consistent with the contention that NAFTA was responsible for Mexico’s high maquiladora growth.

Explaining Stock Price Movements: Is There a Case for Fundamentals?
Nathan S. Balke and Mark E. Wohar

Some observers have argued that the run-up in the Standard & Poor’s 500 stock price index during the 1990s was due to irrational exuberance rather than market fundamentals. This article presents evidence that the case for market fundamentals is stronger than it appears on the surface. Nathan Balke and Mark Wohar show that movements in the price–dividend and price–earnings ratios have exhibited substantial persistence, particularly since World War II. Hence, using the long-run historical average value of the price/earnings or price/dividend ratio as the "normal" valuation ratio is misleading. The authors also show that plausible combinations of lower expected future real discount rates and higher expected real dividend (earnings) growth could rationalize current broad market stock values, raising the possibility that changes in market fundamentals have made a major contribution to the run-up in stock prices. Even if market fundamentals were responsible for the increase in stock prices during the 1990s, we should not necessarily expect future stock returns to be as high as the returns seen in the latter half of the 1990s.