The aim of this paper is to investigate the effects of production and real wages on employment in the manufacturing sector spanning the 32 Mexican states from 2004 to 2017.This analysis is carried out by estimating spatial Durbin panel data models, which can capture heterogeneous performance across states and over time, for the growth rates of total formal manufacturing employment and its two components, permanent and temporary employment. Our results suggest that although the negative direct effects of real wage growth are relevant to the explanation of temporary employment growth, the total effect of production growth can be considered the main determinant of total employment, including both temporary and permanent employment dynamics. The estimated coefficients, however, show a rather small effect. A major policy implication of this is that central and state governments should pursue policies that enhance production growth in order to increase employment in this sector.Reg Sci Policy Pract. 2020;12:303-318.wileyonlinelibrary.com/journal/rsp3 303 54.2% in 2000, respectively (Loría, 2009). 5 These authors incorporate other explanatory variables in their models like productivity, capital and exports, and consider the differences between specialized and non-specialized work. Regressions, time series techniques and panel data models have been used in these papers. We highlight the roles of production and real wages because we analyze their effects on employment, which is affected by the availability of data.