Capital Market Integration and Wages

By Peter Blair HenryDiego Sasson
2009| Working Paper No. 2019

For three years after the typical developing country opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of seven. No such increase occurs in a control group of developing countries. The temporary increase in the growth rate of the real wage drives up the level of average annual compensation for each worker in the sample by 609 US dollarsan increase equal to 25 percent of their annual pre-liberalization salary. The increase in the growth rate of labor productivity in the aftermath of liberalization exceeds the increase in the growth rate of the real wage so that the increase in workers incomes actually coincides with a rise in manufacturing sector profitability. Overall, the results suggest that trade in capital may have a larger impact on wages than trade in goods.

Keywords
economic policy
macroeconomics
economic development