Capital Account Liberalization, Real Wages, and Productivity

Abstract:     
For three years after developing countries open their stock markets 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 that do not liberalize. The temporary increase in the growth rate of the real wage permanently drives up the level of average annual compensation for each worker in the sample by 856 US dollars - an increase equal to more than a quarter 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.

Keywords: Capital Account Liberalization, Labor Market, Wages, Productivity, Economic Growth, Output Per Worker

JEL Classifications: E2, F3, F4, O4

Working Paper Series