Liberalized Capital Accounts and Wages

by Don Boudreaux on August 19, 2008

in Balance of Payments, The Economy, Trade, Work

What is the effect of liberalizing a country’s capital account (that is, making it less costly for assets to flow into and out of the country)?  In this recent paper published by the NBER, Peter Blair Henry and Diego Sasson report their empirical findings on this topic; here’s the abstract:

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
permanently drives up the level of average annual compensation for each
worker in the sample by 752 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.

This effect is unsurprising.  Liberalized capital markets makes capital more abundant, and more abundant capital means higher worker productivity — which, of course, results in higher real wages.

(HT Bob Higgs)


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