Capital Account Liberalization, Real Wages, and Productivity

Publication Date: March 2008

Publisher: Brookings Institution

Author(s): Peter Blair Henry; Diego Sasson

Research Area: Banking and finance; Economics; Labor

Keywords: globalization; financial markets; wages; economic development

Type: Report

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.