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Capital Market Integration and Wages

  • Peter Henry

    (Graduate School of Business)

  • Diego Sasson

    (Credit Suisse)

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    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 dollars—an 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.

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    Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-028.

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    Date of creation: Mar 2009
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    Handle: RePEc:sip:dpaper:08-028
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