Cafe Hayek: Liberalized Capital Accounts and Wages

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August 19, 2008

Liberalized Capital Accounts and Wages

Don Boudreaux

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)

Posted by Don Boudreaux in Balance of Payments, The Economy, Trade, Work | Permalink