Foreign direct investment and wages: a cross-country analysis

While globalization has led to overall economic growth in a number of countries, questions abound on its distributional effects, especially on rising wage inequality across nations. The main objective of this study is to investigate empirically the effects of foreign direct investment (FDI) on wages in a cross-country setting. We investigate the general equilibrium propositions that capital inflows (outflows) increase (lower) wages in host (home) countries due to the change in relative factor endowments. We also explore whether capital inflows have differential impacts on skilled and unskilled wages in developing economies. Time-series data on 26 countries, 15 developed and 11 developing, are used to fit the labour share equation derived from a translog GNP function with net FDI stock as one of its arguments. Results confirm that capital movement brings about a cross-country convergence of wages. However, there is some evidence that inward FDI flows increase the wage gap between skilled and unskilled workers in developing countries.     

International Outsourcing and the Skill–Specific Wage Bill in Eastern Europe

This paper analyses the effects of international fragmentation in terms of intermediate goods trade on the dynamics of the skilled–to–unskilled labour wage bill ratio in 14 manufacturing industries of the Czech Republic, Hungary and Poland. Both intermediate goods exports and imports of the CEEC exhibit a positive impact on the wage bill ratio. Since 1993, intermediate goods trade with the EU alone has accounted for a considerable reduction of the predicted annual change in the skilled–to–unskilled wage bill ratio in the three CEEC.     

Education bias of trade liberalization and wage inequality in developing countries

The aim of this article is to examine the impact of increased trade on wage inequality in developing countries, and whether a higher human capital stock moderates this effect. We look at the skilled–unskilled wage differential. When better educated societies open up their economies, increased trade is likely to induce less inequality on impact because the supply of skills better matches demand. But greater international exposure also brings about technological diffusion, further raising skilled labour demand. This may raise wage inequality, in contrast to the initial egalitarian level effect of human capital. We attempt to measure these two opposing forces. We also employ a broad set of indicators to measure trade liberalization policies as well as general openness, which is an outcome, and not a policy variable. We further examine what type of education most reduces inequality. Our findings suggest that countries with a higher level of initial human capital do well on the inequality front, but human capital which accrues through the trade liberalization channel has inegalitarian effects. Our results also have implications for the speed at which trade policies are liberalized, the implication being that better educated nations should liberalize faster.     

Efficiency wages,unemployment and international factor movements

This paper examines the implications of unemployment resulting from efficiency wages for international factor movements in a standard Heckscher-Ohlin model where the relative size of the endowments of skilled and unskilled workers and the efficiency wage induced unemployment level in the unskilled labour market are simultaneously determined given the population, supply of capital and its distribution in the economy. Capital in the economy is used only to train individuals for the skilled labour market, where workers are fully employed. It is shown that the optimum labour inflow in the market with domestic distortion and the optimum capital inflow are always positive because they reduce the severity of distortion by raising employment and income for the residents. The income and employment of foreigners also increase. Under this situation the optimum labour or capital outflow on the other hand is always zero. These conclusions directly contradict the result obtained for international factor movements in the presence of exogenously determined unemployment.     

Mind the Gender Wage Gap – the Impact of Trade and Competition on Sectoral Wage Differences

This paper examines differences between women’s and men’s wages in 18 selected OECD countries in the period 1970 to 2005. The study is based on 12 manufacturing sector‐ and skill‐specific sets of panel data on the gender wage gap. We apply a system generalised method of moments (GMM) estimator to the extended version of the conditional gender wage gap convergence equation, controlling for sector concentration and industry‐specific measures of openness using a difference‐in‐difference approach: trade‐affected concentrated sectors versus trade‐affected competitive sectors. The results indicate that: (i) an increase in sector concentration is associated with wage gap growth; (ii) both import and export penetration are associated with a reduction of the high‐skill gender wage gap growth in concentrated industries; (iii) there is evidence of a widening impact of trade on the medium and low‐skill occupational gender wage gap growth in less competitive industries; (iv) institutional regulations of the labour market have an impact on the development of the gender wage gap: for highly‐skilled labour an increase in labour market regulation raises the growth of the gender wage gap, while for medium‐ and low‐skilled workers, it lowers it.     

Efficiency wages,unemployment and international factor movements

"This paper examines the implications of unemployment resulting from efficiency wages for international factor movements in a standard Heckscher-Ohlin model where the relative size of the endowments of skilled and unskilled workers and the efficiency wage induced unemployment level in the unskilled labour market are simultaneously determined given the population, supply of capital and its distribution in the economy.... It is shown that the optimum labour inflow in the market with domestic distortion and the optimum capital inflow are always positive because they reduce the severity of distortion by raising employment and income for the residents. The income and employment of foreigners also increase. Under this situation the optimum labour or capital outflow on the other hand is always zero. These conclusions directly contradict the result obtained for international factor movements in the presence of exogenously determined unemployment."     

Can labour market institutions mitigate the China syndrome? Evidence from regional labour markets in Europe

This paper investigates how labour market regulations alter the adverse impact of rising import competition from China in European local labour markets between 1997 and 2006. The paper constructs measures of regional exposure to Chinese imports based on previous literature and on regional labour market frictions exploiting involuntary labour reallocations. Taking into account the endogeneity of import competition and its interaction with labour market regulations, the paper finds that regions more exposed to the rise of China have suffered from a reduction in manufacturing employment shares. This shock grows larger with regional labour market frictions; hence, it exacerbates the impact of trade shock on employment. Moreover, the paper finds that employment in public services, and not in construction or private services sector, absorbed the negative shock to the manufacturing sector. The unemployment rate, the labour force participation rate and wages in all sectors are unresponsive to import competition from China.     

Links between foreign direct investment and human capital formation: Evidence from the manufacturing sector in India

This paper is related to the literature on the effect of foreign direct investment (FDI) on the labour market of host countries. Labour market literature has focused on the demand side of FDI; that is, increasing wage inequality by demanding more skilled workers or just increasing the overall average wages. On the supply side, FDI can enrich the skilled labour force of the host country by the provision of on-the-job training or learning or through indirect technological spillover effects. This paper takes into account both these effects and tests for human capital formation effect of FDI in India for core manufacturing sector firms for the period 2001–2015 using the Prowess database of the Centre for Monitoring Indian Economy. It also takes into account the endogeneity of decision-making on the part of foreign firms in locating FDI. Different dynamic panel data methods are used with static and dynamic generalized method of moments techniques. This study does not find any positive supply-side human capital formation effects of FDI but finds a positive demand-side effect of FDI of raising wage inequality and average wages. The results remain robust while taking into account heterogeneities at region, industry, size, and age of the firms.     

Trade,Technology and Human Capital: Stylised Facts and Quantitative Evidence

Stylised evidence on trade, total factor productivity (TFP) and skill intensity of the labour force is presented. Features emerging as salient are: growing trade in technology‐intensive products from the industrialised nations to the relatively laggard nations leads to embodied technology diffusion; the technology‐intensive sectors have larger shares of skilled workers; countries experiencing TFP growth usually have higher levels of educational attainment; also, the skilled labour payment share for a sector is positively associated with that sector’s regional trade share. These facts together help explain why endowment of more skilled labour facilitates absorption of technology ferried via trade.     

Foreign Direct Investment,Productivity, Demand for Skilled Labour and Wage Inequality: An Analysis of Uruguay

This study seeks to identify the causal effects of foreign ownership on productivity, the demand for skilled labour and wage inequality. With this aim, we use differences‐in‐differences techniques for a panel of Uruguayan manufacturing firms in the period 1997–2005. Our results seem to indicate that FDI causes higher productivity and increased demand for skilled labour. Furthermore, although average wages are higher in foreign‐owned firms than in domestic ones, the wage gap between skilled and unskilled workers is wider. It follows that promoting foreign investment enhances productivity. In addition, due to the greater demand for skilled workers, policies such as training schemes would be conducive to raising productivity still further, while other social policies could help to mitigate the wage inequality effects.     

Foreign direct investment and civil violence in Sub-Saharan Africa

Despite the steady growth in foreign direct investment (FDI) flow into Sub-Saharan Africa (SSA), which is facilitated by the United Nations "2030 Agenda for Sustainable Development", economic development in SSA countries remains relatively weak, due in part to frequent incidents of civil violence. The critics of FDI inflow into SSA posit that the cross-border capital flow fuels civil conflict and unrest, whilst the proponents maintain that FDI inflow helps developing countries raise their economies. To reconcile these two views, this paper considers the impact of FDI on civil violence in SSA by distinguishing recipient industries of FDI. The results from a new general equilibrium theory suggest that an increase in resource-directed FDI inflow to countries where the resource sector is skilled labour (unskilled labour) intensive reduces (increases, respectively) the risk of violence. Using a panel data consisting of 34 SSA countries for 1972–2013, the dynamic panel estimates provide support for our theoretical findings. In particular, an increase in FDI inflow reduces the risk of civil violence for skilled labour intensive fuel-resource-rich SSA countries. However, the likelihood of violence can increase in FDI inflow for countries that are rich in unskilled labour intensive non-fuel, ore and other mineral resources.     

Can Africa compete with China in manufacturing? The role of relative unit labour costs

This paper examines sub‐Saharan Africa's (SSA ) bilateral trade and cost competitiveness with China. We document an extraordinary imbalance in the structure of bilateral trade in that China overwhelmingly exports manufactured products to SSA and almost exclusively imports primary products in return. Our principal means of assessing the competitiveness of SSA 's manufacturing sector vis‐à‐vis China are measures of relative unit labour costs (RULC ). We find that African RULC s declined over the 2000s as China's wages rose faster than Chinese productivity while the reverse was true for the SSA countries in our sample. Nevertheless, RULC s vis‐à‐vis China remain very high for many SSA countries. High RULC s along with weaknesses in the business climate suggest that most SSA countries are unlikely to be competitive in labour‐intensive manufacturing any time soon.     

对外开放与中国制造业工资差距——基于劳动力供需模型的实证检验

选取1998—2006年中国26个省市的面板数据,利用结合劳动力供需的对外开放影响工资差距的理论模型,就对外开放对制造业熟练和非熟练工人工资差距的影响进行实证研究。研究发现:从全国样本看,外商直接投资有利于缩小制造业熟练与非熟练工人工资差距,而贸易开放与制造业熟练和非熟练工人工资差距则是一种倒"U"型的关系。在分地区讨论时,发现外商直接投资对中西部地区制造业熟练与非熟练工人工资差距的缩小作用要大于东部地区,贸易开放对中西部地区制造业熟练与非熟练工人工资差距存在显著的正向影响,而对东部地区的影响不显著,这进一步验证了上述倒"U"型关系的实证结果。     

International competition and wage differentials - the case of Taiwan

This paper documents and investigates the structure of relative wages among skill groups (distinguished by gender, education and potential experience) in Taiwan over the period 1978 to 1990. To account for these changes, I construct a model of wage determination in which demographic groups are treated as separate inputs into the production process. Thus, the changes in relative wages are determined by (i) changes in the relative supply of input factors; (ii) changes in the product composition; and (iii) biased technical changes that shift the relative demand for inputs. Analysis of OECD trade statistics shows that manufacturing imports from Taiwan to OECD, the main source of derived demand for the unskilled labour, exhibited a time pattern that matches the overall relative demand shifts.     

Is FTA/EPA effective for a developing country to attract FDI? The knowledge‐capital model revisited

To prepare an answer to the question of how a developing country can attract foreign direct investment (FDI), this paper explored the factors and policies that may help bring FDI into a developing country by utilising an extended version of the knowledge‐capital model. With a special focus on the effects of a free trade agreement (FTA) or an economic partnership agreement (EPA) between a pair of market and non‐market countries, simulations with the model revealed the following: (i) although FTA/EPA generally tends to increase FDI to a developing country, the possibility of improving welfare through increased demand for skilled and unskilled labour decreases as the size of the country grows; (ii) a developing country may suffer severe welfare losses through FTA/EPA if the availability of skilled labour is extremely limited; and (iii) a developing country can enhance welfare gains from a FTA, and it is even possible to recover the welfare effects from negative to positive, by making the arrangement an EPA.     

Who Supports Free Trade in Latin America?

This paper examines individual trade policy preferences across 17 countries in Latin America. The focus is on whether skilled or unskilled workers are more likely to support liberalised trade and on whether country characteristics, such as factor endowments, alter the preferences of skilled and unskilled workers. Based on the standard Heckscher‐Ohlin model and the Stolper‐Samuelson theorem, wage inequality in developing countries will decrease under free trade and unskilled workers will benefit. We find that on average skilled workers are more likely than unskilled workers to support free trade in Latin American countries. Separate country regressions reveal that this pattern is only statistically significant in 8 out of 17 Latin American countries. However, there are no countries in our sample in which unskilled workers are statistically more likely to support free trade than skilled workers, not even in the lowest skill‐endowed country in the sample. We also find that people from Latin American countries with higher GDP, faster growth, more cropland and a longer period of time since reform were more likely on average to support free trade.     

On the similarity of country endowments

We study the production side of the Heckscher-Ohlin model empirically. The evidence we present suggests that the endowments of countries around the world are too dissimilar for all countries to be able to produce the same set of goods. In contrast, the endowments of the rich OECD countries are sufficiently similar, so that these countries do not have to specialize in different subsets of goods. Our findings have implications for a variety of issues ranging from the trade and wages debate to economic development. Our analysis relies on the lens condition of Deardorff [Journal of International Economics 36 (1994) 167-175] that compares country endowments with sectoral factor inputs. We mainly focus on the production factors capital and labor. We test the robustness of the results with different data sets and with corrections for international differences in productivity and human capital. We confirm the similarity of the developed OECD countries with skilled and unskilled labor data. We also investigate in detail the implications of measurement error and sectoral aggregation.     

Globalisation and Inter‐occupational Inequality: Empirical Evidence from OECD Countries

How does globalisation affect inter‐occupational wage inequality within countries? This paper examines this by focusing on two dimensions of globalisation: openness to trade and openness to capital flows, using a relatively new data set on occupational wages. Estimates from a dynamic model for 15 OECD countries spanning the period 1983–2003 suggest that increased openness increases occupational wage inequality in poorer OECD countries as predicted by the Heckscher–Ohlin–Samuelson model, but for the more advanced OECD countries, we find no significant effect. The absence of the expected result for the latter category can be due to a rapid increase in the supply of skilled labour, to outsourcing of skilled jobs or because changes in the trade flows are too small to have any significant effect in those countries.     

Wage Inequality in the United Kingdom: Trade and/or Technology?

I employ two alternative intra‐industry trade Applied General Equilibrium (AGE) models to explain some stylised facts of the British economy. The model with skill‐biased technical change (i.e. exogenous skill‐biased technical change à la Solow) can explain the rise in wage inequality between skilled and unskilled workers, the decline in manufacturing and the expansion of modern services. However, the model where technical change is trade‐induced (i.e. endogenous sector‐biased technical change à la Romer) performs better, because it can also explain the exponential rise of imported intermediate capital goods and developments in the wage rate of unskilled workers.     

TRAINING AND LABOUR MARKET SEGMENTATION

A two period model of the training decision is analysed using a human capital approach. The segmented labour market model where training opportunities distinguish entrants is compared with a competitive structure with homogeneous entrants. The main conclusions in the paper are the clear effects of training wages and the different effects in the two market structures of both wages and employment prospects in the unskilled market on training.