Capital Market Integration and Wages

For three years after the typical emerging economy 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 three. No such increase occurs in a control group of countries that do not liberalize. 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 $487 U.S.—an increase equal to nearly one-fifth of their annual pre-liberalization salary. The increase in the growth rate of labor productivity in the wake of liberalization exceeds the increase in the growth rate of the real wage so that the increase in workers’ incomes does not drive up unit labor costs. Overall, the results suggest that trade in capital may have a larger impact on wages than trade in goods.  Correspondence to [email protected], [email protected] and [email protected]. Henry gratefully acknowledges financial support from the W.R. Berkley and Richard R. West Professorships, the John A. and Cynthia Fry Gunn Faculty Fellowship, the Stanford Institute for Economic Policy Research and the Stanford Center for International Development. We thank Sandile Hlatshwayo for excellent research assistance. We also thank Olivier Blanchard, Steve Buser, Brahima Coulibaly, Jonah Gelbach, Pierre-Olivier Gourinchas, Avner Greif, Nir Jaimovich, Pete Klenow, Anjini Kochar, John Pencavel, Paul Romer, Robert Solow, Ewart Thomas and seminar participants at UC Berkeley, Brookings, the Chicago Fed, Claremont McKenna, the IMF, MIT, NIPFP-DEA, the Reserve Bank of India, and Stanford for helpful comments. Henry is a member of the Board of Directors of Kraft Foods and the National Bureau of Economic Research (NBER). Sasson is an employee of Goldman Sachs. The views in this paper are our own and do not reflect those of Kraft, the NBER, or Goldman Sachs.