Journal Article

Capital Account Opening and Wage Inequality

Mauricio Larrain

in The Review of Financial Studies

Published on behalf of Society for Financial Studies

Volume 28, issue 6, pages 1555-1587
Published in print June 2015 | ISSN: 0893-9454
Published online November 2014 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhu088
Capital Account Opening and Wage Inequality

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  • Wages, Compensation, and Labour Costs
  • International Finance

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Opening the capital account allows financially constrained firms to raise capital from abroad. Since capital and skilled labor are relative complements, this increases the relative demand for skilled labor versus unskilled labor, leading to higher wage inequality. Using aggregate data and exploiting variation in the timing of capital account openings across 20 mainly European countries, I find that opening the capital account increases aggregate wage inequality. In order to identify the mechanism, I use sectoral data and exploit variation in external financial dependence and capital-skill complementarity across industries. I find that capital account opening increases sectoral wage inequality, particularly in industries with both high financial needs and strong complementarity.

Keywords: F32; J31

Journal Article.  12602 words.  Illustrated.

Subjects: Wages, Compensation, and Labour Costs ; International Finance

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