R E S E A R C H P A P E R S E R I E S
Research Paper No. 1988
Capital Account Liberalization, Real Wages,
and Productivity
Peter Blair Henry
Diego Sasson
February 2008
Research Paper No. 1988
Capital Account Liberalization, Real Wages, and Productivity
Peter Blair Henry*
Diego Sasson*
February 2008
*Correspondence to pbhenry@stanford.edu and dsasson@stanford.edu . Henry gratefully acknowledges financial
support from 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 Olivier Blanchard, Steve Buser,
Brahima Coulibaly, Pierre-Olivier Gourinchas, Avner Greif, Nir Jaimovich, Pete Klenow, Anjini Kochar, John
Pencavel, Paul Romer, Robert Solow, Ewart Thomas and seminar participants at Berkeley, the IMF, MIT, and
Stanford for helpful comments.
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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.
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1. Introduction