Capital Account Liberalization and Wage Inequality: Evidence from Firm Level Data

CapitalAccountLiberalizationandWageInequality:EvidencefromFirmLevelData KodjoviM.EklouandShakebaFoster WP/23/48 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 MAR ©2023InternationalMonetaryFundWP/23/48 IMFWorkingPaper AsiaandPacificDepartment CapitalAccountLiberalizationandWageInequality:EvidencefromFirmLevelDataPreparedbyKodjoviM.EklouandShakebaFoster* AuthorizedfordistributionbyLaminLeigh March2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Firmsplayanimportantroleinshapingincomeinequalityattheaggregatedcountrylevel,giventhatwagesrepresentasignificantproportionofhouseholdincome.Weinvestigatethedistributionalconsequencesofcapitalaccountliberalization,relyingonfirmleveldatatoexploretheimplicationsforbetween-firmsearninginequalityinASEAN5countriesovertheperiod1995-2019.Wefindthatbetween-firmswagedispersionalone,accountsforanontrivialproportionofthevariationinthemarketGini.Ourempiricalfindingsshowthatcapitalaccountliberalizationincreasesbetween-firmswageinequality,aswagesgrowfasteratinitiallyhigh-payingfirmsandslow-downatfirmsatthelowerportionofthewagedistribution.Theseresultsarerobusttoabatteryofrobustnesschecks.Further,thedirectionsandcategoriesofcapitalaccountliberalizationmatterasresultsarepronouncedforinflowliberalizationandequitycapitalflows.WealsoshowthatcapitalaccountliberalizationinducesanincreaseinProfit-to-Wageratios.Furthermore,theimpactdependsoncountrycharacteristics(wagesettinginstitutions,theleveloffinancialdevelopmentandthesizeoftheinformalsector)aswellasindustrycharacteristics(exportorientationandexternalfinancedependence). JELClassificationNumbers: D63;E24;F38;J31. Keywords: WageInequality;Firmheterogeneity;CapitalAccountLiberalization. Author’sE-MailAddress: KEklou@imf.org,shakeba.foster@kcl.ac.uk *“TheauthorswouldliketothankPornpinunChantapacdepong,AlexCopestake,DavideFurceri,TidianeKinda,LaminLeigh,CarloPizzinelliandSilviaSgherriforhelpfulcomments.ThispaperwaswrittenwhileMs.ShakebaFosterwasaninterninAPDA3divisionaspartoftheFundInternshipProgram. WORKINGPAPERS CapitalAccountLiberalizationandWageInequality:EvidencefromFirmLevelData PreparedbyKodjoviM.EklouandShakebaFoster1 1TheauthorswouldliketothankPornpinunChantapacdepong,AlexCopestake,DavideFurceri,TidianeKinda,LaminLeigh,CarloPizzinelliandSilviaSgherriforhelpfulcomments.ThispaperwaswrittenwhileMs.ShakebaFosterwasaninterninAPDA3divisionaspartoftheFundInternshipProgram. Contents I.Introduction3 II.RelatedLiterature4 III.DataandStylizedFacts6 A.Data6 B.StylizedFactsonBetween-FirmsWageInequality7 IV.InvestigatingtheImpactofCapitalAccountLiberalizationonBetween-FirmsWageInequality9 A.EmpiricalStrategy9 B.BaselineResults9 C.RobustnessTests10 D.Channels11 E.AnEventStudyApproach12 V.Conclusion14 Tables15 Appendix.29 References31 FIGURES Figure1:Between-FirmsWageInequality8 TABLES Table1:WageDispersionandGiniindexinASEAN57 Table2:BaselineResults–CapitalAccountLiberalizationandWageInequality15 Table3:CapitalAccountLiberalizationandWageInequality–Reformdummies16 Table4:CapitalAccountLiberalizationandWageInequality–InitialSalaryDistribution17 Table5:CapitalAccountLiberalizationandWageInequality–GMMEstimates18 Table6:CapitalAccountLiberalizationandWageInequality–Country-yeareffects19 Table7:CapitalAccountLiberalization(FARIIndex)andWageInequality20 Table8:CapitalAccountLiberalizationandWageInequality–InflowsandOutflows.21 Table9:CapitalAccountLiberalizationandWageInequality–EquityandBonds22 Table10:CapitalAccountLiberalizationandWageInequality–FDIInflowsandTFP23 Table11:CapitalAccountLiberalizationandWageInequality–FinancialCrises24 Table12:CapitalAccountLiberalizationandWageInequality–FinancialDevelopment25 Table13:CapitalAccountLiberalizationandWageInequality–Heterogeneityacrosscountriesandindustries26 Table14:CapitalAccountLiberalizationandProfittoWageRatio27 Table15:CapitalAccountLiberalizationandProfittoWageRatio–ProfittoWageratioasdependentvariable28 TableA1:SummaryStatistics29 TableA2:Descriptionofvariables30 I.Introduction Incomeinequalityisakeypolicyissueandglobalization,inparticularfinancialglobalization,hasbeenoftencitedasamajorcontributoraroundtheworld.2Wagesaccountforasignificantproportionofhouseholdincomeandwagedispersionplaysanimportantrolethereforeasadriverofoverallincomeinequalityandthusakeylensthroughwhichtheimpactoffinancialglobalization,morespecificallycapitalaccountliberalizationoninequalitycanbeassessed.Inthispaper,werevisitthedistributionalconsequencesofcapitalaccountliberalizationusingfirmleveldatawithafocusonwageinequality.Weaskthefollowingresearchquestions:i)Doescapitalaccountliberalizationinduceanincreaseinwage