THE EFFECT OF FOREIGN DIRECT INVESTMENT ON LABOR INCOME: EVIDENCE FROM OECD COUNTRIES

Abstract

This study investigates whether and to what extent Foreign Direct Investment (FDI) affects labor income in fourteen OECD countries by using a panel approach over the 1990-2010 period. The study uses three labor income measures: average annual wage, statutory annual minimum wage and labor income share. By using different income measures the study identifies to what extent the effect of FDI differs on different classes of labor (i.e. average wage earners versus minimum wage earners). The estimation results show that FDI increases labor income in OECD countries. Both the average and the minimum wage earners benefit from FDI. However, the positive effect of FDI is distributed unevenly between average and minimum wage earners. It implies that FDI can widen the labor income gap between the average and minimum wage earners in OECD countries. Such an effect of FDI on the different classes of labor should be considered by policy makers while designing and following pro FDI policies

Keywords

• Foreign Direct Investment, Labor Income, Wage, Productivity

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