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Labor Market Institutions and the Effects of Financial Openness

Author

Listed:
  • Qingyuan Du
  • Jun Nie
  • Shang-Jin Wei
Abstract
We propose a new channel to explain why developing countries may fail to benefit from financial globalization, based on labor market institutions. In our model, financial openness in a developing country with a rigid labor market leads to capital outflow, and both employment and output fall. In contrast, financial openness in a developing country with a flexible labor market benefits the country. Our model suggests that enhancing labor market flexibility is a complementary reform for developing countries opening capital accounts.

Suggested Citation

  • Qingyuan Du & Jun Nie & Shang-Jin Wei, 2019. "Labor Market Institutions and the Effects of Financial Openness," Research Working Paper RWP 19-11, Federal Reserve Bank of Kansas City, revised 03 Feb 2020.
    • Handle: RePEc:fip:fedkrw:87673
    DOI: 10.18651/RWP2019-11
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    More about this item

    Keywords

    Developing Countries; capital account liberalization; Labor Market Rigidity; Financial Openness; Unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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