Simulation Analysis of the Effects of Increased Foreign Ownership on Wage Inequality

Abstract

Transition countries have, in general, experienced an increase in labour market inequality during and after the initial transition period. Theory and empirical studies analysing the causes and mechanisms of increasing inequality in transition economies identify globalisation, skilled-biased technological change, differences in access to schooling, the pattern and level of unemployment and institutions as important factors. Foreign direct investment (FDI) has increased significantly in transition economies during the transition period and has been considered to be an important channel for the diffusion of new technology, managerial skills and new knowledge. As a result of technological and management expertise FDI may raise the level of wages in the host economies, improve working conditions and increase employment, though little previous research has focused on these effects in transition economies. Using the GINI coefficient as the measure of wage inequality a simulation analysis indicates that the net effects of FDI on wage inequality will depend in part on country specific factors, namely how large are the differences in skilled and unskilled wages, the skill-intensity of employment in foreign-owned firms compared to domestic ones and the relative size of the foreign-owned sector.