Unemployment and Foreign Capital: The Relative Opportunity Costs of Domestic Labour and Welfare

Abstract

The consequences of increased foreign capital for an economy with unemployment are analyzed under different assumptions that influence the relative oportunity costs of domestic labor. The investigation suggests that the implications of the literature on the welfare effect of increased foreign capital are misleading. The paper shows that welfare gains result from increased foreign capital if the opportunity costs of labor are sufficiently low relative to the wages earned by laborers employed by new foreign capital. A number of cases where this occurs are presented. The findings of the paper suggest that cases where increased foreign capital must be welfare-harming represent extreme parameterizations in the set of possibilities. Copyright 1991 by The London School of Economics and Political Science.