Labor Market Institutions and the Effects of Financial Openness

November 26, 2019
By Qingyuan Du, Jun Nie, Senior Economist and Shang-Jin Wei


Research Working PaperDeveloping countries may fail to benefit from capital account liberalization if their labor markets are rigid.

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.

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RWP 19-11, November 2019; updated February 2020

JEL Classification: E24; J08; F41; F44

Article Citation

  • Du, Qingyuan, Jun Nie, and Shang-Jin Wei. “Labor Market Institutions and the Effects of Financial Openness.” Federal Reserve Bank of Kansas City, Research Working Paper no. 19-11, November. Available at https://doi.org/10.18651/RWP2019-11

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