PDFDownload paper RWP 19-11, November 2019; updated February 2020

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.

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 External Linkhttps://doi.org/10.18651/RWP2019-11


Jun Nie

Senior Economist

Jun Nie is a Senior Economist in the Economic Research Department of the Federal Reserve Bank of Kansas City. He received his M.A. and Ph.D. from New York University, and earned …