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Did FDI increase wage inequality in transition economies?

Merita Zulfiu Alili (Faculty of Public Administration and Political Sciences, South East European University, Tetovo, Macedonia)
Nick Adnett (School of Business, Leadership and Economics, Staffordshire University, Stoke-on-Trent, UK)

International Journal of Social Economics

ISSN: 0306-8293

Article publication date: 7 August 2018

Issue publication date: 23 August 2018

763

Abstract

Purpose

The last two decades have been characterised by a rise in income and wage inequality in a wide range of countries, including European transition countries. The rise in globalisation is one major factor explaining this increasing wage inequality. International trade and FDI have increased significantly since the beginning of transition and the purpose of this paper is to focus on whether FDI plays an important role in explaining the pattern of wage inequality in selected transition countries.

Design/methodology/approach

A cross-country empirical investigation has been conducted using two alternative measures of wage inequality: the Gini coefficient and the Theil index. Several model specifications and estimation strategies have been employed to obtain consistent estimates and to check for the robustness of the results.

Findings

The results indicate that a rising share of inward FDI in gross domestic product (GDP) increased wage inequality in transition economies, though its overall effect was relatively small. Considering the long run, there is no clear evidence of a concave relationship between FDI and wage inequality, which may be a consequence of the relatively low levels of FDI in many transition countries.

Practical implications

Inwards FDI has made a small contribution to increasing wage inequality in European transition economies. However, its overall beneficial effects on labour markets in these countries suggest that rather than restricting FDI governments should target increasing the supply of skilled labour.

Originality/value

This new empirical evidence supports the hypothesis that an increased inward FDI stock as a share of GDP increases wage inequality in transition economies, however, this relationship is a complex one. Differences in average wages, wage differentials, employment shares of skilled workers and relative size of the foreign-owned sector are all likely to be important for the behaviour of wage inequality.

Keywords

Acknowledgements

The authors of this paper have not made their research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.

Citation

Zulfiu Alili, M. and Adnett, N. (2018), "Did FDI increase wage inequality in transition economies?", International Journal of Social Economics, Vol. 45 No. 9, pp. 1283-1304. https://doi.org/10.1108/IJSE-09-2017-0373

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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