Did FDI Increase Wage Inequality in Transition Economies?

Purpose of this paper -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 this paper focuses 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 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 suggests that rather than restricting FDI governments should target increasing the supply of skilled labour. What is original/value of paper- 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