FDI, labor market and welfare: How inequality navigates welfare loss?

A significant growth of foreign direct investment (FDI) over the years led to substantial changes in the labor markets of host and home countries. From a host country perspective, the FDI happens to have greater impact on the labor markets conditions where it perpetuates the skewed labor market outcomes and steady income growth. Toward this end, this study explores the welfare implications of FDI on labor market for a panel of 64 countries during the period 1991-92 to 2014-15. We estimate the effect of FDI on labor market outcomes and welfare loss in labor markets by augmenting the welfarist approach of Atkinson (1970) and estimate the loss function. The results reveal that FDI impacts labor markets positively for both developed and developing countries. However, the long-run effects of FDI show a significant difference among the sectoral labor market measures leading to unequal outcomes. On estimating the loss function, we observe a substantial loss of welfare in income and labor market outcomes with a higher magnitude in middle and high-income countries.