The impact of international capital mobility on the volatility of labor income

Abstract.

If project risk is positively related to project return, then the greater diversification available from international capital mobility also leads to more investment in the riskier projects with high expected returns. This results in internationally immobile laborers facing greater risk in the demand for their services, since these services are provided to riskier projects and the laborers do not receive the diversification benefit that capitalists do. This paper develops a model which shows that when there is more capital mobility between two countries, there is a tendency for both countries to experience an increase in the volatility of labor income under perfect wage flexibility, and this impact is stronger in the country less richly endowed with labor and financial wealth.