Financial Sector Reforms and their Impacts on Growth of Real Wages in Pakistan

Abstract

Keeping in view the dearth of systematic analysis of capital flows on the real wages, the present study looks into the influence of financial liberalization on the growth of real wages in the manufacturing sector along with the index of trade liberalization spanning the period from 19712015. The study has constructed an index for financial liberalization, which is called FLI covering all the proportions of reforms and has specifically measured the effect of FLI on the real wages of manufacturing workers. By applying the ARDL cointegration method and error correction mechanism, the results have shown a negative impact of FLI on the increase in real wages in the short-run, while it is found to be positive in the long-run. The capital deepening followed by financial liberalization is highlighted to be an essential component for positively affecting the real wages.