The present study examines the impact of foreign direct investment (FDI) on skilled and unskilled labour demand and wages in a three-sector model economy comprising an organised sector, a semi-organised sector and an unorganised sector. We show theoretically that if FDI comes to organised sector only, then unskilled labour moves to unorganised sector with lower wages, and wage inequality worsens. If FDI comes to semi-organised sector only, then unskilled labour moves from unorganised sector to semi-organised sector with higher wages, and if FDI comes to unorganised sector, then due to surplus skilled labour in organised sector, skilled wage decreases. We test the effect of FDI on wages in the Indian manufacturing sector with 27 industries, which is a semi-organised sector. We find that skilled labour and unskilled labour are complementary, and industry-level FDI has a positive impact on both skilled wage and unskilled wage.
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