Table 12: Initial Levels and Changes in Factor Prices and Migration, FDI Scenarios

|2004|_BaU_|_IBL_|_I_00|_I_<sup>_sub_</sup><br>_BL_|_IML_|_I_<sup>_λL_</sup><br>_BL_|
|---|---|---|---|---|---|---|
|Non-farm unskilled wage<br>37.13|0.64|0.96|0.85|0.62|1.10|0.99|
|Non-farm skilled wage<br>59.56|1.39|1.76|1.59|1.43|1.79|1.80|
|Farm unskilled wage<br>6.16|0.14|0.17|0.27|0.13|0.51|0.21|
|Farm skilled wage<br>10.16|0.12|0.09|0.25|0.11|0.43|0.13|
|Unskilled migration<br>7893|0.50|0.78|0.58|0.49|0.59|0.78|
|Skilled migration<br>504|1.27|1.66|1.34|1.31|1.36|1.66|
|Average unskilled wage<br>23.45|1.08|1.38|1.29|1.06|1.53|1.41|
|Average skilled wage<br>54.51|1.45|1.82|1.66|1.49|1.85|1.86|
|Average tertiary skilled wage<br>125.12|1.65|2.07|1.96|1.11|2.27|2.09|
|Average domestic capital real rent<br>1.00|-0.05|0.24|0.16|1.66|0.41|0.29|
|Average foreign capital real rent<br>1.00|-0.93|-7.27|-7.68|-7.63|-6.98|-7.23|
|_Note:_<br>For each variable, the “2004” column conta<br>thousands of lempiras, and rural-to-urban migratio<br>normalized to one in the base year. Columns 3 throu<br>2004 and 2016 for each of the variables, in percentag<br>exponential growth between the frst and the last pe<br>_Source:_ Author’s calculations.|ins the <br>n in nu<br>gh 8 sho<br>e terms.<br>riod.|base yea<br>mber of <br>w the ave<br> The gro|r values.<br>workers.<br>rage ann<br>wth rates|Wages <br>The re<br>ual grow<br> are calc|are repo<br>al rental <br>th rates <br>ulated as|rted in<br> rate is<br>between<br>suming|

as in section 6.4. Manufacturing and particularly services are relatively more skill-intensive, and as demand for these commodities rises faster than aggregate demand, skilled and tertiary-skilled workers become more scarce and earn higher wages. In fact, the evolution of wages by skill level is virtually identical between the _BaU_ scenarios of Table 12 and Table 8. Similarly, growth in wages paid to non-farm workers in _BaU_ is also very similar. On the other hand, growth in agricultural wages is about half what was recorded in the baseline with only one type of capital. This is due to the fact that producers in these sectors find it advantageous to substitute capital for labor due to the falling rental rate of foreign capital, which is used intensively in these sectors. As a result, there is less labor demand in agriculture, farm wages grow slower, and inter-sectoral migration rises.

In the _IBL_ scenario, the accelerated pace of foreign direct investment inflows leads to a significant decline in the rental rate of foreign capital, which is now more abundant. The fall in the rental rate is somewhat offset by increased demand for the output of FDI-target sectors due to trade liberalization (compare the rental rates of foreign capital between the _IBL_ and _I_ 00) columns, but this additional demand is not sufficient to significantly counterbalance the relative abundance of foreign capital. On the other hand, the returns to more scarce domestic capital rise over time.

Since the production volumes of both agriculture and manufacturing rise significantly relative to _BaU_ , wage growth in both segments of the labor increases. However, the acceleration is more pronounced for the wages of non-farm workers because production in the largest employer of farm labor—domestic crops—declines relative to _BaU_ . As was the case in the _CBL_ scenario, tertiary-skilled workers gain the most in this simulation, followed by skilled and unskilled employees. Therefore, wage inequality, at least at the level of labor market detail considered in this paper, is likely to rise with DR-CAFTA. Furthermore, gains to non-farm workers significantly outpace the wage growth of farm employees.

Allowing FDI to be a substitute, rather than a complement, for domestic investment considerably limits the wage gains from trade liberalization and increased FDI. In fact, growth rates of sectoral and economy-wide wages as well as inter-sectoral migration are remarkably similar between 42