A Sectoral Wage Gap Due to FDI Inflow in the Artificial Intelligence-Induced Non-traded Sector of an Open Economy

Artificial Intelligence (AI), automation, and robotics represent innovative technologies that have the potential to revolutionise various aspects of our society. From janitorial services to self-driving taxi operations, these technologies offer the promise of transformative change at the click of a button. Policymakers and economists are keenly studying how Foreign Direct Investment (FDI) in the AI sector can impact wage disparities within an open economy. This field of research, focussing on the relationship between FDI inflows and the AI sector, is still in its early stages of development. The primary aim of this chapter is to analyse the wage equality within the non-traded sector, specifically in response to FDI driven by advancements in AI technology. We have constructed a specific factor general equilibrium model employing a standard (Jones 1971a, b) framework to study how the incomes of uniform labourers may be affected by the influx of FDI triggered by AI advancements. Our model indicates that AI-induced FDI is likely to bolster the national income of the economy, although with certain short-term costs. In the short run, it is anticipated to widen the wage gap between skilled and unskilled labourers in non-traded sectors. However, over the long term, the influx of foreign capital is expected to mitigate wage disparities both within and among various labour groups.