Academic journal article Economic Inquiry

Paying More to Hire the Best? Foreign Firms, Wages, and Worker Mobility

Academic journal article Economic Inquiry

Paying More to Hire the Best? Foreign Firms, Wages, and Worker Mobility

Article excerpt


As globalization evolves, there is greater interest in its labor-market implications. One dimension of this question concerns the role of foreign firms in terms of their remuneration of host-economy workers. While earlier cross-sectional evidence suggests that foreign firms offer more generous pay levels than their domestic counterparts (Aitken et al. 1996; Feenstra and Hanson 1997), some of these results have been questioned in recent research based on longitudinal worker-level data (Martins 2004; Heyman et al. 2007; Andrews et al. 2007). Moreover, firm-level studies based on foreign acquisitions of domestic firms find mixed results. (1)

The main problem in research about the foreign-ownership wage differential concerns unobserved heterogeneity across workers employed in either domestic or foreign firms. If firm affiliation is correlated with other factors that may affect wages but that are not controlled for, then estimates will be biased. While some research that aims to tackle this issue considers the case of acquisitions (when the same workers can be observed under the two types of firms), here we approach the unobserved heterogeneity challenge from an original perspective--worker mobility.

Specifically, we draw upon a longitudinal census of the Portuguese labor market in order to consider virtually all spells of interfirm worker mobility over a long period of time (1991-2000). Such mobility spells allow us to observe the same workers when employed by domestic and foreign firms, in order to disentangle the wage policy of the firm from the heterogeneity of the workforce. We also consider "selection" effects, namely the unexplained differences in the wages of workers who are to experience a movement to a different firm, before such movement occurs. These unexplained wage differences are likely to capture additional skills not measured in the data but that are observable by those workers' current employers such as ability, motivation, etc.

On the other hand, the "wage policy" effect, which is more directly related to the goal of this paper, concerns differences in remuneration experienced by workers who engage in interfirm mobility, as they move between firms. Such differences in remuneration practices across firms are predicted by noncompetitive models of the labor market, namely efficiency wages and search models. Moreover, the scope for such "wage policy" differences is also supported by abundant empirical evidence, including that of rent sharing, discrimination, cohort effects, and other evidence of firm heterogeneity in general (Abowd et al. 1999; Bartelsman and Doms 2000).

As far as we know, our paper is the first to conduct a systematic analysis of interfirm worker mobility drawing on census data. These population data are particularly important for our purpose as the analysis of even large samples would dramatically diminish one's ability to follow workers over time. Furthermore, we are the first to conduct such an extensive analysis in the context of the foreign-ownership wage differential literature. (2) Finally, our results may also be useful in terms of reconciling some contrasting evidence for different countries; and in terms of shedding light on the role of worker mobility as a channel of productivity spillovers from foreign to domestic firms (Fosfuri et al. 2001 ; Javorcik 2004).

Unlike earlier research based on foreign acquisitions, our paper finds very strong evidence of a sizeable, positive "wage policy" effect for foreign firms. However, "selection" effects are also present, but at a much smaller scale. These results are robust to a number of checks, including the consideration of the case of displaced workers and an analysis of the wage growth patterns of movers when in hiring firms.

The structure of the paper is as follows: Section II describes the data; Sections III and IV present the results and the robustness analysis; finally, Section V concludes. …

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