MNEs and wages: The role of productivity spillovers and imperfect labor markets

Disentangling the labor market implications of increased foreign capital flows remains important. This paper provides a unifying framework allowing to study the wage implications of multinational enterprise (MNE) activities, pointing to the importance of controlling for both labor market imperfections and productivity spillovers from foreign to local firms. Results show that increased MNE activities increase average wages in the local economy while contributing to a larger wage dispersion between the MNE and local firms. While the results pertaining to average wages depends heavily on the frictions in the labor market, how much the wage dispersion alters also depends on the extent of productivity spillovers from the MNEs to the local firms and the complementarity between domestic and foreign capital.     

Alternative theories of wage dispersion

We analyze labor market models where the law of one price fails—i.e., models with equilibrium wage dispersion. We begin considering ex ante heterogeneous workers, but highlight a problem with this approach: If search is costly the market shuts down. We then assume homogeneous workers but ex post heterogeneous matches. This model is robust to search costs, and delivers equilibrium wage dispersion. However, we prove that the law of two prices holds: Equilibrium implies at most two wages. We explore other models, including one combining ex ante and ex post heterogeneity which is robust and delivers more realistic wage dispersion.     

Foreign ownership wage premia in emerging economies

In this article we examine the relationship between wages, labour productivity and ownership using a linked employer–employee dataset covering a large fraction of the Czech labour market in 2006. We distinguish between different origins of ownership and study wage and productivity differences. The raw wage differential between foreign and domestically‐owned firms is about 23 percent. The empirical analysis is carried out on both firm‐ and individual‐level data. A key finding is that industry, region and notably human capital explain only a small part of the foreign–domestic ownership wage differential. Both white and blue collar workers as well as skilled and unskilled employees obtain a foreign ownership wage premium. Foreign ownership premia are more prevalent in older and less technologically advanced firms. Joint estimation of productivity and wage equations show that, controlling for human capital, the difference in productivity is about twice as large as the wage differential. Overall, results indicate that the international firms share their rents with their employees.     

COMPETITIVE SEARCH,EFFICIENCY, AND MULTIWORKER FIRMS*

I study competitive search equilibrium in an environment where firms operate a decreasing‐returns production technology and hire multiple workers simultaneously. Firms post wages, possibly several of them. The equilibrium can feature wage dispersion even though all firms and workers are ex ante identical. Unlike the benchmark where firms hire a single worker, hiring is constrained inefficient. Efficiency requires that firms commit to the number of hires, pay all applicants, or pay wages that depend on the number of applicants. Under wage‐posting, the inefficiency is highest at intermediate levels of labor market tightness.     

The Distribution of Earnings in an Equilibrium Search Model with State‐Dependent Offers and Counteroffers*

We construct an equilibrium job search model with on‐the‐job search in which firms implement optimal‐wage strategies under full information in the sense that they leave no rent to their employees and counter the offers received by their employees from competing firms. Productivity dispersion across firms results in wage mobility both within and across firms. Workers may accept wage cuts to move to firms offering higher future wage prospects. Equilibrium productivity dispersion across ex ante homogeneous firms can be endogenously generated. Productivity dispersion then generates a nontrivial wage distribution which is generically thin‐tailed, as typically observed in the data.     

RESIDUAL WAGE DISPARITY AND COORDINATION UNEMPLOYMENT*

How much of residual wage dispersion can be explained by an absence of coordination among firms? To answer, we construct a dynamic directed search model with identical workers where firms can create high‐ or low‐productivity jobs and are uncoordinated in their offers to workers, calibrated to the U.S. economy. Workers can exploit ex post opportunities once approached by firms, and can conduct on‐the‐job search. The stationary equilibrium wage distribution is hump‐shaped, skewed significantly to the right, and, with baseline parameters, generates residual dispersion statistics 75–90% of those found empirically. However, the model underestimates the average duration of unemployment.     

Wage differentials, discrimination and efficiency

I analyze a large labor market where homogeneous firms post wages to direct the search of workers who differ in productivity. I show that the model has a unique equilibrium. The wage differential depends positively on the workers’ productivity differential only when the latter is large. When the productivity differential is small, high-productivity workers get a lower wage than low-productivity workers. This reverse wage differential remains even when the productivity differential shrinks to zero. However, the equilibrium is socially efficient. High-productivity workers always get the employment priority and higher expected wages than low-productivity workers. Although discrimination in terms of expected wages does not exist, conventional measures are likely to incorrectly find discrimination in the model.     

Wage bargaining and turnover costs with heterogenous labor and perfect history screening

We study effects of mobility costs in a model of (Nash) wage bargaining between workers and firms, with instantaneous matching, heterogeneous workers, identical firms and free firm entry, and where firms can screen workers perfectly according to their previous work history but not their actual productivity. We derive the employment level and the minimum worker quality standard, in the market solution, and in the efficient solution established by a social planner. When workers have positive bargaining power, there is always some inefficient unemployment among desired workers in the market solution. The lowest hiring standard chosen by firms is higher than the planner's standard when firing costs are high relative to hiring costs, but may be lower in the opposite case. We show that any higher established hiring standard corresponds to a market equilibrium. The model explains a tendency for a high initial unemployment rate to remain high, particularly for low-skilled workers.     

On-the-job search and strategic bargaining

This paper studies wage bargaining in a simple economy in which both employed and unemployed workers search for better jobs. The axiomatic Nash bargaining solution and standard strategic bargaining solutions are inapplicable because the set of feasible payoffs is nonconvex. I instead develop a strategic model of wage bargaining between a single worker and firm that is applicable to such an environment. I show that if workers and firms are homogeneous, there are market equilibria with a continuous wage distribution in which identical firms bargain to different wages, each of which is a subgame perfect equilibrium of the bargaining game. If firms are heterogeneous, I characterize market equilibria in which more productive firms pay higher wages. I compare the quantitative predictions of this model with Burdett and Mortensen's [1998. Wage differentials, employer size and unemployment. International Economic Review 39, 257-273.] wage posting model and argue that the bargaining model is theoretically more appealing along important dimensions.     

Male–female wage discrimination in Chinese industryInvestigation using firm‐level data1

We use firm‐level data to analyze male–female wage discrimination in China's industry. We find that there is a significant negative association between wages and the share of female workers in a firm's labour force. However, we also find that the marginal productivity of female workers is significantly lower than that of male workers. Comparing wage gaps and productivity gaps between men and women, we notice an intriguing contrast between state‐owned enterprises (SOEs) and private firms. The wage gap is smaller than the productivity gap in SOEs, while the converse is true for private firms. These results suggest that women in the state sector receive wage premiums, whereas women in the private sector face wage discrimination.     

Egalitarian Wage Policies and Long-Term Unemployment

How does a centrally imposed egalitarian wage policy affect unemployment, when workers differ with respect to productivity? The effect on total unemployment is found to be ambiguous. Egalitarian wages encourage job creation because increased profits derived from the most productive workers more than outweigh reduced profits derived from the least productive workers. Short-term unemployment is reduced. On the other hand, firms respond by raising their reservation productivity. Some workers are left almost completely unemployable. Long-term unemployment rises. Less inequality in the wage distribution is obtained at the expense of more inequality in the distribution of unemployment.     

Unionization,international integration,and selection

Abstract We study how unionization affects competitive selection between heterogeneous firms when wage negotiations can occur at the firm or at the profit‐centre level. With productivity specific wages, an increase in union power has: (i) a selection‐softening; (ii) a counter‐competitive; (iii) a wage‐inequality; and (iv) a variety effect. In a two‐country asymmetric setting, stronger unions soften competition for domestic firms and toughen it for exporters. With profit‐centre bargaining, we show how trade liberalization can affect wage inequality among identical workers both across firms (via its effects on competitive selection) and within firms (via wage discrimination across destination markets).     

Learning the master's trade: Apprenticeship and human capital in Ghana

This paper explores the institution of apprenticeship in Ghana. A model is presented where apprenticeship training is idiosyncratic, increasing an individual's productivity in the current firm, but not in any other firm. Still, individuals are willing to fund apprenticeships as they can reap the returns to the specific training of apprenticeship if they manage to acquire the capital required to start their own firms, and replicate the technology and business practice of the apprenticeship firm. Predictions of the model for the productivity and remuneration of different workers are developed and tested using both a linked employer–employee survey of manufacturing firms and a national household survey.     

Minimum Wages and Firm Productivity: Evidence from Vietnamese Manufacturing Firms

ABSTRACT

This paper empirically examines the minimum-wage impact on firm productivity. Using a detailed Vietnamese firm-level dataset from 2010 through 2015, the regression results suggest that firms raise their labor productivity, total factor productivity, capital intensity and revenue in response to increased minimum wage standards. Firms that pay their workers below the minimum wage react more positively in raising their labor productivity than high-wage firms. Minimum wages has had a more pronounced impact on firms’ labor productivity, total factor productivity and capital intensity since the uniform wage rate was introduced for both domestic private and foreign-invested enterprises in 2012.     

TRADE IMPACTS ON SKILL ACQUISITION VIA VARIETY EXPANSION*

We show that trade enhances skill formation through gains from trade via variety expansion à la Krugman. Although workers are identical as unskilled labour, they differ in productivity as skilled labour. Workers become skilled by incurring training costs. By introducing these settings into a trade model with monopolistic competition, we show that, although trade makes all agents better off, its effect is stronger for skilled than unskilled workers, which stimulates skill acquisition. As a result of less productive workers becoming skilled, the wage dispersion among skilled workers increases.     

Wage/tenure contracts with heterogeneous firms

This paper investigates equilibria where firms post wage/tenure contracts and risk averse workers search for new job opportunities whether employed or unemployed. We generalize previous work by assuming firms have different productivities. Equilibrium implies more productive firms always offer more desirable contracts. Thus workers never quit from more productive firms for less productive firms. Nevertheless turnover is inefficient as employees with long tenures at low productivity firms may reject outside job offers from more productive firms. A worker who quits to a more productive firm may accept a wage cut. Such wage cuts are compensated by faster “promotion” rates to higher wage levels in the future. We also generalize previous arguments by showing equilibria exist where the distribution of offers contains interior mass points and find equilibrium wage/tenure contracts need not be smooth.     

Wage and Technology Dispersion

This paper explains why firms with identical opportunities may use different technologies and offer different wages. Our key assumption is that workers must engage in costly search in order to gather information about jobs (Stigler (1961)). In equilibrium, some firms adopt high fixed cost, high productivity technologies, offer high wages, and fill job openings quickly. Other firms adopt less capital-intensive technologies and offer low wages, hiring mostly uninformed workers. In equilibrium, the amount of wage dispersion leaves workers indifferent about whether to gather information, and the fraction of informed workers leaves firms indifferent about their wage and technology choice. We show that worker search, which would appear to be a rent-seeking activity in partial equilibrium, may be efficiency-enhancing in general equilibrium.     

Economic transition, higher education and worker productivity in China

We investigate the role of education on worker productivity and firms' total factor productivity using a panel of firm-level data from China. We estimate the returns to education by calculating the marginal productivity of workers of different education levels based on estimates of the firm-level production function. We also estimate how the education level of workers and CEO contributes to firms' total factor productivity. Estimated marginal products are much higher than wages, and the gap is larger for highly educated workers. Our estimate shows that an additional year of schooling raises marginal product by 30.1%, and that CEO's education increases TFP for foreign-invested firms. Estimates vary substantially across ownership classes, the effect of schooling on productivity being highest in foreign-invested firms. We infer that market mechanisms contribute to a more efficient use of human capital within firms.     

General training and oligopsony

I consider a duopsony model of a general skilled labour market. The source of the market power of the firms is the mobility cost of the workers. In the model general training is inefficient and the firms bear a share of the general training cost. If capital market imperfections prevent workers from investing in human capital, the imperfect competition in the skilled labour market compared with the perfect competition promotes general training. In order to remove the inefficiency of personnel training it is necessary to link together a minimum wage for skilled workers and loans to apprentices.     

DOES INPUT QUALITY DRIVE MEASURED DIFFERENCES IN FIRM PRODUCTIVITY?*

One explanation for productivity dispersion is that the quality of inputs differs across firms. We add labor market history variables such as experience and firm and industry tenure, as well as general human capital measures such as schooling and sex. Adding these variables decreases the ratio of the 90th to 10th productivity quantiles from 3.27 to 2.68 across eight Danish manufacturing and service industries. We also use the wage bill and worker fixed effects. We find that the wage bill explains as much dispersion as human capital measures.