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The effects of multinationals on workers: evidence from Costa Rica

Alfaro-Ureña, Alonso, Manelici, Isabela and Vasquez Carvajal, Jose (2021) The effects of multinationals on workers: evidence from Costa Rica. PEDL Research Paper. Private Enterprise Development in Low Income Countries, London, UK.

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Abstract

This paper estimates the effects of multinational corporations (MNCs) on workers. To that end, we combine microdata on all formal worker-firm and firm-firm relationships in Costa Rica with an instrumental variable approach that exploits shocks to the size of MNCs in the country. First, using an event-study design, we find an MNC wage premium of nine percent. This premium reflects above market wages rather than compensation for disamenities. Next, we study the effects of MNCs on workers in domestic firms. As MNCs bring jobs that pay a premium, they improve outside options by altering both the level and composition of labor demand. MNCs can also enhance the performance of domestic employers through input-output linkages. Shocks to firm performance may then pass through to wages. We show that the growth rate of annual earnings of a worker experiencing a one standard deviation increase in either her labor market or firm-level exposure to MNCs is one percentage point higher than that of an identical worker with no change in either MNC exposure. Finally, we develop a model to rationalize the reduced-form evidence and estimate structural parameters that govern wage setting in domestic firms. We model MNCs as paying a wage premium and buying inputs from domestic firms. When hiring workers, firms incur recruitment and training costs. We find that workers are sensitive to improvements in outside options. Moreover, we estimate that the marginal recruitment and training cost of the average domestic firm is 90% of the annual earnings of a worker earning the competitive market wage. This high cost allows incumbent workers to extract part of the increase in firm rents coming from intensified linkages with MNCs.

Item Type: Monograph (Working Paper)
Official URL: https://pedl.cepr.org/publications/effects-multina...
Additional Information: © 2021 The Authors
Divisions: Economics
Management
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HC Economic History and Conditions
JEL classification: F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms; International Business
F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions
J - Labor and Demographic Economics > J2 - Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital; Retirement > J21 - Labor Force and Employment, Size, and Structure
J - Labor and Demographic Economics > J2 - Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital; Retirement > J23 - Employment Determination; Job Creation; Demand for Labor; Self-Employment
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc.
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J63 - Turnover; Vacancies; Layoffs
M - Business Administration and Business Economics; Marketing; Accounting > M5 - Personnel Economics > M55 - Labor Contracting Devices: Outsourcing; Franchising; Other
Date Deposited: 19 Aug 2021 08:00
Last Modified: 19 Aug 2021 23:09
URI: http://eprints.lse.ac.uk/id/eprint/111614

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