Internal Labor Markets, Wage Convergence and InvestmentRui C. Silva - London Business School
Management Science, Revise & Resubmit. This version: May 25, 2017
Research Questions and Findings
- Research Question:
(1) Relation between firm boundaries (diversification) and wage?
(2) How does investment respond to this relation?
- Main findings:- Workers earn higher-than-industry wages when firm also operates in
high-wage industries- When exposed to higher labor cost
- Plants increase capital-labor ratio - “Overinvestment” in low-investment divisions disappears
Data
US Census Bureau: 1977 - 2000
- LBS - Longitudinal Business Database- All non-farm establishments w/ min. 1 employee- Data: No. of employees, payroll, location, industry, firm
- CMF - Census of ManufacturersASM - Annual Survey of Manufacturing
- Years ending in 2 or 7: all manufacturing establishments (plants)- Remaining years: plants >= 250 staff + random sample- Data: sales, values added, wages, number of production workers,
production worker hours, investment, book value of assets
Main Variables
Log(Firm Wage)dft =
: average wage of workers in divisions other than d
Xidft: age, firm size, division size, plant size, State x Year x Industry
FEs, Divdummy, 1-HHI Employees where
Capital-labor ratio (K/L): book assets / no. of employees
Investment: CAPX / Sales
Main Result: Wage Convergence
Top Down or Bottom Up?(1)
(2)
Quasi-Experiment 1: NAFTA Agreement
- Took effect on 1st January 1994- Eliminated tariffs on one-third of US exports to Mexico and on (almost) all
US-Canada trade- Focus on 1991-1993 and 1994-1996- “Two-stage regressions”
Quasi-Experiment 1: NAFTA Agreement - First Stage
- Establish that NAFTA as exogenous shock to wage of exporting firms- Sample:
- Exporting plants: continuous export during 1994-1996- Non-exporting firms: zero exports during 1994 - 1996
Quasi-Experiment 1: NAFTA Agreement - Second Stage- (1) Only plants that belong to zero-export divisions but belong to
- Treatment group: firms with continuous exports 3 years after NAFTA- Control group: firms with no exports 3 years after NAFTA
- (2) As (1) and has no interplant transfers
Quasi-Experiment 1: NAFTA Agreement - Inference- First stage: Wages of exporting plants increase after NAFTA- Second stage: Wages of non-exporting plants inside exporting firms increase
after NAFTA=> Wages of non-exporting plants inside exporting firms increase as wages of exporting plants increase
Internal Labor Market and Investment Decision
Internal Labor Market and Investment Decision
Summary
- Workers earn higher-than-industry wages when firm also operates in high-wage industries
- When exposed to higher labor cost- Plants increase capital-labor ratio - “Overinvestment” in low-investment divisions disappears
- Comment:- Plant FE not used throughout the paper- Results based solely on manufacturing workers
Quasi-Experiment 2: State-level Minimum Wage Change
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