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Foreign Firms, Domestic Wages

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  • Nikolaj Malchow-Møller

    (University of Southern Denmark)

  • James R. Markusen

    (University of Colorado, Boulder)

  • Bertel Schjerning

    (Department of Economics, University of Copenhagen)

Abstract

Many papers have documented a wage premium in foreign-owned and large firms. However, there is very little formal theory in the literature and empirical analyses are typically not based on hypotheses which are rigorously derived from theory. This paper contributes to the theory-empirics gap by developing a model that allows for two “pure” explanations for the wage premium. The first is a heterogenous-worker explanation along the lines of Yeaple (2005), where firms that select more scaleintensive technologies select ex-ante more productive workers. In this case, the wage premium is a pure selection phenomenon. The second explanation builds on the heterogeneous-firm model of Melitz (2003) combined with on-the-job learning as in Markusen (2001). Productivity differences between firms are internalized by ex-ante homogeneous workers, so the wage premium is a pure learning phenomenon due to ex-post higher productivity in foreign firms. Our model yields a number of precise empirical hypotheses. When these predictions are tested on Danish matched employer-employee data, we find that both explanations play a role in explaining the observed wage premium. Specifically, the foreign- and large-firm premiums explained by selection are in the neighborhood of 30-65% of the total premium, with the remainder consistent with learning. There is also considerable support for a number of other predictions specific to the worker-learning explanation.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics in its series CAM Working Papers with number 2009-02.

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Length: 28 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:kud:kuieca:2009_02

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Citations

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Cited by:
  1. Teixeira, Aurora A.C. & Tavares-Lehmann, Ana Teresa, 2014. "Human capital intensity in technology-based firms located in Portugal: Does foreign ownership matter?," Research Policy, Elsevier, Elsevier, vol. 43(4), pages 737-748.
  2. Thomas Sampson, 2012. "Brain drain or brain gain? Technology diffusion and learning on-the-job," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 51503, London School of Economics and Political Science, LSE Library.
  3. Hartmut Egger & Udo Kreickemeier, 2011. "Why Foreign Ownership May be Good for You," CESifo Working Paper Series 3631, CESifo Group Munich.
  4. Hijzen, Alexander & Martins, Pedro S. & Schank, Thorsten & Upward, Richard, 2013. "Foreign-owned firms around the world: A comparative analysis of wages and employment at the micro-level," European Economic Review, Elsevier, Elsevier, vol. 60(C), pages 170-188.
  5. Anders Akerman & Rikard Forslid, 2009. "Firm Heterogeneity and Country Size Dependent Market Entry Costs," Global COE Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University gd09-056, Institute of Economic Research, Hitotsubashi University.
  6. Dieter M. Urban, 2010. "FDI, Technology Spillovers, and Wages," Review of International Economics, Wiley Blackwell, vol. 18(3), pages 443-453, 08.
  7. Dammert, Ana C. & Ural Marchand, Beyza & Wan, Chi, 2013. "Gender Wage-Productivity Differentials and Global Integration in China," IZA Discussion Papers 7159, Institute for the Study of Labor (IZA).
  8. Akerman, Anders & Forslid, Rikard, 2007. "Country Size, Productivity and Trade Share Convergence: An Analysis of Heterogenous Firms and Country Size Dependent Beachhead Costs," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6545, C.E.P.R. Discussion Papers.
  9. Thomas Sampson, 2012. "Brain Drain or Brain Gain? Technology Diffusion and Learning On-the-job," CEP Discussion Papers, Centre for Economic Performance, LSE dp1168, Centre for Economic Performance, LSE.
  10. Dasgupta, Kunal, 2012. "Learning and knowledge diffusion in a global economy," Journal of International Economics, Elsevier, Elsevier, vol. 87(2), pages 323-336.
  11. Mario Larch & Wolfgang Lechthaler, 2008. "Multinational Firms and Heterogeneous Workers," Kiel Working Papers 1454, Kiel Institute for the World Economy.
  12. Sándor Csengödi & Dieter M. Urban, 2008. "Foreign Takeovers and Wage Dispersion in Hungary," CESifo Working Paper Series 2188, CESifo Group Munich.
  13. Jeffrey T. Prince & Shane Greenstein, 2013. "Measuring Consumer Preferences for Video Content Provision via Cord-Cutting Behavior," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2013-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.

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