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Margins of Multinational Labor Substitution

  • Marc-Andreas Muendler
  • Sascha O. Becker

Multinational labor demand responds to wage differentials at the extensive margin, when a multinational enterprise (MNE) expands into foreign locations, and at the intensive margin, when an MNE operates existing affiliates across locations. We derive conditions for parametric and nonparametric identification of an MNE model to infer elasticities of labor substitution at both margins, controlling for location selectivity. Prior studies have rarely found foreign wages or operations to affect employment. Our strategy detects salient adjustments at the extensive margin for German MNEs. With every percentage increase in German wages, German MNEs allocate 2,000 manufacturing jobs to Eastern Europe at the extensive margin and 4,000 jobs overall.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1713.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1713
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