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Margins of Multinational Labor Substitution

  • Muendler, Marc-Andreas


    (University of California, San Diego)

  • Becker, Sascha O.


    (University of Warwick)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2131.

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Length: 52 pages
Date of creation: May 2006
Date of revision:
Publication status: published in: American Economic Review, 2010, 100 (5), 1999-2030
Handle: RePEc:iza:izadps:dp2131
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