Exporters, multinationals and residual wage inequality: Evidence and theory

Abstract

A growing empirical literature underscores the pivotal role of ”global firms” in shaping labour market outcomes, including inequality. These are firms that participate in the international economy across multiple dimensions, including both trade and foreign direct investment (FDI). This prompts an important question: Is wage inequality among workers with similar characteristics primarily influenced by firms engaged solely in exporting, those involved solely in FDI, or by multinational enterprises (MNEs) that do both? Using linked employer–employee panel data for Germany, this paper unveils nuanced patterns in wage premia among various internationalising establishments, where I identify sorting between workers and establishments as a key driver. I interpret these patterns using a theoretical model that incorporates trade and FDI with monopolistic competition, wherein heterogeneous firms operate within frictional labour markets as they search for workers. My model gives rise to a novel channel for the MNE wage premium, stemming from their ability to transfer their human resource practices to their plant abroad.