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