Theory and Evidence on the Multinational Wage Premium

• Applicants: Professor Dr. Hartmut Egger; Professorin Dr. Elke Jahn
• Subject Area: Economic Policy, Applied Economics
• Term: from 2016 to 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 322072184

It is a general belief that multinationals generate good jobs, which offer high wages. From academic point of view, it is therefore of interest to understand the nature and main determinants of the wage premium multinational firms offer their workforce. In the last two decades the empirical trade literature has documented vast evidence on these issues. The general insight from this literature is that multinational wage premium can to a significant part be explained by firm and worker characteristics, leaving still a prominent role for the country of ownership of a multinational subsidiary, i.e. the country in which the parent firm is located, as an additional explanatory factor. The relevance of the country of ownership has been documented for different countries and a rationale for it has been provided by the argument of international rent sharing within a multinational network of producers. However, both theoretical models that can explain the multinational wage premium as well as datasets that allow for a rigorous empirical analysis of its determinants are still scarce. In particular, the specific role of the size and structure of the multinational network has not been studied in detail so far. The purpose of this project is to close this gap. On the one hand, we will extend the theoretical literature on the multinational wage premium in three different dimensions. First, we will develop a model of firm overlap, which allows analyzing the different determinants of the multinational wage premium in a uniform framework. Second, we will allow for different skill types to shed light on whether the multinational wage premium is similarly important for all skill groups. Third, we will account for different forms of multinational activity to analyze whether the multinational wage premium is of equal size in the case of horizontal and vertical linkages. In addition, we will run a series of empirical exercises, making use of a new database provided by the Research Data Centre (FDZ) of the Federal Employment Agency at the Institute for Employment Research (IAB), which allows matching information from the Orbis firm data base of Bureau van Dijk to three in the scientific community well established datasets of the IAB, the Establishment History Panel (BHP), the Integrated Labour Market Biographies (IEB), and the IAB Establishment Panel. These linked datasets will (OBHP) will provide detailed information on workers, the composition of workforce in firms, and the ownership structure in multinational networks. Finally, we will build our own dataset by adding detailed information on foreign firms in a multinational network from Orbis, which are not available yet, in order to get detailed insights on the size and structure of the multinational network, in which a German firm is embedded. This enhanced dataset will provide an excellent data source for the empirical analysis in this project.

• DFG Programme: Research Grants
• International Connection: USA
• Cooperation Partner: Dr. Daniela Hochfellner