Globalized Labour Markets? International Rent Sharing Across 47 Countries

AuthorPedro S. Martins,Yong Yang
Publication Date01 Dec 2015
Globalized Labour Markets? International
Rent Sharing Across 47 Countries
Pedro S. Martins and Yong Yang
We present evidence about the role of rent sharing in fostering the interdepen-
dence of labour markets around the world. Our results draw on a firm-level
panel of more than 2,000 multinationals and over 5,000 of their affiliates,
covering 47 home and host countries. We find considerable evidence that multi-
nationals share profits internationally by paying higher wages to their workers
in foreign affiliates in periods of higher headquarter profits. This occurs even
across continents, and not only within Europe, as shown in earlier research. The
results are robust to different tests, including a falsification exercise based on
‘matched’ parents. Finally, we show that rent sharing is higher when the affiliate
is located in countries with specific relative characteristics, such as lower eco-
nomic development or taxation, while it falls with the number of affiliates. We
argue that these results are consistent with transfer pricing and bargaining
1. Introduction
National labour markets are influenced by a large number of variables, some
of which are determined abroad. Indeed, forces such as international trade
have most likely played an important role in labour outcomes for many
centuries. More recently, foreign investment — and multinationals — have
become important drivers of labour markets too, in particular as globaliza-
tion regained momentum since the last decade of the last century. This article
investigates one aspect of such international linkages of labour markets,
namely the extent to which domestic wages are influenced by decisions taken
by multinationals. In particular, we ask if multinational firms share rents
across borders. This question not only sheds light on the general functioning
of labour markets but it also addresses another channel behind the interna-
tional transmission of business cycles.
Pedro S. Martins is at CEG-IST, IZA and Queen Mary University of London. Yong Yang is at
the University of Sussex.
British Journal of Industrial Relations doi: 10.1111/bjir.12050
© John Wiley & Sons Ltd/London School of Economics 2014. Published by John Wiley & Sons Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
53:4 D ecemb er 2015 0007–1080 pp. 664 –691
Globalized Labour Markets?
Most evidence on rent sharing — supranormal profits split between
employers and employees, which is not predicted in competitive frameworks
— stems from within-country analyses (Abowd and Lemieux 1993; Arai
2003; Blanchflower et al. 1996; Dobbelaere and Mairesse 2010; Martins 2009;
Van Reenen 1996). This work, based on different identification strategies,
finds without exception that industry or firm profitability increases workers’
wages. However, a recent paper, Budd et al. (2005), presents evidence that
rents are also shared by multinationals to their affiliates abroad. Based on
firm-level data from European multinationals and their affiliates in Europe,
they find significant elasticities of affiliate wages with respect to parents’
profits, of around 0.03, even after controlling for the profitability of the
affiliate itself.1
Our article makes three contributions to this emerging literature. First, we
extend the analysis in Budd et al. (2005) of 14 countries to a much wider set
of countries. In particular, we consider a large variety of multinational–
affiliate relationships, drawing on an extended version of their data that
covers 47 countries. This allows for a more stringent test of international rent
sharing than analyses across the North American border or within Europe,
given the much greater heterogeneity in labour markets and other dimensions
between, say, the United States and China than, say, Germany and France.
Second, we conduct a number of new robustness tests, including a falsifica-
tion exercise that seeks to control for the role of common shocks affecting
both the parent and its affiliate. Third, we investigate some of the possible
determinants of the international rent sharing that we document, namely the
role of different measures of the heterogeneity (or distance) between the
parent and the affiliate.
Our results indicate that multinationals do share their profits with their
affiliates abroad, even if the latter are located in a very different country. The
wage elasticities we find are precisely estimated and around 0.01 (from firm
fixed-effects estimation). In some cases, namely when using IV and GMM
estimators, the elasticities are as large as 0.08, even if less precisely estimated.
We also find that the elasticity of the affiliate wage to the parent profits is
higher when the affiliate is located in a country with low gross domestic
product (GDP) or taxation, among other variables. Furthermore, the het-
erogeneity between multinationals and their affiliates increases the magni-
tude of the rent sharing, while the number of affiliates of a multinational has
the opposite effect. We believe this is consistent with a bargaining interpre-
tation of rent sharing but less so with fairness or risk sharing views. Indeed,
the heterogeneity between parents and affiliates can be regarded as a proxy
for the complementarity between them in terms of the global production
process of the conglomerate, and such complementarity can be assumed to
increase the bargaining power of affiliates.
The next section describes the data used, after which Section 3 presents the
main results. Sections 4 and 5 study the robustness of the main results, and
the relationship between the heterogeneity of locations and rent sharing,
respectively. Finally, Section 6 concludes.
© John Wiley & Sons Ltd/London School of Economics 2014.

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