Abstract
This paper examines remuneration patterns among workers in foreign-owned firms operating in New Zealand. By tracking workers as they move across jobs in different types of firms, we document the extent of the “foreign wage premium” distinguishing between compositional factors (e.g., differences in industry and employment composition between foreign and domestic firms) and remaining differences in wage levels and growth rates. We find that much of the average earnings gap between foreign- and domestically-owned firms is due to compositional factors—foreign firms tend to be larger and to employ workers who would have received relatively high wages regardless of where they worked. However, even among apparently similar workers and firms, we find a two to four percent earnings gap between workers in domestic and foreign-owned firms. This gap is primarily associated with a wage increase of around two percent on moving from a domestic to a foreign firm, augmented by higher wage growth within foreign-owned firms. However, these premia appear to be specific to foreign-firm employment, as workers who return to domestically-owned firms do not appear to retain these additional earnings in their subsequent jobs.
Access to the anonymised data used in this study was provided by Statistics New Zealand in accordance with security and confidentiality provisions of the Statistics Act 1975, and secrecy provisions of the Tax Administration Act 1994. The findings are not Official Statistics. The results in this paper are the work of the authors, not Statistics NZ, the Ministry of Business, Innovation and Employment, or Motu Economic and Public Policy Research, and have been confidentialised to protect individuals and businesses from identification. See Maré et al. (2014) for the full disclaimer.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Taylor and Driffield (2005) find that FDI has been a significant contributor to wage inequality in the UK manufacturing sector between 1983 and 1992.
- 2.
Moreover, where local MNEs (domestically-owned firms with subsidiary companies located offshore) can be distinguished from other domestic firms, the “foreign” wage premium is shown to be more strongly associated with multi-national status than with foreignness per se (Doms and Jensen 1998; Heyman et al. 2007; Iammarino and McCann 2013).
- 3.
Foreign wage premia are generally found to be stronger in developing than developed countries (Hijzen et al. 2013), which may reflect larger differences in the characteristics of foreign and domestic firms in these countries, greater concerns about retention of trained workers in an environment with weaker intellectual property protection and/or lower levels of skill and education in the wider labour force, and international rent-sharing across countries (on the latter, see Budd et al. 2005; Egger and Kreickemeier 2013).
- 4.
While Doan et al. (2015) find little evidence of productivity spillovers from FDI, their work uses industry-level measures of supplier–customer relationships based on input–output tables. These measures do not take into account other forms of interaction, such as interfirm labour mobility, which may be an important source of knowledge transfer.
- 5.
Foreign-owned firms may also pay higher wages and/or provide better working conditions if they are more closely held to account by either local authorities or international customers than domestic firms, particularly in countries with lower enforcement of labour standards.
- 6.
More correctly, the diagram could allow for factors such as the age-wage profile, with slower within and between job wage growth later in the life cycle. These refinements are omitted for simplicity.
- 7.
An additional possibility, which we do not consider here, is that knowledge spillovers and complementarities between workers may affect the earnings of workers who remain in domestic firms as well as those who move into foreign firms. When worker 1 returns to a domestic firm, knowledge transfer and skill complementary may raise the productivity and hence the earnings of worker 2. If this is the case, the estimated residual impact of working in a foreign firm may be biased downwards, as the control group of workers who remain in domestic firms will also have their earnings raised through contact with other workers. Poole (2013) finds evidence of spillovers of this type in Brazilian firms.
- 8.
Pesola (2011) finds no evidence that Finnish workers pay for foreign experience in the form of lower starting wages.
- 9.
We exclude all periods of employment where the employee has ever received income as a working proprietor of that firm, as there are empirical and conceptual issues with determining the appropriate measure of earnings when workers have an ownership interest. To accommodate periods of leave and other short breaks in employment, we allow for one-month gaps in income receipt within a job spell. Where an income gap extends beyond one month, the periods before and after the gap are treated as two separate jobs with the same employer and are excluded from the main analysis.
- 10.
Full-time status is identified following Maré and Hyslop (2007).
- 11.
In cases where an individual receives no income in the relevant month, we use earnings from the third (or third-to-last) month of employment.
- 12.
Where firms are part of a group of parent-subsidiary enterprises, we give precedence to responses of the individual firm. If no information is available at the firm level, and the information provided by other group members is consistent, firms are allocated to domestic or foreign ownership based on the group response.
- 13.
See Sanderson (2013) for a discussion of alternative sources of FDI information in the LBD.
- 14.
These adjustments are made in response to information about firm ownership from other sources, including other Statistics New Zealand surveys and media reports.
- 15.
A small number of apparent single-year transitions into and out of foreign ownership from IR4s are ignored where they are inconsistent with other sources of FDI information.
- 16.
As our definition of ownership is based on “permanent” ownership status over the life of the firm, there is little variation in reported foreign ownership rates over time aside from an initial decrease in the proportion of firms and employment allocated to the “unknown” ownership category as firms for which we have no FDI information exit the population.
- 17.
As our method of identifying full time employment is based on wage and benefit income receipt, rather than hours information, the distinction between foreign- and domestically-owned firms may be overstated, as high-wage employees are less likely to be identified as working part time.
- 18.
Labour market regions are defined based on labour catchments, following Papps and Newell (2002).
- 19.
Panel A is restricted to the regression population used in Sect. 1.5. This population is restricted to job spells where we observe a clean, full-time transition between jobs at both the start and the end of the relevant job spell. Workers moving in or out of part-time jobs, multiple job holders, and repeated employment spells with the same firm are excluded. Panels B and C relax these constraints, covering all observed job starts and ends within the period from June 2000 to March 2010.
- 20.
These estimates are lower than the average tenure found by Papadopoulos (2008). Longer spells are excluded from our analysis as we restrict to spells where we can observe a clean transition at either end of the job. Short spells (less than 3 months) are also excluded as monthly wage changes cannot be observed.
- 21.
The lower panel of Table 1.6 maintains the requirement that the current job start or job end is full time to maintain comparability of earnings, but places no restrictions on either the existence or characteristics of past or future job spells or job characteristics at the other end of the current spell.
- 22.
Including all clean transitions between two full-time jobs shows very similar results (lower panel, Table 1.7).
- 23.
Spell ends are necessarily later in the period and thus may be affected by worsening economic conditions associated with aftermath of the Global Financial Crisis.
- 24.
The larger difference between job starts and job ends in the balanced panel (where we are by definition observing these start and the end of the same spell) compared to the lower panel in which we observe a different set of spells for the start and end transitions, is consistent with reductions in wage growth with age.
- 25.
Never foreign-owned firms form the reference group.
- 26.
See also Addison et al. (2009), who cast doubt on the assumption of a declining reservation wage.
- 27.
For both start and end wages, the control variables are included as second order polynomials, containing the following terms: \( \left\{{A}_1,{A}_2,{A}_1^2,{A}_2^2,{A}_1{A}_2\right\} \), where A1 is the worker’s age (in months) at the start of the relevant period, A2 is age at the end of the period, and the period in question is either the period of unemployment prior to a job start or the period of tenure prior to a job end. This specification controls for age, tenure and experience effects, though we cannot separately identify all three and thus cannot interpret the coefficients of the polynomial.
- 28.
This relationship is consistent throughout later regressions, with the exception of the within-job wage growth premium analysis.
- 29.
Further controls for firm performance (e.g., productivity, profitability) would likely reduce this premium further. However, as firm-specific advantages are a core part of the argument for a positive impact of FDI, controlling for these factors could be viewed as dismissing the very phenomenon we are interested in.
- 30.
Wage growth premia are examined directly in Table 1.12.
- 31.
Employment controls include: : ln E1, ln E2, (ln E1)2, (ln E2)2, ln E1 * ln E2, where E1 is employee count at the previous firm in the month in which we measure workers’ end-of-job earnings, and E2 is employee count at the current firm, in the month in which we measure starting earnings in that job.
- 32.
Consistent with the cross-job regressions, firm size controls include ln E1, ln E2, (ln E1)2, (ln E2)2, and ln E1 * ln E2, where E1 is now employment count at firm j at the start of the employee’s job spell and E2 is employment in the same firm at the end of that spell.
- 33.
Looking at firms classed as “sometimes” foreign owned across the full sample period, transitions from domestic to foreign ownership are more common than from foreign to domestic ownership. Of the 1974 firms for which we can observe ownership status in 2000/2001, and also in 2010/2011, 17.5% move from domestic to foreign ownership, while only 7.9% transition in the opposite direction.
- 34.
Relevant factors may include earnings potential and employment conditions, but also lifestyle decisions such as location and job content.
- 35.
In any given subgroup there are a range of other factors involved, including both endogeneity in employment paths and potential heterogeneity across other dimensions of worker and firm characteristics. However, allowing for the full range of observable heterogeneity in premia would require a fully interacted model with impacts of FDI allowed to vary by age, by tenure, by location, etc., an approach which quickly becomes unmanageable. As such the reported results should again be treated as an observed average, which is of interest when thinking about the distributional impacts of FDI even though it does not imply a deterministic relationship between any of the binary categories considered below and the strength of the FDI premium.
- 36.
This may in part reflect sample size differences—“prime-age” workers account for around two-thirds of the total population.
References
Addison J, Centeno M, Portugal P (2009) Do reservation wages really decline? Some international evidence on the determinants of reservation wages. J Lab Res 30(1):1–8
Andrews M, Bellmann L, Schank T, Upward R (2009) The takeover and selection effects of foreign-owned establishments: An analysis using linked employer-employee data. Rev World Econ 145(2):293–317
Balsvik R (2011) Is labor mobility a channel for spillovers from multinationals? Evidence from Norwegian manufacturing. Rev Econ Stat 93(1):285–297
Bernard A, Sjöholm F (2003) Foreign owners and plant survival. Working Papers 10039, National Bureau of Economic Research
Budd J, Konings J, Slaughter M (2005) Wages and international rent sharing in multinational firms. Rev Econ Stat 87(1):73–84
Cartwright W (2001) Multinational enterprise engagement and development in New Zealand. In: Yeabsley J (ed) Global player? Benchmarking New Zealand’s competitive upgrade. New Zealand Institute of Economic Research, Wellington, pp 41–47
Devine TJ, Kiefer NM (1993) The empirical status of job search theory. Labour Econ 1(1):3–24
Doan T, Maré D, Iyer K (2015) Productivity spillovers from foreign direct investment in New Zealand. N Z Econ Pap 49(3):249–275
Doms M, Jensen JB (1998) Comparing wages, skills, and productivity between domestically and foreign-owned manufacturing establishments in the United States. In: Baldwin R, Lipsey R, Richards JD (eds) Geography and ownership as bases for economic accounting, NBER Books, National Bureau of Economic Research, pp 235–258
Egger H, Kreickemeier U (2013) Why foreign ownership may be good for you. Int Econ Rev 54(2):693–716
Fabling R, Sanderson L (2014) Foreign acquisition and the performance of New Zealand firms. N Z Econ Pap 48(1):1–21
Fosfuri A, Motta M, Ronde T (2001) Foreign direct investment and spillovers through workers’ mobility. J Int Econ 53(1):205–222
Gawith A (2002) Firm-level manufacturing export study. Tech. rep., Report to the Ministry of Economic Development, the Treasury, and Trade New Zealand, Wellington
Girma S, Görg H (2007) Evaluating the foreign ownership wage premium using a difference-in-differences matching approach. J Int Econ 72(1):97–112
Glass A, Saggi K (2002) Multinational firms and technology transfer. Scand J Econ 104(4):495–513
Görg H, Strobl E (2003) “Footloose” multinationals? Manch Sch 71(1):1–19
Görg H, Strobl E (2005) Spillovers from foreign firms through worker mobility: an empirical investigation. Scand J Econ 107(4):693–709
Görg H, Strobl E, Walsh F (2007) Why do foreign-owned firms pay more? The role of on-the-job training. Rev World Econ 143(3):464–482
Heyman F, Sjöholm F, Tingvall P (2007) Is there really a foreign ownership wage premium? Evidence from matched employer-employee data. J Int Econ 73(2):355–376
Hijzen A, Martins P, Schank T, Upward R (2013) Foreign-owned firms around the world: a comparative analysis of wages and employment at the micro-level. Eur Econ Rev 60(C):170–188
Huttunen K (2007) The effect of foreign acquisition on employment and wages: evidence from Finnish establishments. Rev Econ Stat 89(3):497–509
Iammarino S, McCann P (2013) Multinationals and economic geography: location, technology and innovation. Edward Elgar, Cheltenham
Katz L, Summers L (1989) Industry rents: evidence and implications. Brookings papers on economic activity: microeconomics, pp 209–290
Lipsey RE (2004) Home- and host-country effects of foreign direct investment. In: Baldwin R, Winters LA (eds) Challenges to globalization: analyzing the economics. University of Chicago Press, Chicago
Malchow-Møller N, Markusen J, Schjerning B (2013) Foreign firms, domestic wages. Scand J Econ 115(2):292–325
Maré DC, Hyslop DR (2007) Earnings heterogeneity and job matching – evidence from linked employer-employee data. N Z J Employ Relat 32(1):1–16
Maré D, Sanderson L, Fabling R (2014) Earnings and employment in foreign-owned firms. Working paper 14-16, New Zealand Treasury
Martins P (2005) Inter-firm employee mobility, displacement, and foreign direct investment spillovers. Working paper, Queen Mary, University of London
Newell J, Callister P (2009) Australian and New Zealand labour markets: Some similarities and differences. Labour, Employment and Work in New Zealand: Proceedings of the Thirteenth Conference
Oi W (2004) Firm size and wages. In: Ashenfelter OC, Card D (eds) Handbook of labor economics, vol 3. Elsevier, London, pp 2165–2214
Papadopoulos T (2008) Measuring job tenure using Linked Employer-Employee Data. Tech. Rep., Statistics New Zealand
Papps K, Newell J (2002) Identifying functional labour market areas in New Zealand: a reconnaissance study using travel-to-work data. Discussion Paper 443, IZA
Pesola H (2011) Labour mobility and returns to experience in foreign firms. Scand J Econ 113(3):637–664
Poole JP (2013) Knowledge transfers from multinational to domestic firms: evidence from worker mobility. Rev Econ Stat 95(2):393–406
Rogerson R, Shimer R, Wright R (2005) Search-theoretic models of the labor market: a survey. J Econ Lit 43(4):959–988
Sanderson L (2013) Sources of international investment data in the Longitudinal Business Database. Working Papers 2013/31, New Zealand Treasury
Taylor K, Driffield N (2005) Wage inequality and the role of multinationals: evidence from UK panel data. Labour Econ 12(2):223–249
Troske KR (1999) Evidence on the employer size-wage premium from worker-establishment matched data. Rev Econ Stat 81(1):15–26
Acknowledgments
The authors would like to thank Riccardo Crescenzi, Joe Beaglehole, Matt Benge, Tim Ng, and seminar participants at the New Zealand Treasury, Ministry of Business, Innovation and Employment, Delhi School of Economics, and LSE Spatial Economics Research Centre (SERC) for valuable comments. The authors gratefully acknowledge funding received from the Treasury. Lynda Sanderson was employed by the Treasury while completing this research.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2021 The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Maré, D.C., Sanderson, L., Fabling, R. (2021). Earnings and Employment in Foreign-Owned Firms. In: Cochrane, W., Cameron, M.P., Alimi, O. (eds) Labor Markets, Migration, and Mobility. New Frontiers in Regional Science: Asian Perspectives, vol 45. Springer, Singapore. https://doi.org/10.1007/978-981-15-9275-1_1
Download citation
DOI: https://doi.org/10.1007/978-981-15-9275-1_1
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-15-9274-4
Online ISBN: 978-981-15-9275-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)