Wages, Labour Poaching, and Foreign Competition: Evidence from Ethiopia

Authors
Daniel Agness

The economic literature largely agrees that foreign direct investment (FDI) in low-income countries has a positive direct effect on domestic workers and a positive indirect effect on firms both upstream and downstream of the investment.  Less attention has been paid, however, to domestic and foreign firm competition over labour, resources, and customers. This project thus aims to contribute to the relevant literature by focusing on a direct mechanism currently understudied as a result of data limitations: worker flows and labour “poaching”. The researcher will attempt to answer the following research questions: 1) What is the wage premium paid by foreign firms in Ethiopia? 2) To what extent do foreign firms entering Ethiopia poach labour from domestic firms and what types of workers do they hire? 3) What are the implications of labour poaching by foreign firms for domestic firms? 4) How does the consideration of labour poaching change the distributional and welfare effects of FDI? 

To answer these questions, the research team will compile the first employer-employee matched dataset from the Ethiopian Private Organizations Employees Social Security Agency (POESSA). Survey evidence will also be essential to shed light on the determinants of the foreign firm wage premium as well as hiring and retention practices. To estimate the causal effect of labour poaching on domestic firm outcomes, the researcher will employ a number of empirical strategies. The long panel allows for the inclusion of work and firm fixed-effects, used in a mover design as in Alfaro-Urena et al. (2019). Next, the project will build on the dynamic difference-in-differences model outlined by Jäger and Heining (2019), identifying the effect of labour poaching using a match sampling procedure and weak assumptions on the conditional exogeneity of worker movement. Finally, the research team will use a time-varying instrumental variable approach derived from expected but unrealized FDI projects to manage endogenous worker movements.

This study will help Ethiopian policymakers to increase the protection of domestic firms from foreign competition. In particular, policy lessons drawn from this project may be relevant in other contexts, as FDI enters more low-income countries. By working with POESSA, the research is also directly helping the local authorities to reach their policy objectives: though they are charged with keeping the definitive records of social security contributions, data entry and manpower issues hinder their ability to meet this goal.
 

Authors

Daniel Agness

University of California, Berkeley