The Effects of Multinationals on Workers: Evidence from Costa Rica

Working Paper
Published on 1 April 2021

Abstract

This paper estimates the effects of multinational corporations (MNCs) on workers. To that end, Alfaro-Ureña et al. (2021) combine microdata on all formal worker-firm and firm-firm relationships in Costa Rica with an instrumental variable approach that exploits shocks to the size of MNCs in the country. First, using an event-study design, they find an MNC wage premium of nine percent. This premium reflects above market wages rather than compensation for disamenities. Next, the researchers study the effects of MNCs on workers in domestic firms. As MNCs bring jobs that pay a premium, they improve outside options by altering both the level and composition of labour demand. MNCs can also enhance the performance of domestic employers through input-output linkages. Shocks to firm performance may then pass through to wages. The researchers show that the growth rate of annual earnings of a worker experiencing a one standard deviation increase in either her labour market or firm-level exposure to MNCs is one percentage point higher than that of an identical worker with no change in either MNC exposure. Finally, they develop a model to rationalise the reduced-form evidence and estimate structural parameters that govern wage setting in domestic firms. They model MNCs as paying a wage premium and buying inputs from domestic firms. When hiring workers, firms incur recruitment and training costs. The researchers find that workers are sensitive to improvements in outside options. Moreover, they estimate that the marginal recruitment and training cost of the average domestic firm is 90% of the annual earnings of a worker earning the competitive market wage. This high cost allows incumbent workers to extract part of the increase in firm rents coming from intensified linkages with MNCs.

Authors

Alonso Alfaro-Ureña

University of Costa Rica

Isabela Manelici

Princeton University

Jose Pablo Vasquez Carvajal

University of California, Berkeley