Economic Insecurity and the Globalization of Production Kenneth Scheve Yale University Matthew J.Slaughter Tuck School of Business at Dartmouth and NBER July 2003 A central question in the international and comparative political economy literatures on globalization is whether economic integration increases worker insecurity in advanced economies.Previous research has focused on the role of international trade and has failed to produce convincing evidence that such a link exists.In this paper,we argue that globalization increases worker insecurity,but that foreign direct investment(FDI)by multinational enterprises (MNEs)is the key aspect of integration generating risk.FDI by MNEs increases firms'elasticity of demand for labor.More-elastic labor demands,in turn,raise the volatility of wages and employment,all of which tends to make workers feel less secure.We present new empirical evidence,based on the analysis of panel data from Great Britain collected from 1991-1999,that FDI activity in the industries in which individuals work is positively correlated with individual perceptions of economic insecurity.This correlation holds in analyses accounting for individual- specific effects and a wide variety of control variables. Kenneth.Scheve@Yale.Edu and Matthew.Slaughter@Dartmouth.Edu.For financial support we thank the National Science Foundation for award #SES-0213671,the Yale Center for the Study of Globalization,the Carnegie Corporation's Globalization and Self-Determination Project at the Yale Center for International and Area Studies,the Leitner Program in International Political Economy,and the Institution for Social and Policy Studies.For very helpful data assistance we thank Simon Harrington at the U.K.Office of National Statistics and Ralf Martin. For helpful comments and discussion we thank Chris Anderson,Samuel Bowles,Jose Cheibub, Rafaela Dancygier,Keith Darden,Esther Duflo,Jonathan Haskel,Michael Hiscox,Hyeok Kwon,Lisa Martin,Fredrik Sjoholm,Mike Tomz,Michael Wallerstein,and seminar participants at Binghamton University,Cornell University,Duke University,the Santa Fe Institute,the University of Michigan and the University of Nottingham
Economic Insecurity and the Globalization of Production* Kenneth Scheve Yale University Matthew J. Slaughter Tuck School of Business at Dartmouth and NBER July 2003 A central question in the international and comparative political economy literatures on globalization is whether economic integration increases worker insecurity in advanced economies. Previous research has focused on the role of international trade and has failed to produce convincing evidence that such a link exists. In this paper, we argue that globalization increases worker insecurity, but that foreign direct investment (FDI) by multinational enterprises (MNEs) is the key aspect of integration generating risk. FDI by MNEs increases firms’ elasticity of demand for labor. More-elastic labor demands, in turn, raise the volatility of wages and employment, all of which tends to make workers feel less secure. We present new empirical evidence, based on the analysis of panel data from Great Britain collected from 1991-1999, that FDI activity in the industries in which individuals work is positively correlated with individual perceptions of economic insecurity. This correlation holds in analyses accounting for individualspecific effects and a wide variety of control variables. * Kenneth.Scheve@Yale.Edu and Matthew.Slaughter@Dartmouth.Edu. For financial support we thank the National Science Foundation for award #SES-0213671, the Yale Center for the Study of Globalization, the Carnegie Corporation’s Globalization and Self-Determination Project at the Yale Center for International and Area Studies, the Leitner Program in International Political Economy, and the Institution for Social and Policy Studies. For very helpful data assistance we thank Simon Harrington at the U.K. Office of National Statistics and Ralf Martin. For helpful comments and discussion we thank Chris Anderson, Samuel Bowles, José Cheibub, Rafaela Dancygier, Keith Darden, Esther Duflo, Jonathan Haskel, Michael Hiscox, Hyeok Kwon, Lisa Martin, Fredrik Sjoholm, Mike Tomz, Michael Wallerstein, and seminar participants at Binghamton University, Cornell University, Duke University, the Santa Fe Institute, the University of Michigan and the University of Nottingham
1 1.Introduction Determining whether international economic integration in advanced economies increases worker insecurity is critical to competing explanations of welfare-state policymaking and the politics of globalization.An influential argument in the welfare-state literature is that increases in economic insecurity from globalization generate demands for more generous social insurance that compensates workers for a riskier environment (e.g.,Cameron,1978;Rodrik 1997,1998; Garrett 1998;Burgoon 2001;Hays,Ehrlich,and Peinhardt 2002;Boix 2002).The connection between globalization and welfare spending in this argument depends on the causal mechanism that international economic integration increases worker insecurity.Claims that no such link exists undermine this explanation for variation in welfare-state spending. The link between economic integration and worker insecurity is also an essential element of explanations for patterns of public opposition to policies aimed at further liberalization of international trade,immigration,and foreign direct investment (FDI)in advanced economies. Economic insecurity may contribute to the backlash against globalization in at least two ways. First is a direct effect in which individuals that perceive globalization to be contributing to their own economic insecurity are much more likely to develop policy attitudes against economic integration.Second,if globalization limits the capacities of governments to provide social insurance,or is perceived to do so,then individuals may worry further about globalization and this effect is likely to be magnified if labor-market risks are heightened by global integration. Previous empirical research has focused on whether one particular component of globalization,international trade,generates economic volatility.This research has been inconclusive.Among others,Rodrik (1997,1998)argues in the affirmative and presents evidence that exposure to external risk from trade,measured by the interaction between trade
1 1. Introduction Determining whether international economic integration in advanced economies increases worker insecurity is critical to competing explanations of welfare-state policymaking and the politics of globalization. An influential argument in the welfare-state literature is that increases in economic insecurity from globalization generate demands for more generous social insurance that compensates workers for a riskier environment (e.g., Cameron, 1978; Rodrik 1997, 1998; Garrett 1998; Burgoon 2001; Hays, Ehrlich, and Peinhardt 2002; Boix 2002). The connection between globalization and welfare spending in this argument depends on the causal mechanism that international economic integration increases worker insecurity. Claims that no such link exists undermine this explanation for variation in welfare-state spending. The link between economic integration and worker insecurity is also an essential element of explanations for patterns of public opposition to policies aimed at further liberalization of international trade, immigration, and foreign direct investment (FDI) in advanced economies. Economic insecurity may contribute to the backlash against globalization in at least two ways. First is a direct effect in which individuals that perceive globalization to be contributing to their own economic insecurity are much more likely to develop policy attitudes against economic integration. Second, if globalization limits the capacities of governments to provide social insurance, or is perceived to do so, then individuals may worry further about globalization and this effect is likely to be magnified if labor-market risks are heightened by global integration. Previous empirical research has focused on whether one particular component of globalization, international trade, generates economic volatility. This research has been inconclusive. Among others, Rodrik (1997, 1998) argues in the affirmative and presents evidence that exposure to external risk from trade, measured by the interaction between trade
2 openness and the standard deviation of a country's terms of trade,is positively correlated with growth volatility.In contrast,Iversen and Cusack (2000)contend that there is no convincing evidence that international trade increases economic insecurity.They argue that Rodrik's correlation is not sufficient,and that it is necessary either that price volatility in international markets be greater than in domestic markets or that trade concentrate rather than diversify economic risks.Iversen and Cusack then present evidence that,at least for advanced economies, there is no correlation between trade openness and volatility in output,earnings,or employment. In this paper,we investigate whether international economic integration increases economic insecurity.Our analysis makes a substantial departure from existing research by focusing on a relatively overlooked dimension of globalization:the cross-border flow of FDI within multinational enterprises(MNEs).This focus on FDI rather than trade is rare in the literature, and we argue that this omission matters for both empirical and theoretical reasons. Empirically,in recent decades,cross-border flows of FDI have grown at much faster rates than have flows of goods and services.UNCTAD (2001)reports that from 1986 through 2000, worldwide cross-border outflows of FDI rose at an annualized rate of 26.2%,versus a rate of 15.4%for worldwide exports of goods and services.In the second half of the 1990s this difference widened to 37.0%versus just 1.9%.Moreover,it is the multinationalization of production that a number of scholars have pointed to as the distinguishing feature of the current phase of globalization compared to previous eras(e.g.,Bordo,Eichengreen,and Irwin 1999). This lack of attention to FDI also matters because,as we will discuss,there are strong theoretical reasons to believe that FDI can substantially influence economic insecurity.The globalization of production by MNEs gives firms greater access to foreign factors of production, and thus greater ease of substitution away from workers in any single location.As a result
2 openness and the standard deviation of a country’s terms of trade, is positively correlated with growth volatility. In contrast, Iversen and Cusack (2000) contend that there is no convincing evidence that international trade increases economic insecurity. They argue that Rodrik’s correlation is not sufficient, and that it is necessary either that price volatility in international markets be greater than in domestic markets or that trade concentrate rather than diversify economic risks. Iversen and Cusack then present evidence that, at least for advanced economies, there is no correlation between trade openness and volatility in output, earnings, or employment. In this paper, we investigate whether international economic integration increases economic insecurity. Our analysis makes a substantial departure from existing research by focusing on a relatively overlooked dimension of globalization: the cross-border flow of FDI within multinational enterprises (MNEs). This focus on FDI rather than trade is rare in the literature, and we argue that this omission matters for both empirical and theoretical reasons. Empirically, in recent decades, cross-border flows of FDI have grown at much faster rates than have flows of goods and services. UNCTAD (2001) reports that from 1986 through 2000, worldwide cross-border outflows of FDI rose at an annualized rate of 26.2%, versus a rate of 15.4% for worldwide exports of goods and services. In the second half of the 1990s this difference widened to 37.0% versus just 1.9%. Moreover, it is the multinationalization of production that a number of scholars have pointed to as the distinguishing feature of the current phase of globalization compared to previous eras (e.g., Bordo, Eichengreen, and Irwin 1999). This lack of attention to FDI also matters because, as we will discuss, there are strong theoretical reasons to believe that FDI can substantially influence economic insecurity. The globalization of production by MNEs gives firms greater access to foreign factors of production, and thus greater ease of substitution away from workers in any single location. As a result
3 workers feel more insecure.Stated in terms of the underlying labor economics,the central idea is that FDI by MNEs increases firms'elasticity of demand for labor.More-elastic labor demands, in turn,raise the volatility of wages and employment-and thereby raise worker insecurity. This theoretical framework motivates our empirical analysis of the relationship between the multinationalization of production and the economic insecurity of workers.We present new evidence,based on analysis of individual-level panel data from Great Britain over 1991-1999, that FDI activity in the industries in which individuals work is positively correlated with individual perceptions of worker insecurity.This correlation holds in analyses accounting for individual-specific effects and a wide variety of control variables.Moreover,FDI exposure has one of the largest substantive effects in accounting for the within-individual variation in insecurity.We regard these individual-level panel results as the first valid evidence consistent with a causal relationship from FDI to worker insecurity. There are four remaining sections to the paper.The next section provides a theoretical framework for the economics of FDI and worker insecurity.Section 3 describes the data to be used in the study and the econometric models to be estimated.Section 4 reports the empirical results and the final section concludes. 2.Theoretical Framework for FDI and Worker Insecurity 2.1 Defining Worker Insecurity Although there are a number of alternative definitions of economic insecurity,most often it is understood to be an individual's perception of the risk of economic misfortune (Dominitz and Manski 1997).Consequently,researchers have focused on the risk of events such as the loss of health insurance,being a victim of a burglary,losing a job,and significant decreases in wages (e.g.,Anderson and Pontusson 2001,Mughan and Lacy 2002)
3 workers feel more insecure. Stated in terms of the underlying labor economics, the central idea is that FDI by MNEs increases firms’ elasticity of demand for labor. More-elastic labor demands, in turn, raise the volatility of wages and employment—and thereby raise worker insecurity. This theoretical framework motivates our empirical analysis of the relationship between the multinationalization of production and the economic insecurity of workers. We present new evidence, based on analysis of individual-level panel data from Great Britain over 1991-1999, that FDI activity in the industries in which individuals work is positively correlated with individual perceptions of worker insecurity. This correlation holds in analyses accounting for individual-specific effects and a wide variety of control variables. Moreover, FDI exposure has one of the largest substantive effects in accounting for the within-individual variation in insecurity. We regard these individual-level panel results as the first valid evidence consistent with a causal relationship from FDI to worker insecurity. There are four remaining sections to the paper. The next section provides a theoretical framework for the economics of FDI and worker insecurity. Section 3 describes the data to be used in the study and the econometric models to be estimated. Section 4 reports the empirical results and the final section concludes. 2. Theoretical Framework for FDI and Worker Insecurity 2.1 Defining Worker Insecurity Although there are a number of alternative definitions of economic insecurity, most often it is understood to be an individual’s perception of the risk of economic misfortune (Dominitz and Manski 1997). Consequently, researchers have focused on the risk of events such as the loss of health insurance, being a victim of a burglary, losing a job, and significant decreases in wages (e.g., Anderson and Pontusson 2001, Mughan and Lacy 2002)
It is likely that most people's perceptions of economic insecurity depend heavily on their purchasing power,which in turn depends on both their asset ownership and their labor-market status-both employment and income earned there from.In reality,the large majority of people rely much more on labor income than capital income for purchasing power.Accordingly,we think labor-market status is the main determinant of perceptions of economic insecurity. In light of this labor-market focus,we conjecture that the economic misfortunes underlying people's economic insecurity stem mainly from more-volatile employment and/or wage interactions with their employers.That is,risk-averse workers are not indifferent between employment options that yield the same amount of expected earnings but with differing degrees of certainty.More-certain earnings outcomes-due to more-certain wage and/or employment realizations-are preferred to less-certain ones,and insecurity rises with this uncertainty. 2.2 Worker Insecurity in Labor-Market Equilibrium:Why FDI Matters Equilibrium in a standard competitive labor market is set by the intersection of labor supply and labor demand.The labor-supply curve is aggregated across individuals,and at each point It is important to note that there is now a large body of evidence that labor-market volatility has been rising in many countries,especially in the 1990s,in terms of greater earnings volatility, declining job tenure,and self reports.Gottschalk and Moffitt (1994)report substantial increases in year-to-year earnings volatility for the United States over the 1970s and 1980s.Looking at the 1990s as well,a symposium issue of the Journal of Labor Economics (1999)documented declines in U.S job stability,especially in the 1990s for large groups of workers such as those with more tenure.Within that symposium issue,Schmidt's(1999)analysis of individual surveys finds that U.S.workers in the 1990s were more pessimistic about losing their jobs than they were during the 1980s-despite the ongoing economic expansion of the 1990s
4 It is likely that most people’s perceptions of economic insecurity depend heavily on their purchasing power, which in turn depends on both their asset ownership and their labor-market status—both employment and income earned there from. In reality, the large majority of people rely much more on labor income than capital income for purchasing power. Accordingly, we think labor-market status is the main determinant of perceptions of economic insecurity. In light of this labor-market focus, we conjecture that the economic misfortunes underlying people’s economic insecurity stem mainly from more-volatile employment and/or wage interactions with their employers. That is, risk-averse workers are not indifferent between employment options that yield the same amount of expected earnings but with differing degrees of certainty. More-certain earnings outcomes—due to more-certain wage and/or employment realizations—are preferred to less-certain ones, and insecurity rises with this uncertainty.1 2.2 Worker Insecurity in Labor-Market Equilibrium: Why FDI Matters Equilibrium in a standard competitive labor market is set by the intersection of labor supply and labor demand. The labor-supply curve is aggregated across individuals, and at each point 1 It is important to note that there is now a large body of evidence that labor-market volatility has been rising in many countries, especially in the 1990s, in terms of greater earnings volatility, declining job tenure, and self reports. Gottschalk and Moffitt (1994) report substantial increases in year-to-year earnings volatility for the United States over the 1970s and 1980s. Looking at the 1990s as well, a symposium issue of the Journal of Labor Economics (1999) documented declines in U.S job stability, especially in the 1990s for large groups of workers such as those with more tenure. Within that symposium issue, Schmidt’s (1999) analysis of individual surveys finds that U.S. workers in the 1990s were more pessimistic about losing their jobs than they were during the 1980s—despite the ongoing economic expansion of the 1990s
5 along it the elasticity of labor supply,n,is defined as the percentage change in the quantity of labor supplied by workers in response to a one-percent increase in the price of labor.Higher wages typically induce a greater quantity of labor supplied. The labor-demand curve is aggregated across firms,and at each point along it the elasticity of labor demand,nD,is defined as the percentage decline (in absolute value)in the quantity of labor demanded in response to a one-percent increase in the price of labor.This elasticity consists of two parts.The substitution effect tells,for a given level of output,how much firms substitute away from labor towards other factors of production when wages rise.The scale effect tells how much labor demand falls after a wage increase thanks to the rise in the firms'costs and thus the fall in their output and so demand for labor and all other factors.When wages rise,both the substitution and scale effects reduce the quantity of labor demanded. In accord with a wide range of empirical evidence,we introduce volatility into the labor market by assuming that the labor-demand schedule is stochastic.To see what forces drive this volatility,note that each firm's labor-demand schedule traces out the marginal revenue product of its workers as the wage rate varies.A profit-maximizing firm hires workers until the revenue generated by the last worker hired equals the market wage that firm must pay that last worker. For each firm,its product prices and technology are two key determinants of marginal revenue products.Aggregated across firms,then,the position of the labor-demand schedule depends crucially on all relevant product prices and production technologies.Define mrp as the percentage shift in the labor-demand schedule due to shocks to prices and/or technologies.It is straightforward to then show that the resulting percentage change in wages(w)and employment
5 along it the elasticity of labor supply, ηS, is defined as the percentage change in the quantity of labor supplied by workers in response to a one-percent increase in the price of labor. Higher wages typically induce a greater quantity of labor supplied. The labor-demand curve is aggregated across firms, and at each point along it the elasticity of labor demand, ηD, is defined as the percentage decline (in absolute value) in the quantity of labor demanded in response to a one-percent increase in the price of labor. This elasticity consists of two parts. The substitution effect tells, for a given level of output, how much firms substitute away from labor towards other factors of production when wages rise. The scale effect tells how much labor demand falls after a wage increase thanks to the rise in the firms’ costs and thus the fall in their output and so demand for labor and all other factors. When wages rise, both the substitution and scale effects reduce the quantity of labor demanded. In accord with a wide range of empirical evidence, we introduce volatility into the labor market by assuming that the labor-demand schedule is stochastic. To see what forces drive this volatility, note that each firm’s labor-demand schedule traces out the marginal revenue product of its workers as the wage rate varies. A profit-maximizing firm hires workers until the revenue generated by the last worker hired equals the market wage that firm must pay that last worker. For each firm, its product prices and technology are two key determinants of marginal revenue products. Aggregated across firms, then, the position of the labor-demand schedule depends crucially on all relevant product prices and production technologies. Define ∧ mrp as the percentage shift in the labor-demand schedule due to shocks to prices and/or technologies. It is straightforward to then show that the resulting percentage change in wages ( ∧ w ) and employment
6 (e)re repectively given byandIfsradom variable. then we can write Var(w)= Var(mrp)and Var(e)= Var(mrp). The above expressions demonstrate that greater volatility in labor-market outcomes-and thus greater economic insecurity-can arise either from greater aggregate volatility in prices and technology,Var(mrp),or from a higher elasticity of demand for labor,nD.The former can be thought of as the volatility of aggregate shocks to labor demand,and the latter can be thought of as the pass-through of those shocks into volatility of wages and employment.In this framework, the link between globalization and labor-market volatility depends on some component of globalization,such as trade or FDI,altering one of these quantities,Var(mrp)or nD. We argue that an important channel through which FDI can affect labor-market volatility is by increasing labor-demand elasticities via the substitution effect.Suppose that a firm is vertically integrated with a number of production stages.A multinational firm can move abroad some of these stages (e.g.,Helpman 1984).This globalization of production within multinationals gives access to foreign factors of production,either directly through foreign affiliates or indirectly through intermediate inputs.This expands the set of factors firms can substitute towards in response to higher domestic wages beyond just domestic non-labor factors to include foreign factors as well.Thus,greater FDI can raise labor-demand elasticities-and so worker insecurity because of more-volatile wage and employment outcomes This argument does not exclude other mechanisms through which globalization may increase economic insecurity.For example,openness to international trade may increase the volatility of aggregate shocks to labor demand (Var(mrp)).As discussed in the introduction,this is the link
6 ( ∧ e ) are respectively given by ∧ ∧ + w = mrp S D D η η η and ∧ ∧ + e = mrp S D D S η η η η . If ∧ mrp is a random variable, then we can write ( ) ( ) 2 ∧ + = ∧ Var w Var mrp S D D η η η and ( ) ( ) 2 ∧ + = ∧ Var e Var mrp S D D S η η η η . The above expressions demonstrate that greater volatility in labor-market outcomes—and thus greater economic insecurity—can arise either from greater aggregate volatility in prices and technology, ) ( ∧ Var mrp , or from a higher elasticity of demand for labor, ηD. The former can be thought of as the volatility of aggregate shocks to labor demand, and the latter can be thought of as the pass-through of those shocks into volatility of wages and employment. In this framework, the link between globalization and labor-market volatility depends on some component of globalization, such as trade or FDI, altering one of these quantities, ) ( ∧ Var mrp or ηD. We argue that an important channel through which FDI can affect labor-market volatility is by increasing labor-demand elasticities via the substitution effect. Suppose that a firm is vertically integrated with a number of production stages. A multinational firm can move abroad some of these stages (e.g., Helpman 1984). This globalization of production within multinationals gives access to foreign factors of production, either directly through foreign affiliates or indirectly through intermediate inputs. This expands the set of factors firms can substitute towards in response to higher domestic wages beyond just domestic non-labor factors to include foreign factors as well. Thus, greater FDI can raise labor-demand elasticities—and so worker insecurity because of more-volatile wage and employment outcomes. This argument does not exclude other mechanisms through which globalization may increase economic insecurity. For example, openness to international trade may increase the volatility of aggregate shocks to labor demand ( ) ( ∧ Var mrp ). As discussed in the introduction, this is the link
7 examined in much of the previous research on globalization and economic insecurity,and its empirical importance remains an open question.Another example is that theoretically, international trade in final goods-whether mediated by multinationals or not-could also affect insecurity by making labor demands more elastic through the scale effect.This pro-competitive effect of trade has been well-studied,and FDI can also work on the scale effect(e.g.,as foreign firms compete with domestic incumbents). We have focused on the substitution effect of FDI for several reasons.Most importantly,the substitution effect is direct in that it places domestic workers in competition with foreign labor for employment within the same firm.It is thus likely to have a larger effect on labor demand elasticities.2 Further,other researchers have emphasized in theory its possible role in generating insecurity(e.g.,Rodrik,1997),but no compelling empirical evidence has been produced. 2 There are several recent empirical studies documenting that MNEs and FDI do increase labor- demand elasticities through the substitution effect.Slaughter(2001)estimates that demand for U.S.production labor in manufacturing became more elastic from 1960 to the early 1990s,and that these increases were correlated with FDI outflows by U.S.-headquartered MNEs.Fabbri, Haskel,and Slaughter (2003)estimate that both U.K.-multinational plants and foreign-owned plants each had larger increases than did U.K.domestic plants in the elasticity of demand for production labor in manufacturing over 1973-1992.An important margin on which MNEs may affect elasticities is on the extensive margin of plant shutdowns.MNEs may be more likely than domestic firms to respond to shocks by closing entire plants.For the manufacturing sectors in at least three countries it has now been shown that plants that are part of an MNE are more likely to close than are their purely domestic counterparts:the United Kingdom(Fabbri,et al 2003);the United States(Bernard and Jensen 2002);and Ireland (Gorg and Strobl 2003)
7 examined in much of the previous research on globalization and economic insecurity, and its empirical importance remains an open question. Another example is that theoretically, international trade in final goods—whether mediated by multinationals or not—could also affect insecurity by making labor demands more elastic through the scale effect. This pro-competitive effect of trade has been well-studied, and FDI can also work on the scale effect (e.g., as foreign firms compete with domestic incumbents). We have focused on the substitution effect of FDI for several reasons. Most importantly, the substitution effect is direct in that it places domestic workers in competition with foreign labor for employment within the same firm. It is thus likely to have a larger effect on labor demand elasticities.2 Further, other researchers have emphasized in theory its possible role in generating insecurity (e.g., Rodrik, 1997), but no compelling empirical evidence has been produced. 2 There are several recent empirical studies documenting that MNEs and FDI do increase labordemand elasticities through the substitution effect. Slaughter (2001) estimates that demand for U.S. production labor in manufacturing became more elastic from 1960 to the early 1990s, and that these increases were correlated with FDI outflows by U.S.-headquartered MNEs. Fabbri, Haskel, and Slaughter (2003) estimate that both U.K.-multinational plants and foreign-owned plants each had larger increases than did U.K. domestic plants in the elasticity of demand for production labor in manufacturing over 1973-1992. An important margin on which MNEs may affect elasticities is on the extensive margin of plant shutdowns. MNEs may be more likely than domestic firms to respond to shocks by closing entire plants. For the manufacturing sectors in at least three countries it has now been shown that plants that are part of an MNE are more likely to close than are their purely domestic counterparts: the United Kingdom (Fabbri, et al 2003); the United States (Bernard and Jensen 2002); and Ireland (Gorg and Strobl 2003)
8 Before turning to an empirical test of the link between FDI and insecurity,we note one other important aspect of MNEs and labor markets.Many studies across a variety of countries have documented that establishments owned by MNEs pay higher wages than do domestically owned establishments.This is true even controlling for a wide range of observable worker and/or plant characteristics such as industry,region,and overall size.The magnitudes involved are usually quite big3 This multinational wage premium may reflect several forces.It could be accounted for by higher worker productivity due to superior technology and/or capital;or by higher worker productivity due to unobservable worker qualities;or by greater profits and therefore more rent sharing with workers.Our theory framework suggests another possibility:that MNEs pay more to compensate workers for the greater labor-market volatility associated with MNEs. Regardless of the cause(s)of the multinational wage premium,its existence is important for considering how the globalization of production affects economic insecurity.All else equal,this premium likely makes multinational employees feel more secure.Our focus on elasticities and labor-market volatility highlights MNE influences on different dimensions of the overall worker- firm relationship.These contrasting issues of labor-demand elasticities and wage premia suggest that the net impact of MNEs on worker insecurity is ex ante unclear.Whether wage premia fully compensate for increased risks from higher elasticities is an empirical question. 3 Doms and Jensen(1998)document that for U.S.manufacturing plants in 1987,multinational wages exceeded domestically owned wages by a range of 5%-15%,with larger differentials for production workers rather than non-production workers.Griffith (1999)presents similar evidence for the United Kingdom;Globerman,et al (1994)for Canada;Aitken et al (1996)for Mexico and Venezuela;and Te Velde and Morrissey(2001)for five African countries
8 Before turning to an empirical test of the link between FDI and insecurity, we note one other important aspect of MNEs and labor markets. Many studies across a variety of countries have documented that establishments owned by MNEs pay higher wages than do domestically owned establishments. This is true even controlling for a wide range of observable worker and/or plant characteristics such as industry, region, and overall size. The magnitudes involved are usually quite big.3 This multinational wage premium may reflect several forces. It could be accounted for by higher worker productivity due to superior technology and/or capital; or by higher worker productivity due to unobservable worker qualities; or by greater profits and therefore more rent sharing with workers. Our theory framework suggests another possibility: that MNEs pay more to compensate workers for the greater labor-market volatility associated with MNEs. Regardless of the cause(s) of the multinational wage premium, its existence is important for considering how the globalization of production affects economic insecurity. All else equal, this premium likely makes multinational employees feel more secure. Our focus on elasticities and labor-market volatility highlights MNE influences on different dimensions of the overall workerfirm relationship. These contrasting issues of labor-demand elasticities and wage premia suggest that the net impact of MNEs on worker insecurity is ex ante unclear. Whether wage premia fully compensate for increased risks from higher elasticities is an empirical question. 3 Doms and Jensen (1998) document that for U.S. manufacturing plants in 1987, multinational wages exceeded domestically owned wages by a range of 5%-15%, with larger differentials for production workers rather than non-production workers. Griffith (1999) presents similar evidence for the United Kingdom; Globerman, et al (1994) for Canada; Aitken et al (1996) for Mexico and Venezuela; and Te Velde and Morrissey (2001) for five African countries
9 3.Data Description and Empirical Specification 3.1 Data Description In light of our theory discussion of Section 2,the objective of our empirical work is to examine the impact of FDI on economic insecurity.Specifically,we will evaluate how individual self-assessments of economic insecurity correlate with the presence of mobile capital in the form of FDI in the industries in which individuals work.Our data cover Great Britain, which we think is an excellent case to examine both because inward and outward FDI have long figured prominently in the overall economy and because of the high quality of data available The individual data are from the British Household Panel Survey (BHPS)(2001).This survey is a nationally representative sample of more than 5,000 U.K.households and over 9,000 individuals questioned annually from 1991 to 1999.It records detailed information about each respondent's perceptions of economic insecurity,employment,wages,and many other characteristics.The most important pieces of survey information required for our analysis are a measure of economic insecurity,identification of the respondents'industry of employment,and repeated measurement of the same individual over time. We measure economic insecurity by responses to the following question asked in each of the nine years of the panel. "I'm going to read out a list of various aspects of jobs,and after each one I'd like you to tell me from this card which number best describes how satisfied or dissatisfied you are with that particular aspect of your own present job-job security.” 4 The BHPS is ongoing,but our data are through 1999 only
9 3. Data Description and Empirical Specification 3.1 Data Description In light of our theory discussion of Section 2, the objective of our empirical work is to examine the impact of FDI on economic insecurity. Specifically, we will evaluate how individual self-assessments of economic insecurity correlate with the presence of mobile capital in the form of FDI in the industries in which individuals work. Our data cover Great Britain, which we think is an excellent case to examine both because inward and outward FDI have long figured prominently in the overall economy and because of the high quality of data available. The individual data are from the British Household Panel Survey (BHPS) (2001). This survey is a nationally representative sample of more than 5,000 U.K. households and over 9,000 individuals questioned annually from 1991 to 1999.4 It records detailed information about each respondent’s perceptions of economic insecurity, employment, wages, and many other characteristics. The most important pieces of survey information required for our analysis are a measure of economic insecurity, identification of the respondents’ industry of employment, and repeated measurement of the same individual over time. We measure economic insecurity by responses to the following question asked in each of the nine years of the panel. “I’m going to read out a list of various aspects of jobs, and after each one I’d like you to tell me from this card which number best describes how satisfied or dissatisfied you are with that particular aspect of your own present job—job security.” 4 The BHPS is ongoing, but our data are through 1999 only
