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 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, 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