Internal labor markets, wage convergence and investment



Publishing details

IFA Working Paper

Authors / Editors

Silva R

Publication Year



The literature on conglomerates has focused on the misallocation of investments as the cause of the conglomerate discount. I study frictions in the internal labor market as a possible cause of misallocation of investments. Using detailed plant-level data, I document wage convergence in conglomerates: workers in low-wage industries collect higher-than-industry wages when the diversified firm is also present in high-wage industries (by 5.2%). I confirm this effect by exploiting a quasi-experiment involving the implementation of the NAFTA agreement that exogenously increases worker wages of exporting plants. I track the evolution of wages in nonexporting plants in diversified firms that also own exporting plants and find a significant increase in wages of these plants relative to unaffiliated non-exporting plants after the event. This pattern of wage convergence affects investments. Plants where workers collect higher-than-industry wages increase the capital-labor ratio in response to their higher labor cost -- and this response to higher wages is associated with higher investment in some divisions.


IFA Working Paper