Internal labor markets, wage convergence and investment
Subject
Finance
Publishing details
IFA Working Paper
Publication Year
2016
Abstract
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.
Series
IFA Working Paper
Available on ECCH
No
