Distance and the Multinational Wage Premium

Hartmut Egger (), Elke Jahn and Udo Kreickemeier

No 7347, CESifo Working Paper Series from CESifo

Abstract: Combining administrative data on German workers with commercial data on German firms, we find evidence for a distance effect on the multinational wage premium: Foreign multinationals pay lower wages than German multinationals if the ultimate owner is located in close proximity to Germany, whereas the opposite is true if the ultimate owner is located further away. In addition to this so far unexplored effect, our results confirm previous evidence that on average foreign multinationals and domestic multinationals pay wages of similar size, with both types of firms paying a premium relative to other local firms. To provide a rationale for this pattern, we develop a theoretical model in which wages are firm-specific and firms can serve the foreign market via exporting or via FDI. In case of FDI, they face uncertainty about the wages to be paid abroad, and due to this uncertainty, firms that pay high wages at home are more likely to seek foreign investment. In the model, the observed distance effect on the multinational wage premium occurs since the alternative of exporting is less attractive for distant locations, and firms are therefore more willing to accept higher wages for foreign production in locations that are further away from their headquarters.

Keywords: multinational wage premium; heterogeneous firms; distance effects (search for similar items in EconPapers)
JEL-codes: F12 F14 F21 F23 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-eur and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Distance and the Multinational Wage Premium (2018)
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