The effect of international firm mobility on wages and unemployment

Although the increase in international firm mobility is well documented, its effects on macroeconomic aggregates and the labour market remain controversial. Multinational enterprises (MNEs) benefit from an international outside option during wage bargaining, leading to a decrease in average wages. However, a strategic incentive to hire extra workers in a foreign (home) plant in order to reduce wages in the home (foreign) plant has an indirect positive effect on wages due to spillovers resulting from an increased demand for labour. In a framework of frictional unemployment, permitting MNEs leads to a decrease in unemployment. Abstracting from transport and plant fixed costs, MNEs lead to higher wages. Including transport and plant costs generally leads to lower wages, though the effects are small. The strategic hiring effect is important in mitigating the fall in wages.

► During wage bargaining multinational firms have an advantage over workers. ► The bargaining advantage of multinationals causes them to hire more workers. ► This reduces the negative effect on wages. ► A numerical simulation is performed based on Danish data. ► Overall the effects on wages and unemployment are small.