Trade and Employment From Myths to Facts - International Labour ...

Trade and Employment: From Myths to Facts
sending countries worse off. As Kanbur (2001) points out, if instead of receiving a
competitive return, capital and labour bargain over wages and employment, an increase
in capital mobility is akin to increasing the bargaining power of capital in both labour
markets. Despite these claims, however, there have been very few efforts to test the
relationship between increased capital mobility and labour’s share of income.
Work by the US Bureau of Economic Analysis (BEA) confirms that the foreign
operations of US multinational corporations (MNCs) continue to grow at a rapid
pace. One explanation offered by the BEA for the increase in overseas investment
is the privatization of electric utilities and telephone companies as well as the liberalization
of direct investment policies in foreign host countries. Harrison and
McMillan (2004) show that expansion abroad has also been associated with an increase
in the return to capital abroad relative to its return at home. In 1977, the
return on capital 17 for affiliates in developing countries, 8.84 per cent, was virtually
indistinguishable from the return for parent firms, 8.82 per cent. However, between
1977 and 1999, the return to capital increased by 4.5 percentage points for parent
companies while it increased by 55.7 percentage points for developing country affiliates.
During this same period, real wages in these developing country affiliates
fell by over 20 percentage points for both production and non-production workers.
The divergence in returns to capital and labour in these developing country affiliates
is striking. Furthermore, research by the BEA shows that the average return on capital
for overseas affiliates has been consistently much higher than the return for similar
US corporations without overseas affiliates (Mataloni, 1999). One outcome is likely
to be upward pressure on returns to capital in the United States as firms shift real
capital abroad; these increasing returns to capital are documented using aggregate
US data in Poterba (1997).
Harrison and McMillan (2004) explore this issue in an econometric framework
using confidential, firm-level data from the BEA, which collects detailed information
on US multinationals and their affiliates abroad. Data are collected on employment,
labour compensation, sales and other variables. What is unique about these data is
that they include detailed information on the activities of the US affiliates located
in other countries and their parent companies operating in the United States. With
this information, supplemented by additional data on the operations of US firms
operating in the United States, it is possible to test whether relocation by US firms
abroad reduces wages for remaining workers in the US parent plant.
With these data, they also address whether US workers in other plants are being
threatened by plant relocation. They call this the “neighbour” effect. For example,
they test whether workers in US auto plants are forced to accept lower wages when
other US plants relocate some of their auto operations abroad. Thus, they are able
to distinguish between the threat effect of affiliate activity in Europe, where wages
are comparable, with activity in Mexico or other developing countries. They hy-
17 Calculations of the return on capital and labour’s share include net income, which may reflect
the practice of transfer pricing. If firms report higher profits abroad for tax purposes, then net income
will be measured with error. Harrison and McMillan (2004) find similar trends in horizontally- and
vertically-integrated firms and conclude that transfer pricing is not driving these trends.
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