DP2471 Multinational Corporations, Wages and Employment: Do Adjustment Costs Matter?

Author(s): Giovanni Bruno, Anna M Falzoni
Publication Date: June 2000
Keyword(s): Adjustment Costs, Dynamic Duality, Labour Demand, Multinational Corporations
JEL(s): F23, J23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2471

This paper investigates the extent to which expansion of international production by US multinationals reduces labour demand at home and at other foreign locations in the presence of labour adjustment costs. The adjustment-cost model of the firm is applied to estimate short-run and long-run price elasticities between home and foreign labour, using dynamic panel data techniques. Evidence is found of significant adjustment costs for employment in Latin American and Canadian affiliates. Also, due to slow adjustments, the relationship between employment in US parents and in Latin American affiliates is reversed from the short to the long-run, changing from substitution into complementarity. Finally, labour substitution prevails both in the short and in the long-run between locations in the Western Hemisphere and in Europe.