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

This paper investigates the extent to which expansion of international production by US multinational reduces labor demand at home and at other foreign locations. The few existing empirical studies on this subject maintain, along with firm’s cost minimizing behavior, perfectly variable inputs. In our view, this constitute s a strong restriction, which may seriously bias the short run cross-price elasticity estimates. We offer simple examples in which this is actually the case. We suggest an alternative approach to the problem, which explicitly considers for the presence of adjustment costs. A dynamic model of the firm is applied to estimate short-run and long-run cross-price elasticities between home and foreign labor. We find evidence of significant adjustment costs for employment in Latin American and Canadian affiliates, We also find that, in some instances, due to the presence of slow input adjustments, the complementarity/substitution relationship between employment in different international locations is reversed from the short to the long-run.