Essays on the Effects of Globalization on Workers and Firms

This dissertation studies the effects of globalization on workers and firms. Chapter 1 provides an introduction that binds all chapters together according to the dissertation theme. Chapters 2 and 3 (co-authored with Alonso Alfaro-Ure\~{n}a and Isabela Manelici) provide new evidence on how MNCs affect the host country, by focusing on the case of Costa Rica. Chapter 4 (coauthored with Andres Rodriguez-Clare and Mauricio Ulate) turns the focus from MNCs towards trade, and it also changes the country of study from Costa Rica to the United States. Finally, Chapter 5 concludes. In the remainder of this abstract, I provide a summary of each of the three main chapters./nChapter 2 measures the effects of MNCs on workers. To that end, my coauthors and I combine microdata on all worker-firm and firm-firm relationships in the economy with an instrumental variable strategy that exploits shocks to the size of MNCs in the country. First, using a within-worker event-study design, we find a direct MNC wage premium of nine percent. This premium reflects above market wages rather than compensation for disamenities. Next, we study the indirect effects of MNCs on workers in domestic firms. As MNCs bring jobs that pay a premium, they can improve the outside options of workers by altering both the level and composition of labor demand. MNCs can also enhance the performance of domestic employers through firm-level input-output linkages. Shocks to firm performance may then pass through to wages. We show that the growth rate of annual earnings of a worker experiencing a one standard deviation increase in either her labor market or firm-level exposure to MNCs is one percentage point higher than that of an identical worker with no change in either MNC exposure. We also develop a model to rationalize the reduced-form evidence and estimate structural parameters that govern wage setting in domestic firms. We model MNCs as paying a wage premium and buying inputs from domestic firms. To hire new workers, domestic firms need to incur recruitment and training costs. Model-based estimates reveal that workers in domestic firms are sensitive to improvements in outside options. Moreover, the marginal recruitment and training cost of the average domestic firm is estimated at 90% of the annual earnings of a worker earning the competitive market wage. This high cost allows incumbent workers to extract part of the increase in firm rents coming from intensified linkages with MNCs./nChapter 3 investigates the effects of becoming a supplier to MNCs exploiting firm-to-firm transaction data. Event-study estimates reveal that after starting to supply to MNCs, domestic firms experience substantial and persistent improvements in performance, including the expansion of their workforce by 26% and gains in standard measures of total factor productivity (TFP) of 6-9% four years after. Moreover, the sales of domestic firms to buyers other than the first MNC buyer grow by 20%, both through a larger number of buyers and larger sales per buyer. We then propose a simple model by which TFP and reputation affect the number of buyers, but TFP alone affects sales conditional on buying. We find a model-based increase in TFP of 3% four years after. Finally, we collect survey data from managers in both domestic firms and MNCs for further insights on mechanisms. Our surveys suggest that becoming suppliers to MNCs is transformative for domestic firms, with changes ranging from new managerial practices to better reputation./nChapter 4 focuses on the domestic employment effects of sector-level foreign shocks. There is a growing empirical consensus suggesting that sector-specific productivity increases in a foreign country can have substantial unemployment and nonemployment effects across the different regions of an economy. Such employment changes cannot be explained by the workhorse quantitative trade model since it assumes full employment and a perfectly inelastic labor supply curve. We show how adding downward nominal wage rigidity and home employment allows the quantitative trade model to generate changes in unemployment and nonemployment that match those uncovered by the empirical literature studying the "China Shock." We also compare the associated welfare effects predicted by this model with those in the model without unemployment. We find that the China Shock leads to welfare increases in most states of the U.S., including many that experience unemployment during the transition. On average, across U.S. states, nominal rigidities reduce the gains from the China Shock from 31 to 17 basis points.

Advisor: Kline, Patrick