FOREIGN OWNERSHIP, WAGES, AND WAGE CHANGES IN U.S. INDUSTRIES, 1987–92

I. INTRODUCTION A considerable body of literature has grown on the effects of foreign ownership on host country labor markets. That literature has asked whether foreign-owned firms pay higher wages than domestically owned firms and whether the growth of foreign ownership has affected wages in domestically owned firms or workers in general, whoever their employers are. Studies have covered both developed and developing countries, used both cross-section and longitudinal data, and have been based on both aggregate and individual firm or establishment data. Most of this literature in recent years has studied countries other than the United States. One reason for the omission of the United States as a subject is that U.S. firms are often assumed to be the possessors of the most advanced technology. They are therefore the ones most likely to exploit technological advantages or transmit technology to others in host countries, rather than to face foreign firms with superior technologies. Another reason is that scholars have preferred to examine this issue with firm or industry microdata, but that procedure, increasingly feasible for other countries, is still blocked by legal complications in the United States. The authors attempt here to fill the gap in knowledge about the wage effects in the United States by using the only source that contains matched data for foreign-owned and domestically owned establishments in the United States. That is the matching of Business Censuses to inward foreign direct investment surveys that was carried out by the Census Bureau and the Bureau of Economic Analysis (BEA) for 1987 and 1992. A similar matching was performed for 1997, but the wage data were never published, and the industrial classification differed substantially from those for the two earlier years. To investigate this issue, the authors construct from the Census-BEA matched data and the 1987 and 1992 Economic Censuses a data set of industry by state by ownership average wages for 1987 and 1992 and ask three questions. One is whether foreign-owned establishments in the United States paid higher wages than domestically owned ones. If they did, can the wage difference be explained by differences in the measurable characteristics of the foreign-owned and domestically owned establishments, or was there some remaining differential associated with foreign ownership? The second question is whether increases in foreign ownership over time in an industry in a state produced increases in domestic establishment wages. The third is whether increased foreign ownership was associated with higher wages in general in an industry in a state. Previous studies of the United States used cross-section data to answer these questions because only 1987 data were available. This study uses industry-by-state data for 1987 and 1992, the two available years and thus provides more robust evidence on the impact of employment in foreign establishments and its growth on wages. (1) It would be desirable to use individual establishment data, as has been done for studies in the United Kingdom and some developing countries. However, the establishment data from the BEA-Census match are not available for research use as microdata. For that reason, the data by state and industry used here are the only avenue for investigating this question. Although foreign investment in production in the United States dates back to the origins of the country, the foreign shares of U.S. employment have been relatively low. In the period covered here, 1987 to 1992, the share grew from 3.7% to 5.8%, a rapid growth but still a small part of the labor force (U.S. Department of Commerce 1992, 1997). (2) Employment in nonbank foreign affiliates grew from 2.0 million in 1980 to 3.2 million in 1987 and 4.7 million in 1992, increases of almost 60% in seven years and 46% in the five years studied here. That means that a large part of the employment in foreign-owned firms is a result of fairly recent foreign investment. …