Margins of Multinational Labor Substitution

Abstract

Employment at a multinational enterprise (MNE) responds to wages at the extensive margin, when an MNE enters a foreign location, and at the intensive margin, when an MNE operates existing affiliates. We present an MNE model and conditions for parametric and nonparametric identification. Prior studies rarely found wages to affect MNE employment. Our integrated approach documents salient labor substitution for German manufacturing MNEs and removes bias. In Central and Eastern Europe, most employment responds at the extensive margin, while in Western Europe the extensive margin accounts for around two-thirds of employment shifts. At distant locations, MNEs respond to wages only at the extensive margin. (JEL F23, J23, J31, R32)