Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-20T10:45:48.396Z Has data issue: false hasContentIssue false
  • English
  • Français

Internal Labor Markets, Wage Convergence, and Investment

Published online by Cambridge University Press:  14 September 2020

Rui C. Silva Open the ORCID record for Rui C. Silva [Opens in a new window]
Rui C. Silva*
Affiliation:
Nova School of Business and Economics and [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

I document wage convergence in conglomerates using detailed plant-level data: Workers in low-wage industries collect higher-than-industry wages when the diversified firm also operates in high-wage industries. I confirm this effect by exploiting the implementation of the North American Free Trade Agreement (NAFTA) and changes in minimum wages at the state level as sources of exogenous increases in wages in some plants. I then track the evolution of wages of the remaining workers of the firm, relative to workers of unaffiliated plants. Plants where workers collect higher-than-industry wages operate with higher capital intensity, suggesting that internal labor markets may affect investment decisions in internal capital markets.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 4 , June 2021 , pp. 1192 - 1227
Copyright
© THE AUTHOR(S), 2020. PUBLISHED BY CAMBRIDGE UNIVERSITY PRESS ON BEHALF OF THE MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I am indebted to my thesis committee, Gary Becker, Raghuram Rajan, Amit Seru, Liu Yang (the referee), and Luigi Zingales for extremely valuable comments, discussions, encouragement, and support. Additionally, I greatly benefitted from discussions with Philip Berger, João Cocco, Alex Edmans, Anil Kashyap, Gregor Matvos, Canice Prendergast, Henri Servaes, Margarida Soares, Denis Sosyura, Amir Sufi, and Robert Vishny and seminar participants at Aarhus University, Católica Lisbon, the University of Chicago (Economics Department and Booth School of Business), Columbia Business School, the Einaudi Institute for Economics and Finance (EIEF), the Federal Reserve Board, Harvard Business School, the University of Illinois at Urbana–Champaign, INSEAD, London Business School, London School of Economics, Nova School of Business and Economics, New York University Stern School of Business, Ross School of Business, the Toulouse School of Economics, Washington University in St. Louis, and the Wharton School. A special thank you is due to Chad Syverson and Ali Hortaçsu for access to the data used in this article. Any opinions and conclusions expressed herein are those of the author and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. All remaining errors are mine.

References

Abowd, J. M.; Kramarz, F.; and Margolis, D. N.. “High Wage Workers and High Wage Firms.” Econometrica, 67 (1999), 251–333.CrossRefGoogle Scholar
Akerlof, G. “Labor Contracts as Partial Gift Exchange.” Quarterly Journal of Economics, 97 (1982), 543–569.CrossRefGoogle Scholar
Akerlof, G. “Gift Exchange and Efficiency-Wage Theory: Four Views.” American Economic Review, 74 (1984), 79–83.Google Scholar
Akerlof, G., and Yellen, J.. “The Fair Wage-Effort Hypothesis and Unemployment.” Quarterly Journal of Economics, 105 (1990), 255–283.CrossRefGoogle Scholar
Alok, S., and Gopalan, R.. “Managerial Compensation in Multidivision Firms.” Management Science, 64 (2017), 2856–2874.CrossRefGoogle Scholar
Atalay, E.; Hortaçsu, A.; and Syverson, C.. “Vertical Integration and Input Flows.” American Economic Review, 104 (2014), 1120–1148.CrossRefGoogle Scholar
Baghai, R.; Silva, R.; Thell, V.; and Vig, V.. “Talent in Distressed Firms: Investigating the Labor Costs of Financial Distress.” Working Paper, London Business School (2017).CrossRefGoogle Scholar
Baghai, R.; Silva, R.; and Ye, L.. “Teams and Bankruptcy.” Research Paper, Swedish House of Finance (2018).Google Scholar
Baker, G.; Gibbs, M.; and Holmstrom, B.. “The Wage Policy of a Firm.” Quarterly Journal of Economics, 109 (1994), 921–955.CrossRefGoogle Scholar
Baker, G., and Holmstrom, B.. “Internal Labor Markets: Too Many Theories, Too Few Facts.” American Economic Review, 85 (1995), 255–259.Google Scholar
Benmelech, E.; Bergman, N.; and Seru, A.. “Financing Labor.” Technical Report, National Bureau of Economic Research (2011).CrossRefGoogle Scholar
Berger, P., and Ofek, E.. “Diversification’s Effect on Firm Value.” Journal of Financial Economics, 37 (1995), 39–65.CrossRefGoogle Scholar
Bernard, A., and Jensen, J.. “Exporters, Skill Upgrading, and the Wage Gap.” Journal of International Economics, 42 (1997), 3–31.CrossRefGoogle Scholar
Bertrand, M. “From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship.” Journal of Labor Economics, 22 (2004), 723–765.CrossRefGoogle Scholar
Bewley, T. Why Wages Don’t Fall During a Recession. Cambridge, MA: Harvard University Press (1999).Google Scholar
Brosnan, S., and De Waal, F.. “Monkeys Reject Unequal Pay.” Nature, 425 (2003), 297–299.CrossRefGoogle ScholarPubMed
Brown, C., and Medoff, J.. “The Employer Size-Wage Effect.” Journal of Political Economy, 97 (1989), 1027–1059.CrossRefGoogle Scholar
Card, D.; Cardoso, A. R.; Heining, J.; and Kline, P.. “Firms and Labor Market Inequality: Evidence and Some Theory.” Journal of Labor Economics, 36 (2018), S13–S70.CrossRefGoogle Scholar
Chen, H.; Kacperczyk, M.; and Ortiz-Molina, H.. “Do Nonfinancial Stakeholders Affect the Pricing of Risky Debt? Evidence from Unionized Workers.” Review of Finance, 16 (2011a), 347–383.CrossRefGoogle Scholar
Chen, H. J.; Kacperczyk, M.; and Ortiz-Molina, H.. “Labor Unions, Operating Flexibility, and the Cost of Equity.” Journal of Financial and Quantitative Analysis, 46 (2011b), 25–58.CrossRefGoogle Scholar
Chevalier, J. “Why Do Firms Undertake Diversifying Mergers? An Examination of the Investment Policies of Merging Firms.” Working Paper, Yale School of Management (2000).Google Scholar
Coase, R. “The Nature of the Firm.” Economica, 4 (1937), 386–405.CrossRefGoogle Scholar
Custodio, C. “Mergers and Acquisitions Accounting and the Diversification Discount.” Journal of Finance, 69 (2014), 219–240.CrossRefGoogle Scholar
Davis, R., and Duhaime, I.. “Diversification, Vertical Integration, and Industry Analysis: New Perspectives and Measurement.” Strategic Management Journal, 13 (1992), 511–524.CrossRefGoogle Scholar
DeMarzo, P., and Kaniel, R.. “Relative Pay for Non-Relative Performance: Keeping up with the Joneses with Optimal Contracts.” Working Paper, available at https://ssrn.com/abstract=2755856 (2017).CrossRefGoogle Scholar
Doeringer, P., and Piore, M.. Internal Labor Markets and Manpower Analysis. Armonk, NY: Sharpe, M. E. (1985).Google Scholar
Duchin, R.; Goldberg, A.; and Sosyura, D.. “Spillovers Inside Conglomerates: Incentives and Capital.” Review of Financial Studies, 30 (2017), 1696–1743.CrossRefGoogle Scholar
Foster, L.; Haltiwanger, J.; and Syverson, C.. “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?” American Economic Review, (2008), 394–425.CrossRefGoogle Scholar
Frank, R. “Are Workers Paid Their Marginal Products?” American Economic Review, 74 (1984), 549–571.Google Scholar
Frank, R. Choosing the Right Pond: Human Behavior and the Quest for Status, New York, NY: Oxford University Press (1985).Google Scholar
Gartenberg, C., and Wulf, J.. “Pay Harmony? Social Comparison and Performance Compensation in Multibusiness Firms.” Organization Science, 28 (2017), 39–55.CrossRefGoogle Scholar
Gertner, R.; Powers, E.; and Scharfstein, D.. “Learning About Internal Capital Markets from Corporate Spin-Offs.” Journal of Finance, 57 (2002), 2479–2506.CrossRefGoogle Scholar
Giroud, X., and Mueller, H.. “Firms’ Internal Networks and Local Economic Shocks.” American Economic Review, 109 (2019), 3617–3649.CrossRefGoogle Scholar
Grossman, S. J., and Hart, O. D.. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy, 94 (1986), 691–719.CrossRefGoogle Scholar
Harris, M. “The Association Between Competition and Managers’ Business Segment Reporting Decisions.” Journal of Accounting Research, 36 (1998), 111–128.CrossRefGoogle Scholar
Hart, O., and Moore, J.. “Property Rights and the Nature of the Firm.” Journal of Political Economy, 98 (1990), 1119–1158.CrossRefGoogle Scholar
Hart, O., and Moore, J.. “Contracts as Reference Points.” Quarterly Journal of Economics, 123 (2008), 1–48.CrossRefGoogle Scholar
Hirsch, B., and Macpherson, D.. “Union Membership and Coverage Database from the Current Population Survey: Note.” Industrial and Labor Relations Review, 56 (2002), 349.CrossRefGoogle Scholar
Lang, L., and Stulz, R.. “Tobin’s q, Corporate Diversification, and Firm Performance.” Journal of Political Economy, 102 (1994), 1248–1280.Google Scholar
Levin, J. “Multilateral Contracting and the Employment Relationship.” Quarterly Journal of Economics, 117 (2002), 1075–1103.CrossRefGoogle Scholar
Lichtenberg, F. “The Managerial Response to Regulation of Financial Reporting for Segments of a Business Enterprise.” Journal of Regulatory Economics, 3 (1991), 241–249.CrossRefGoogle Scholar
Maksimovic, V., and Phillips, G.. “Do Conglomerate Firms Allocate Resources Inefficiently across Industries? Theory and Evidence.” Journal of Finance, 57 (2002), 721–767.CrossRefGoogle Scholar
Maksimovic, V., and Phillips, G.. “Conglomerate Firms and Internal Capital Markets.” Handbook of Corporate Finance: Empirical Corporate Finance, 1 (2007), 423–480.CrossRefGoogle Scholar
Manski, C. F. “Identification of Endogenous Social Effects: The Reflection Problem.” Review of Economic Studies, 60 (1993), 531–542.CrossRefGoogle Scholar
Matsa, D. “Capital Structure as a Strategic Variable: Evidence from Collective Bargaining.” Journal of Finance, 65 (2010), 1197–1232.CrossRefGoogle Scholar
Matvos, G.; Seru, A.; and Silva, R. C.. “Financial Market Frictions and Diversification.” Journal of Financial Economics, 127 (2018), 21–50.CrossRefGoogle Scholar
Milgrom, P., and Roberts, J.. “An Economic Approach to Influence Activities in Organizations.” American Journal of Sociology, 94 (1988), S154–S179.CrossRefGoogle Scholar
Milgrom, P., and Roberts, J.. “Bargaining Costs, Influence Costs, and the Organization of Economic Activity.” Perspectives on Positive Political Economy, (1990), 57–89.CrossRefGoogle Scholar
Momand, P. Keeping Up with the Joneses. New York, NY: Cupples & Leon (1920).Google Scholar
Oi, W., and Idson, T.. “Firm Size and Wages.” Handbook of Labor Economics, 3 (1999), 2165–2214.CrossRefGoogle Scholar
Ozbas, O., and Scharfstein, D. S.. “Evidence on the Dark Side of Internal Capital Markets.” Review of Financial Studies, 23 (2010), 581–599.CrossRefGoogle Scholar
PricewaterhouseCoopers. “How Synergies Drive Successful Acquisitions: Identifying, Realizing, and Tracking Synergies in the M&A Process.” Transaction Services Roundtable, PricewaterhouseCoopers (2010).Google Scholar
Rajan, R.; Servaes, H.; and Zingales, L.. “The Cost of Diversity: The Diversification Discount and Inefficient Investment.” Journal of Finance, 55 (2000), 35–80.CrossRefGoogle Scholar
Scharfstein, D. S. “The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates.” Working Paper, National Bureau of Economic Research (1998).CrossRefGoogle Scholar
Scharfstein, D. S., and Stein, J.. “The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment.” Journal of Finance, 55 (2000), 2537–2564.CrossRefGoogle Scholar
Schoar, A. “Effects of Corporate Diversification on Productivity.” Journal of Finance, (2002), 2379–2403.CrossRefGoogle Scholar
Seru, A. “Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity.” Journal of Financial Economics, 111 (2014), 381–405.CrossRefGoogle Scholar
Servaes, H. “The Value of Diversification During the Conglomerate Merger Wave.” Journal of Finance, 51 (1996), 1201–1225.CrossRefGoogle Scholar
Shin, H., and Stulz, R.. “Are Internal Capital Markets Efficient?” Quarterly Journal of Economics, 113 (1998), 531–552.CrossRefGoogle Scholar
Simintzi, E.; Vig, V.; and Volpin, P.. “Labor Protection and Leverage.” Review of Financial Studies, 28 (2014), 561–591.CrossRefGoogle Scholar
Stein, J. “Internal Capital Markets and the Competition for Corporate Resources.” Journal of Finance, 52 (1997), 111–133.CrossRefGoogle Scholar
Stein, J. “Information Production and Capital Allocation: Decentralized versus Hierarchical Firms.” Journal of Finance, 57 (2002), 1891–1921.CrossRefGoogle Scholar
Stein, J. “Agency, Information and Corporate Investment.” Handbook of the Economics of Finance, 1 (2003), 111–165.CrossRefGoogle Scholar
Tate, G. A., and Yang, L.. “The Bright Side of Corporate Diversification: Evidence from Internal Labor Markets.” Review of Financial Studies, 28 (2015), 2203–2249.CrossRefGoogle ScholarPubMed
Tate, G. A., and Yang, L.. “The Human Factor in Acquisitions: Cross-Industry Labor Mobility and Corporate Diversification.” Working Paper, available at https://ssrn.com/abstract=2578636 (2016).CrossRefGoogle Scholar
Tavassoli, N. T.; Sorescu, A.; and Chandy, R.. “Employee-Based Brand Equity: Why Firms with Strong Brands Pay Their Executives Less.” Journal of Marketing Research, 51 (2014), 676–690.CrossRefGoogle Scholar
Villalonga, B. “Diversification Discount or Premium? New Evidence from the Business Information Tracking Series.” Journal of Finance, 59 (2004a), 479–506.CrossRefGoogle Scholar
Villalonga, B. “Does Diversification Cause the ‘Diversification Discount’?” Financial Management, 33 (2004b), 5–27.Google Scholar
Zingales, L. “In Search of New Foundations.” Journal of Finance, 55 (2000), 1623–1653.CrossRefGoogle Scholar
Supplementary material: PDF

Silva Supplementary Materials

Silva Supplementary Materials

Download Silva Supplementary Materials(PDF)
PDF 249 KB