Across-Country Wage Compression in Multinationals

Many multinationals do not fully adjust wages to the local context of their foreign establishments; instead, they partially link the wages of foreign workers in a given position to the wages paid in the same position at headquarters — a practice the authors call “wage anchoring.” Using yearly establishment-level compensation data on roughly 1,200 multinationals operating across 174 cities worldwide (2000–2015) and matched employer-employee administrative data (RAIS) from Brazil, Hjort, Li, and Sarsons document that a 10 percent higher headquarters wage is associated with 1.63–2.8 percent higher wages for workers in the same occupation at foreign establishments, with the within-firm across-country correlation substantially exceeding the correlation between a given establishment’s wages and the local average paid by other multinationals for the same position. To establish a causal link between externally imposed headquarters wage changes and subsequent foreign establishment wage responses, the paper exploits two identification strategies: minimum wage shocks in the headquarters country or U.S. state and exchange rate fluctuations, both of which generate plausibly exogenous variation in headquarters wages that is then partially transmitted to foreign workers in the same position. Wage change transmission appears to be direct and to operate through firm-wide wage-setting procedures rather than through associated changes in technology or employment at foreign establishments, a conclusion the Brazil RAIS data support because total employment at multinationals’ Brazilian establishments shows little change following positive external shocks to headquarters wages. Wage anchoring is strongest for low-skill occupations (cleaners, drivers, security guards), where a 10 percent higher headquarters wage is associated with a 2.8 percent higher foreign establishment wage, versus roughly 1.2 percent for middle- and high-skill occupations; the resulting spatial compression of wages is in line with how many multinationals themselves report setting pay across locations.

Heather Sarsons | Macro Paper Warehouse

Across-Country Wage Compression in Multinationals