Multinational Production, Skilled Labor and Real Wages

Abstract

Adapting our earlier model of multinationals, we address policy issues involving wages and labor skills. Multinational firms may arise endogenously, exporting their firm-specific knowledge capital to foreign production facilities, and geographically fragmenting production into skilled and unskilled-labor-intensive activities. Multinationals thus alter the nature of trade, from trade in goods (produced with both skilled and unskilled labor) to trade in skilled- labor-intensive producer services. Results shed light on several policy questions. First, multinationals increase the skilled/unskilled wage gap in the high income country and, under some circumstances, in the low income country as well. Second, there is a sense in which multinationals export low skilled jobs to the lower income country. Third, trade barriers do not protect unskilled labor in the high income countries. By inducing a regime shift to multinationals, trade barriers protect the abundant factor, at least in the high income country and possibly in both countries. Fourth, a convergence in country characteristics induces the entry of multinationals and raises the skilled-unskilled wage gap in the initially large and skilled-labor-abundant country, and possibly in the small skilled-labor-scarce country as well.