Firm’s globalization and wage elasticity of labour demand in South Korea

ABSTRACT

This study investigates the effects of exports and overseas investments on the wage elasticity of labour demand for both foreign multinational corporations (MNCs) and Korean MNCs using a 2006–2015 firm-level unbalanced panel dataset from South Korea. I employ the system generalized method of moments to estimate a dynamic labour demand function to solve the problem of reverse causality due to potential endogeneity. The results suggest that exports play a critical role in increasing wage elasticity among foreign MNCs, whereas overseas investments render labour demand more elastic among both foreign MNCs and Korean MNCs. Particularly, these effects of globalization on increasing wage elasticity became strengthened among foreign MNCs during the post-financial crisis period. Moreover, the intra-firm and inter-firm exports of foreign MNCs from OECD nations, which reflect the vertical integration of foreign MNCs with their affiliated firms, increase the wage elasticity of labour demand. Since overseas investments induce higher wage elasticity of labour demand, overseas investment substitutes for local production activity. These empirical results imply that the rapid pace of globalization exacerbates the instability of the local labour market, and the aggravation of employment vulnerability during the post-crisis period is driven by foreign MNC activity.

KEYWORDS:

• Foreign multinational corporations
• overseas investment
• wage elasticity of labour demand
• intra-firm and inter-firm exports

JEL CLASSIFICATION:

• F16
• F66
• J23

Acknowledgments

The author is grateful to participants at the 93rd Annual conference of the Western Economic Association International, the 2018 joint seminar of Bank of Korea and Korean Economic Association, and the 5th International Conference on Applied Theory, Macro and Empirical Finance for their comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Lichter, Peichl, and Siegloch (2017) pointed out that endogeneity would induce an upward bias of the interaction term between wages and the export share, resulting in more negative estimates of the interaction term. Therefore, as suggested in Lichter, Peichl, and Siegloch (2017), the estimates of the fixed effects model might serve as a lower bound.

² I appreciate the comment by an anonymous referee.

³ The lags of these endogenous variables are used for the instruments for system GMM.

⁴ I appreciate this practical suggestion by David Roodman.

⁵ As discussed earlier, Korean MNCs include those with affiliated firms located both domestically and abroad due to the data limitation. Korean MNCs with affiliated firms located abroad may be more heavily engaged in globalized production. Thus, the results for Korean MNCs may provide a conservative estimate since the sample cannot exclude the firms that have affiliated firms located within the domestic market.

Additional information

Funding

This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2018S1A5A8030205).