Exporters, Multinationals and Residual Wage Inequality: Evidence and Theory

This paper studies the implications for wage inequality of two distinct forms of globalisation, namely trade and foreign direct investment. I use German linked employer-employee data to (1) jointly estimate the exporter and the multinational wage premium and (2) to further distinguish between wage premia of multinational firms that are foreign owned (inward FDI) and domestically owned (outward FDI). My findings exhibit a clear hierarchy of firms’ international activities with regard to wage premia and workforce ability. I interpret these patterns using a theoretical framework, which incorporates ex-ante homogeneous workers, heterogeneous firms and search and matching frictions into a multi-region model of trade and FDI with monopolistic competition. The model allows me to account for the observed empirical patterns, and delivers novel insights about the interplay between trade, FDI and labour market institutions.