Internal Labor Markets, Wage Convergence, and Investment

Silva, R (2021) Internal Labor Markets, Wage Convergence, and Investment. Journal of Financial and Quantitative Analysis, 56 (4). pp. 1192-1227. ISSN 0022-1090

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.