Globalized Labour Markets? International Rent Sharing Across 47 Countries

Abstract

We present evidence about the role of rent sharing in fostering the interdependence of labour markets around the world. Our results draw on a firm-level panel of more than 2,000 multinationals and over 5,000 of their affiliates, covering 47 home and host countries. We find considerable evidence that multinationals share profits internationally by paying higher wages to their workers in foreign affiliates in periods of higher headquarter profits. This occurs even across continents, and not only within Europe, as shown in earlier research. The results are robust to different tests, including a falsification exercise based on 'matched' parents. Finally, we show that rent sharing is higher when the affiliate is located in countries with specific relative characteristics, such as lower economic development or taxation, while it falls with the number of affiliates. We argue that these results are consistent with transfer pricing and bargaining views.