Wage differentials between foreign multinational enterprises and domestic firms in Korea

Abstract

The primary research questions addressed here are whether or not multinational enterprises (MNEs) pay higher wages than domestic firms for equally skilled workers, and if so, why. This dissertation builds a theoretical framework to explain the wage differential between MNEs and domestic firms. MNEs, which have certain characteristics such as a lower ability to monitor workers, and less employment stability and job prestige, will pay higher wages in order to elicit effort from their workers. Our empirical examination and tests for the hypotheses support this theoretical explanation. This study uses a human capital earnings equation to investigate the existence of the wage differential for equally skilled workers between MNEs and domestic firms, and to test several hypotheses. Estimated earnings equations show that there exist significant and substantial wage differentials between MNEs and domestic firms in Korea. Even when workers are grouped by industry, occupation, collar color, or firm size, those who work for MNEs receive higher wages than those in domestic firms. These findings differ from those of most studies which have argued that differences in industry, occupation, and firm size cause the wage differential. Several hypotheses for explaining the wage differential are empirically tested using two test methods. Empirical tests support the information hypothesis, the job stability hypothesis, and the job prestige hypothesis which are drawn from the model. That is, the wage differential is greater, (i) the lower is the ability of MNEs to monitor their workers, (ii) the higher is the job loss risk from MNEs, and (iii) the lower is the prestige associated with a job in MNEs. However, three alternative hypotheses--the union avoidance hypothesis, the labor quality hypothesis, and the fair wage hypothesis--are rejected.