Internal Labor Markets and Investment in Conglomerates

Abstract

The literature on conglomerates has focused on the allocation of investments across divisions. I study frictions in the internal labor market as a determinant of allocation of investments. Using detailed plant-level data, I document wage convergence in conglomerates: workers in low-wage industries collect higher-than-industry wages when the diversified firm is also present in high-wage industries. Exploiting a quasi-experiment involving the implementation of the NAFTA agreement that exogenously increases worker wages of exporting plants, I track the evolution of wages in non-exporting plants in diversified firms that also own exporting plants and find a significant increase in wages of these plants relative to unaffiliated non-exporting plants after the event. I confirm this effect by studying exogenous changes in worker wages that result from changes in minimum wage laws at state level and analyze the transmission towards workers of the firm in other states. This pattern of wage convergence affects investments. Plants where workers collect higher-than-industry wages increase the capital-labor ratio in response to their higher labor cost and this response to higher wages is associated with higher investment in some divisions.