Strategic Sourcing, Markups And Labor Demand Elasticities
The authors examine how multinational firms strategically source production to mitigate the consequences of wage bargaining with workers. When production in one country requires negotiating with workers over wages, firms allocate production of goods with high markups toward countries with relatively competitive labor markets. This strategy allows multinationals to raise the derived elasticity of labor demand for bargaining workers, reducing negotiated wages with little net change in the total volume of offshore production. Evidence from the automotive industry provides strong support that multinationals locate production of vehicles with higher markups more intensively in Mexico, away from UAW collective bargaining pressure.