Threat Effect of Foreign Direct Investment on Labor Union Wage Premium

This paper explores the impact of “threat effects” of foreign direct investment on labor markets in the United States. In this context, the term “threat effect” refers to the use by employers of the implicit or explicit threat that they will move all or part of their production to a different location, even if they do not actually do so. In this paper, I construct a unique industry level panel data set and I show that the union wage premium has been negatively associated with the stock of outward FDI in the U.S. manufacturing sector for the period of 1983-1996. The union wage premium is chosen as the dependent variable to test the hypothesis that the increased capital mobility changes the nature of bargaining between workers and employers as predicted in threat effect theory.