The Impact of Foreign Production on Wage Bargaining in the Home Country

We examine the effect of international production relocation on wage bargaining in the home country. We consider the two-stage game. In the first stage, at a domestic plant, a firm and a labor union negotiate over a wage. In the second stage, after observing the negotiated wage, the firm decides where to produce. The most interesting result is that, in choosing a production location, the skewedness of a wage distribution of the foreign country plays a very important role. A more left-skewed wage distribution of a foreign country, implying that most workers in the country are highly likely to receive a low wage, directly reduces the firm’s production cost in the country. Definitely, the reduction in the cost leads to more production and higher profits from foreign production. In response to the increased incentive for foreign production, when the union at a domestic plant bargains over a wage, it should accept a lower wage to secure jobs.