Offshoring Wage Inequality in Tax Havens

Abstract

We use matched employer-employee data on the universe of French firms to study the role of multinational enterprises’ (MNEs) presence in tax havens in determining within-firm wage inequalities. We implement a difference-in-differences and a panel event-study design to analyze the effect of firm entry in tax havens on firms’ wage variance. We find that the average firm wage variance experiences a drop by 4.7% over the immediate years following the establishment in a tax haven. We argue that wage inequality within MNEs with presence in tax havens is underestimated, due to the “salary split” for the highest wages of the firm. Indeed, we find that top 1% wages of the firm decline on average by 3.1% after the tax haven entry. On top of this, when we decompose the effects on the top 1%, we find a stronger wage decline due to the tax haven entry for the top salaries, as follows: a 4.4% decline for the top 0.5% and 4.8% for the 0.1% of top wages. The drop in wage variance is explained by a decline in wages at the top of the distribution and not by an effect on the rest of wages, on which there is no statistically significant effect. We show that these developments are exclusively related to tax haven foreign investment and not to other foreign investments. Finally, we introduce a methodology to estimate the macro-level effect of firm-level use of tax havens and we find that it represents around 2% of the observed change in the aggregate variance of wages

Kevin Parra Ramirez

PhD candidate in Economics, Sciences-Po Paris &

I am a Ph.D candidate at Sciences-Po Paris under the supervision of Prof. Philippe Martin (Sciences-Po) and Vincent Vicard (Deputy Director of CEPII) and Research Economist at Banque de France