Firms’ Main Market, Human Capital, and Wages

Abstract

This paper contributes to the recent literature on the exporter wage premium. The literature has focused on an exporter/non-exporter dichotomy. Instead, this paper provides first evidence that there is a more continuous destination-market effect. Using Spanish data, we estimate wage premia for establishments selling to the national, European Union, and rest of the world markets (wages in local-market establishments are the reference). Controlling for worker and establishment characteristics, output-market wage premia are increasing in market remoteness and employee education. Establishment human capital is also increasing in output-market remoteness. On the theoretical side, the paper builds a model predicting that firms selling to more-remote markets employ higher human capital and pay higher wages to employees within each education group. The channel linking these variables is firms’ endogenous choice of quality. The model provides a potential explanation for the empirical results in the paper, which is consistent with the evidence on the positive relationship between output-market remoteness and quality of exports put forward by recent trade literature.