A large body of work has examined the impact of corporate takeovers on the financial stakeholders (shareholders and bondholders) of the merging firms. Since the late 2000s, empirical research has increasingly highlighted the crucial role played by the non-financial stakeholders (labor, suppliers, customers, government, and communities) in these transactions. It is, therefore, important to understand the interplay between corporate takeovers and the non-financial stakeholders of the firm.
Financial economists have long viewed the firm as a nexus of contracts between various stakeholders connected to the firm. Corporate takeovers not only play an important role in redefining the broad boundaries of the firm but also result in major changes to corporate ownership and structure. In the process, takeovers can significantly alter the contractual relationships with non-financial stakeholders. Because the firm’s relationships with these stakeholders are governed by implicit and explicit contracts, circumstances can arise that allow acquiring firms to fully or partially abrogate these contracts and extract rents from non-financial stakeholders after deal completion. In contrast, non-financial stakeholders can also potentially benefit from a takeover if they get to share in any efficiency gains that are generated in the deal.
Given this framework, the ex-ante importance of these contractual relationships can have a bearing on the efficacy of takeovers. The ability to alter contractual relationships ex post can affect the propensity of a takeover and merging firms’ shareholders and, in turn, impact non-financial stakeholders. Non-financial stakeholders will be more vested in post-takeover success if they can trust the acquiring firm to not take actions that are detrimental to them. The big picture that emerges from the surveyed literature is that non-financial stakeholder considerations affect takeover decisions and post-takeover outcomes. Moreover, takeovers also have an impact on non-financial stakeholders. The directions of all these effects, however, depend on the economic environment in which the merging firms operate.
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Corporate Takeovers and Non-Financial Stakeholders
Daniel Greene, Omesh Kini, Mo Shen, and Jaideep Shenoy
Article
Earnings Inequality in Latin America: A Three-Decade Retrospective
Manuel Fernández and Gabriela Serrano
Latin American countries have some of the highest levels of income inequality in the world. However, earnings inequality have significantly changed over time, increasing during the 1980s and 1990s, declining sharply in the 2000s, and stagnating or even increasing in some countries since 2015. Macroeconomic instability in the region in the 1980s and early 1990s, as well as the introduction of structural reforms like trade, capital, and financial liberalization, affected the patterns of relative demand and relative earnings across skill-demographic groups in the 1990s, increasing inequality. Significant gains in educational attainment, the demographic transition, and rising female labor force participation changed the skill-demographic composition of labor supply, pushing the education and experience premiums downward, but this was not enough to counteract demand-side trends. At the turn of the 21st century, improved external conditions, driven by China’s massive increase in demand for commodities, boosted economies across Latin America, which began to grow rapidly. Growth was accompanied by a positive shift in the relative demand for less-educated workers, stronger labor institutions, rising minimum wages, and declining labor informality, a confluence of factors that reduced earnings inequality. In the aftermath of the global financial crisis, particularly after the end of the commodities price boom in 2014, economic growth decelerated, and the pace of inequality decline stagnated. There is extensive literature documenting and trying to explain the causes of recent earnings inequality dynamics in Latin America. This literature is examined in terms of themes, methodological approaches, and key findings. The focus is on earnings inequality and how developments in labor markets have shaped it.
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The Impact of Brexit
Jonathan Portes
Brexit resulted in major changes to the United Kingdom’s economic relationship with the European Union. The U.K.–E.U. Trade and Cooperation Agreement provides for tariff-free trade but has also resulted in the introduction of customs controls and various non-tariff barriers. In addition, the ending of free movement of workers between the United Kingdom and the EU was accompanied by major changes to the UK’s system for work-related migration.
These changes have resulted in a reduction in UK trade compared to other advanced economies, with goods exports most adversely affected. However, the proportion of overall UK trade that is with the EU does not yet appear to have fallen. Investment has also suffered. However, a fall in migration from EU countries has been at least offset by very large increases in migration from the rest of the world, particularly in the health sector.
Overall, UK GDP growth has underperformed synthetic counterfactuals by about 5% since the Brexit referendum, but a substantial proportion of this is likely to reflect factors not directly related to Brexit: comparisons with other large European economies are much less negative. Nevertheless, Brexit has had a negative impact on growth. Looking forward, this impact is likely to grow, although it could in part be offset by improvements to the UK’s regulatory framework, or mitigated by changes to the Trade and Cooperation Agreement.
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International Trade With Heterogeneous Firms: Theory and Evidence
Alessandra Bonfiglioli, Rosario Crinò, and Gino Gancia
International trade is dominated by a small number of very large firms. Models of trade with heterogeneous firms have been developed to study the causes and consequences of this observation. The canonical model of trade with heterogeneous firms shows that trade leads to between-firm reallocations and selection: It shifts employment toward firms with the best attributes and forces marginal firms to exit. The model also illustrates the role of heterogeneity, and its various sources, in explaining the volume of trade and the firm-level margins of adjustment. Consistent with the model, the empirical literature has documented that exporting is a rare activity, that exporting firms are larger and more productive than other firms, and that trade liberalization reallocates market shares toward the best-performing firms in various countries. Studies using transaction-level data have unveiled additional salient features of trade flows. First, sales by foreign firms are very heterogeneous and highly concentrated. Second, both the extensive margin (number of exporting firms) and the intensive margin (average export per firm) are important in explaining the level of exports and its changes over time. More heterogeneity in sales across firms is associated with a higher volume of trade along both margins. Third, increased foreign competition reallocates market shares toward top firms and hence can increase concentration from any country of origin. Numerous extensions of the benchmark model have been proposed to study other important aspects, such as the relevance of multi-product and multinational firms, the import behavior of firms, and the extent to which heterogeneity is endogenous to firms’ choices, but some open challenges still remain.
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The Economics of International Wage Differentials and Migration
Lant Pritchett and Farah Hani
The key question for the economics of international migration is whether observed real wage differentials across countries for workers with identical intrinsic productivity represent an economic inefficiency sustained by legal barriers to labor mobility between geographies. A simple comparison of the real wages of workers with the same level of formal schooling or performing similar occupations across countries shows massive gaps between rich and poorer countries. These gaps persist after adjusting for observed and unobserved human capital characteristics, suggesting a “place premium”—or space-specific wage differentials that are not due to intrinsic worker productivity but rather are due to a misallocation of labor. If wage gaps are not due to intrinsic worker productivity, then the incentive for workers to move to richer countries is high. The idea of a place premium is corroborated by macroeconomic evidence. National accounts data show large cross-country output per worker differences, driven by the divergence of total factor productivity. The lack of convergence in total factor productivity and corresponding spatial productivity differentials create differences in the marginal product of factors, and hence persistent gaps in the wages of equal productivity workers. These differentials can equalize with factor flows; however their persistence and large magnitude in the case of labor, suggest legal barriers to migration restricting labor flows are in fact constraining significant return on human capital, and leaving billions in unrealized gains to the world’s workers and global economy. A relaxation of these barriers would generate worker welfare gains that dwarf gold-standard poverty reduction programs.
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Trade Liberalization and Informal Labor Markets
Lourenço S. Paz and Jennifer P. Poole
In recent decades, economic reforms and technological advances have profoundly altered the way employers do business—for instance, the nature of employment relationships, the skills firms demand, and the goods and services they produce and export. In many developing economies, these changes took place concurrently with a substantive rise in work outside of the formal economy. According to International Labour Organization estimates, informal employment can be as high as 88% of total employment in India, almost 50% in Brazil, and around 35% of employment in South Africa. Such informal employment is typically associated with lower wages, lower productivity, poorer working conditions, weaker employment protections, and fewer job benefits and amenities, and these informal workers are often poorer and more vulnerable than their counterparts in the formalized economy. Informal jobs are a consequence of labor market policies—like severance payments or social security contributions—that make the noncompliant informal job cheaper for the employer than a compliant formal job. Each model has a different benefit (or lack of punishment) for employing formal workers, and a distinct mechanism through which international trade shocks alter the benefit-cost of these types of jobs, which in turn results in a change in the informality share. The empirical literature concerning international trade and formality largely points to an unambiguous increase in informal employment in the aftermath of increased import competition. Interestingly, increased access to foreign markets, via liberalization of major trading partners, offers strongly positive implications for formal employment opportunities, decreasing informality. Such effects are moderated by the de facto enforcement of labor regulations. Expansions toward the formal economy and away from informal wage employment in the aftermath of increased access to foreign markets are smaller in strictly enforced areas of the country.
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Trade Shocks and Labor-Market Adjustment
John McLaren
When international trade increases, either because of a country’s lowering its trade barriers, a trade agreement, or productivity surges in a trade partner, the surge of imports can cause dislocation and lowered incomes for workers in the import-competing industry or the surrounding local economy. Trade economists long used static approaches to analyze these effects on workers, assuming either that workers can adjust instantly and costlessly, or (less often) that they cannot adjust at all. In practice, however, workers incur costs to adjust, and the adjustment takes time. An explosion of research, mostly since about 2008, has explored dynamic worker adjustment through change of industry, change of occupation, change of location, change of labor-force participation, adjustment to change in income, and change in marital status or family structure.
Some of these studies estimate rich structural models of worker behavior, allowing for such factors as sector-specific or occupation-specific human capital to accrue over time, which can be imperfectly transferable across industries or occupations. Some allow for unobserved heterogeneity across workers, which creates substantial technical challenges. Some allow for life-cycle effects, where adjustment costs vary with age, and others allow adjustment costs to vary by gender. Others simplify the worker’s problem to embed it in a rich general equilibrium framework.
Some key results include: (a) Switching either industry or occupation tends to be very costly; usually more than a year’s average wages on average. (b) Given that moving costs change over time and workers are able to time their moves, realized costs are much lower, but the result is gradual adjustment, with a move to a new steady state that typically takes several years. (c) Idiosyncratic shocks to moving costs are quantitatively important, so that otherwise-identical workers often are seen moving in opposite directions at the same time. These shocks create a large role for option value, so that even if real wages in an industry are permanently lowered by a trade shock, a worker initially in that industry can benefit. This softens or reverses estimates of worker losses from, for example, the China shock. (d) Switching costs vary greatly by occupation, and can be very different for blue-collar and white-collar workers, for young and old workers, and for men and women. (e) Simple theories suggest that a shock results in wage overshooting, where the gap in wages between highly affected industries and others opens up and then shrinks over time, but evidence from Brazil shows that at least in some cases the wage differentials widen over time. (f) Some workers adjust through family changes. Evidence from Denmark shows that some women workers hit by import shocks withdraw from the labor market at least temporarily to marry and have children, unlike men.
Promising directions at the frontier include more work on longitudinal data; the role of capital adjustment; savings, risk aversion and the adjustment of trade deficits; responses in educational attainment; and much more exploration of the effects on family.
