There is a belief among the general public that employment volatility tends to be greater for firms with higher foreign exposure, but the relationship between the two is ambiguous in theory. This column uses firm-level data for Japan to compare the impact of foreign exposure on employment volatility for multinational, trading, and non-trading firms; for manufacturing and wholesale and retail trade; and for intra-firm and inter-firm trade. In manufacturing, the effect of exports on the volatility of employment varies, depending on the share of intrafirm exports to total sales. In wholesale retail, the effect of exports is generally insignificant.
Increased labour demand elasticities have important labour market consequences. As Rodrik (1997) noted, one of the main concerns is the relationship between foreign exposure and employment volatility—firms that are exposed to foreign demand and/or supply are expected to have higher labour demand elasticities. For example, trade liberalisation could cause greater product market competition, which results in higher labour demand elasticities (e.g. Rodrik 1997). Offshoring could increase the substitution between foreign and domestic workers, which also flattens the labour demand curve (e.g. Senses 2010). Thus, it is widely believed by the general public that the employment of firms with higher foreign exposure tends to be more volatile than that of domestic firms.
If firms are risk neutral, whether employment volatility is high or not does not seem to be a problem, provided that there are no labour adjustment costs. However, when firms face high labour adjustment costs, higher employment volatility will be an issue because it will generate large adjustment costs to the economy as a whole. Indeed, OECD (2005) featured labour adjustment costs as one of the concerns relating to the expansion of international trade and foreign direct investment (FDI). The adjustment of labour in response to foreign exposure is an important concern for policy makers.
Despite this importance, the relationship between foreign exposure and employment volatility is theoretically ambiguous. In the case of exports, on the one hand, employment volatility will be higher for exporters than for non-exporters if the volatility of shocks is significantly higher for the trading partners than for the home country (in this column, Japan), or if the export activity itself is volatile, owing to, for example, changes in the exchange rate. On the other hand, exporters may be able to absorb demand shocks in one country, diversifying their activities in other countries.
Similarly, in the case of imports, a firm that sources inputs from many countries can more easily absorb a shock to a particular input by switching its sources to another country, compared with a firm that sources inputs only from the domestic market. In contrast, importers could have higher employment volatility if imported intermediate inputs are easily substitutable for labour inputs. A similar argument can be applied to the case of FDI. Because the effects of foreign exposure on employment volatility are ambiguous in theory, empirical analysis is needed to clarify which effects appear to be strongest in reality.
A number of studies have examined the causes and effects of employment volatility. To our knowledge, only Kurz and Senses (2016) have examined the relationship between foreign exposure and employment volatility. Using firm- and transaction-level data from US manufacturing firms between 1991 and 2005, they found that the employment of exporters was less volatile than that of domestic firms, whereas that of importers was more volatile. Their study also found a non-monotonic relationship between export status and employment volatility. The effects of exports could be more or less volatile, depending on the share of exports to total sales. They concluded that "as long as a firm's overall exposure is not too large, exporting affords firms the ability to diversify their demand sources across countries and products".
Building upon Kurz and Senses (2016), in a new paper we examine the theoretically ambiguous relationship between the volatility of employment growth and the foreign exposure of a firm (Higuchi et al. 2016). We use unique firm-level data for Japan for the period 1994-2012, which allow us to examine the differences between 1) multinational firms, trading firms, and non-trading firms, 2) manufacturing and wholesale and retail trade, and 3) intra-firm and inter-firm trade.