Human Capitalists and the Global Division of Labor
Abstract: The widespread practice of equity-based compensation has transformed skilled labor from a labor input into a class of human capitalists that are de facto firm owners. This paper studies how globalization, via access to foreign inputs, affects this development. To study the empirical relation between input imports and compensation contracts for highly skilled labor, I combine data on managerial equity ownership and incomes for public firms in the U.S. and U.K. with international input-output data. I document that managers in more offshorable industries obtain larger levels of compensation and own more equity wealth. Using a shift-share instrumentation strategy based on variation in foreign input supply and trade costs, I find that input imports provoke a reallocation of managerial compensation towards equity ownership. This finding is driven by the largest firms in the economy and suggests that equity wealth inequality becomes more prevalent than income inequality for top earners in an open economy. To rationalize these findings I develop a heterogeneous firm assignment model in which firms choose to compensate managers with equity to alleviate agency frictions. In the model, agency frictions depend on firm size such that globalization provokes a reallocation of compensation towards equity ownership for top earners. Calibrating the model to micro and macro moments in U.S. and U.K. data, I illustrate that globalization accounts for substantial heterogeneity in compensation contracts. Ignoring the ownership of equity results in substantial mismeasurement of the returns of globalization to highly skilled labor and financial incentives.
