Arbitraging Labor Markets

In this paper we develop a new rationale for the existence of business groups (BGs) and conglomerates that operate in multiple locations within the same country: They arbitrage local labor markets. We show that BG firms grow less if firms of the same group in other locations can offer more attractive access to employees in their local labor market. On the flip side BG firms grow faster if they offer such access to other firms in the group. Attractiveness is measured as labor costs, labor supply, and labor fit between the firm and the local labor force. Local labor conditions are of similar importance for location decisions of business group firms as general agglomeration economies. Internal flows of employees between BG firms account for only a small portion of the variation in employment growth rates. We conclude that business groups predominantly move jobs, but not employees, between their locations. As such, they arbitrage local labor markets.