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Services and materials outsourcing to low-wage countries and employment: Empirical evidence from EU countries. Yvonne Wolfmayr with Martin Falk. WORKS Expert Workshop Leuven, March 13-14. Motivation.

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Yvonne wolfmayr with martin falk

Services and materials outsourcing to low-wage countries and employment: Empirical evidence from EU countries

Yvonne Wolfmayr

with Martin Falk

WORKS Expert Workshop Leuven, March 13-14


Motivation

Motivation

  • Imported materials are one the fastest growing input factors used in production in OECD and EU countries

  • 2 distinctive features:

    • increased sourcing of material inputs from low-wage countries

      • - Austria, Germany, Finland: significant increase of imported inputs from CEEC5/NMS

    • increased cross-border outsourcing of services

  • Effects of outsourcing

    • employment losses

    • negative distributional effects (relative employment of low-skilled, relative wages)

    • productivity gains

    • gain in competitiveness and market position


The paper

The paper

  • New insights into effects of international outsourcing on total employment

  • Outsourcing measures based on Input-Output Tables

  • Extension of previous work:

    • cross-country study (5 EU countries; AT, FI, DE, IT, NL)

    • outsourcing of services

    • construction of several different measures of international outsourcing:

      • distinction between outsourcing sectors: manufacturing and services sectors

      • distinction between type of inputs (materials, services, business services)

    • disaggregation: imported inputs from high and low wage countries

    • robustness checks – model specification and estimation techniques


Outline

Outline

  • Previous literature

  • Data and measurement of international outsourcing

  • Data and descriptive statistics

  • Empirical model and hypotheses

  • Estimation results

  • Conclusions


Previous literature

Previous Literature

  • Huge literature on the impact of outsourcing on skilled and unskilled workers

    • based on Heckscher-Ohlin Model

    • find significant negative effect on:

      • - relative employment of low-skilled: Europe

      • - relative wages of low-skilled: USA

  • In this study: total employment

    • based on labour demand framework

      • segmented markets; no intersectoral mobility of factors

      • short-run


Previous literature1

Previous Literature

Impact of total imports

  • Negative correlation between employment growth and imports/import prices (Sachs and Shatz, 1994; Greenaway et al., 1999; Revenga, 1992)

  • Sachs and Shatz (1994): Industry employment levels fall due to imports from developing rather than developed countries

  • Neven and Wyplosz (1996): Imports from developing and developed countries have similar effects

  • Landesmann, Stehrer and Leitner (2001):

    • import penetration from emerging countries has a significant negative effect on employment growth in the period 1982-1988; effect disappears in the 1990s

    • effect is stronger in the high-skill intensive industries than in the low-skill intensive industries


Previous literature2

Previous Literature

Impact of imported (manufactured) inputs

  • Falk-Wolfmayr (2005): 7 EU coutries

    • significant negative impact on employment in low-skill intensive manufacturing industries


Previous literature3

Previous Literature

Impact of services outsourcing

  • US: Baily – Lawrence (2004), Schultze (2004), Amiti-Wei (2006)

  • UK: Amiti-Wei (2005)

  • Amiti-Wei papers:

    • outsourcing measures based on trade data (imports of computing and business services) and IO-Tables

    • no distinction between imports from high-wage and low-wage countries

    • pool across outsourcing industries

    • small negative effect of service outsourcing on employment using highly disaggregated sector data

    • negative effect disappears at more aggregated sector level


Measurement of international outsourcing

Measurement of International Outsourcing

  • Input-Output Tables 1995 and 2000 (Eurostat)

    • imported intermediates, domestic intermediates

    • 5 EU countries (AT, FI, DE, IT, NL)

    • NACE 2-digits

  • Regional breakdown of imported inputs – UN COMTRADE an Newcronos

    • i..purchasing industry, j..type of input, c..country

  • high-wage – low-wage countries (CEEC; Asia)

  • Imported intermediates as % of gross output


  • Outsourcing measures

    Outsourcing Measures

    • Outsourcing by the manufacturing sector

      • Outsourcing of manufactured inputs („materials“)

        • narrow measure: purchases of inputs from within the same industry aggregate

        • wide measure: includes purchases from all other manufacturing industries

        • exclusion of energy inputs and other primary inputs

      • Outsourcing of services inputs

        • all kinds of service inputs

        • knowledge intensive business services („KIBS“): computer services, R&D, other business services (managment, consulting, accounting, egineering, etc.)


    Outsourcing measures1

    Outsourcing Measures

    • Outsourcing by the services sector

      • Narrow measure: inputs from within the same service sector

      • Wide measure: all types of services inputs

      • Knowledge intensive business services – „KIBS“


    Potential problems drawbacks

    Potential Problems, Drawbacks

    • Limited data availability:

      • published only every 5 years;

      • time lag

    • Outsourcing measured in current values

    • No regional breakdown of imports

      • Breakdown by country of origin of intermediate imports is the same across all input purchasing sectors

    • Better proxy than indicators based on trade data alone


    Empirical model

    Empirical Model

    • Labour demand model

      • - Lit: total employment

      • - Yit: value added in constant prices

      • - WPit: real wage

      • Outsourcingit: outsourcing indicator

  • Estimation equation

    ∆: average annual change of the variables between 1995-2000

  • Estimation methods: (i) OLS using first differences, (ii) robust regression (iii) weighted OLS with employment shares as weights


  • Research questions

    Research Questions

    • Impact of international outsourcing (imported inputs) on employment

    • Impact of international outsourcing to low-wage and high-wage countries on employment

    • Impact of domestic outsourcing on employment

    • for manufacturing and service industries

    • by types of inputs

      • manufactured inputs: narrow and wide measure of outsourcing

      • services inputs: total and KIBS

  • Growth and initial levels of int. outsourcing


  • International outsourcing of materials by the manufacturing sector 2000

    International Outsourcing of Materials by the Manufacturing Sector, 2000

    • Share of imported materials in gross production in EU5 in 2000 (narrow measure):

      • Total: 8.9%

      • High-wage countries: 6.8%

      • Low-wage countries: 2.1%

      • Strong increase in international outsourcing to low-wage countries: +8.5% p.a. (1995-2000)


    Imported material inputs from the same industry in 2000 as of gross production

    Imported Material Inputs (from the same industry) in 2000; as % of gross production


    Growth of imported material inputs average annual percentage change 1995 2000

    Growth of Imported Material InputsAverage annual percentage change 1995-2000


    Most important material outsourcing sectors in manufacturing

    Most Important (Material) Outsourcing Sectors in Manufacturing

    Import of material inputs

    • Low-wage countries (LIC):

      • leather

      • office machinery and computers

      • TV, radio, communication equipment

      • textiles, apparel

      • basic metals

    • High-wage countries (HIC)

      • chemical products

      • transport equipment and motor vehicles

      • office machinery

      • communication equipment


    International outsourcing of services

    International Outsourcing of Services

    • by the manufacturing sector – by service sector

    • Share of imported services as % of production (EU5):

    • very low levels; clearly less important than international outsourcing of materials (9%)

    • outsourcing to high-wage countries dominates

    • higher growth rates for imports of service inputs from high-wage countries


    Stylized facts summary

    Stylized Facts - Summary

    • International outsourcing of materials much more important than outsourcing of services

      • 8.9% vs. 1.1% or 2.7% respectively

    • Outsourcing of services is still at very low levels

    • Outsourcing to high-wage countries clearly dominates

    • Int. outsourcing of manufactured inputs  Shift to low-wage countries

    • Int. Outsourcing of services  higher growth of outsourcing to high-wage countries


    Estimation results labour demand manufacturing sector

    Estimation Results, Labour Demand -Manufacturing Sector

    International Outsourcing of manufactured inputs

    • Average annual changes

      • negative and significant impact of imported materials from low-wage countries

      • negative impact much more pronounced for outsourcing to China and other Asian countries than CEEC

      • no impact of imported materials from high-wage countries

      • no impact of total imported materials

    • Initial levels of international outsourcing

      • negative and significant impact of imports from low-wage countries

      • negative coefficient higher for CEEC than Asian countries

    • Robust regression

      • same signs; coefficients become more negative and are of higher significance


    Ols results manufacturing sector labour demand

    OLS Results – Manufacturing Sector, Labour Demand

    Imported Material Inputs


    Estimation results labour demand manufacturing sector1

    Estimation Results, Labour Demand -Manufacturing Sector

    International Outsourcing of Services

    • Average annual changes

      • no impact of imported service inputs

      • no impact of domestic service inputs

      • no impact of KIBS

    • Initial levels of outsourcing

      • no impact of imported service inputs

      • negative and significant impact of domestic service inputs

      • no impact of KIBS


    Manufacturing sector contribution of sources of labour demand growth in points

    Manufacturing Sector: Contribution of Sources of Labour Demand Growth (in %-points)


    Estimation results labour demand service sector

    Estimation Results, Labour Demand -Service Sector

    International Outsourcing of service inputs (total)

    • Average annual changes

      • low-wage countries: significant negative impact on employment

      • high-wage countries: no impact

      • total imports of service inputs: negative, insignificant

    • Initial levels of international outsourcing

      • negative and significant impact of imports from low-wage countries and total service imports

    • Robust regression

      • D total imports of services: significant, negative impact


    Estimation results labour demand service sector1

    Estimation Results, Labour Demand -Service Sector

    International Outsourcing of KIBS

    • Average annual changes

      • insignificant coefficients concerning KIBS imports thoughout

      • imports of „other“ service inputs from low-wage countries remain significant and negative

      • no impact of „other“ services input imports from HIC and total

    • Initial levels of international outsourcing

      • positive and significant impact of KIBS

      • negative and highly significant impact of „other services“


    Ols results service sector labour demand

    OLS Results – Service Sector, Labour Demand

    Imported Services Inputs Total


    Service sector contribution of sources of labour demand growth in points

    Service Sector: Contribution of Sources of Labour Demand Growth (in %-points)


    Conclusions

    Conclusions

    • Important to distinguish between different trading partners

      • significant negative impact of imported materials in the manufacturing sector and imported services from low-wage countries in the service sector on total employment

      • no impact of international outsourcing to high-wage countries

    • Important to distinguish different types of inputs outsourced

      • Service Sector:

        • - „other services“ responsible for negative effect

        • - no impact of changes in int. KIBS outsourcing; positive impact of initial KIBS outsourcing level

      • Manufacturing Sector:

        • only materilal outsourcing has negative impact

        • No impact of imported services on employment


    Conclusions1

    Conclusions

    • Results are robust to model specification and econometric methodology

    • Outsourcing measures based on IO-Tables

      • so far: published only every 5 years with time lag;

      • only 2 points in time

      • limits set of econometric methodologies

        • - no control for potential endogeneity

        • time persistence in employment

        •  dynamic panel data methods (GMM-estimation)

      • Outsourcing measured in current values, no price information

      • better proxy than indicators based on trade data

      • what definition of outsourcing: wide or narrow measure to proxy value chain restructuring?


    Future work

    Future Work

    • IO-Tables more and more get available on yearly basis (Austria)

    • inclusion of other determinants of labour demand – technological innovations

    • Disaggregation of employment by skills  heterogenours labour demand


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