Outline of Presentation

Manufacturer’s Outsourcing to Employment Services Matthew Dey, BLSSusan Houseman, Upjohn Institute Anne Polivka, BLS Presentation for 2008 World Congress on National AccountsViews are those of the authors’ and do not necessarily reflect official BLS positionsMay 15, 2008

Outline of Presentation • Why Concentrating on Employment Services (ES) and Manufacturing • OES Data and Construction of OES Panel • OES Trends in Occupational Structure of Employment Services • Imputing Employment Service Workers to Manufacturing • Implications of ES Outsourcing for Productivity Trends

Employment Services Sector Includes: 3 Industries ○ Temporary Help Agencies (THS) – 71% in 2005 ○ PEOs – 21% in 2005 ○ Employment Placement Agencies – 8% in 2005

Concentration on Employment Services and Manufacturing • Employment Services is the best measured form of domestic contracting out • Employment Services exhibited rapid employment growth during the 1990’s • Manufacturing exhibited marked employment decline during the 1990s • Employment Services exhibited dramatic occupational shift

1990s Period of Rapid Employment Growth in U.S. • Aggregate payroll employment grew by 21.3% from 1989-2000 • Employment Services ○ Accounted for 10.6% of aggregate employment growth ○ Increased share of aggregate employment from 1.3% to 3.0% • Manufacturing employment decreased by 4.1%

OES Data and Construction of Panel • Occupational Employment Survey program • Operated in current form since 1988, most recently available data 2004 • Provides wage and employment data for detailed occupations, industries, and geographic areas • Surveys ≈ 400,000 establishments annually • Change in survey structure in 1996: • Pre-1996, surveyed 1/3 of industries each year • 1996-present: every industry surveyed every year • We have access to establishment level data 1996-2004

OES Data and Construction of Panel Data • Constructing Panel Data on Occupation by Industry from OES • To handle changes in occupation and industry classification systems, aggregate data into 18 occupation groups and 16 sectors • Benchmark employment levels to CES • Pre-1996: assume occupation structure of employment same for three-year cycle • Jack-knife methods to compute standard errors of occupation by industry employment estimates from 1996-2004

Dramatic Shift in ES Occupational Structure in 1990s • Dramatic growth in production and other manual occupations in ES ○ Equivalent to almost all of employment growth in these occupations economy wide ○ Trend first noted by Segal and Sullivan, 1997 • Shift towards higher-skilled production occupations ○ Accounted for almost a quarter of ES growth

Trends in Occupational Distribution of Employment within ES, Selected Occupations aReported figures are percentage of employment services employment in the indicated occupation. Standard errors of this percentage are in parentheses. bReported figures are the percentage of employment services growth over the period accounted for by growth in the indicated occupation.

Share of Total Employment in ES and Manufacturing, Selected Occupations and Years aShares are written as a percentage. Standard errors are in parentheses.

Imputing Employment Service Workers to Manufacturing • Methodology and Assumptions • Results • Robustness Checks

Imputing ES Workers to Manufacturing • Previous Studies • Segal and Sullivan, 1997 • Estavão and Lach (1999a, 1999b) • Hampered by lack of data and inconsistencies

Imputing ES Workers to Manufacturing • Our Approach Use proportion of THS workers in each occupation assigned to manufacturing from CWS with OES estimates of number of ES workers in each occupation

Key Assumptions Underlying Our Approach • Within occupations, CWS provides an unbiased estimate of industry of assignment for THS workers • Probability of THS workers in occupation being assigned to manufacturing = Probability of other ES workers (PEOs) working in manufacturing • Within occupations, assignment probabilities do not change over time ○ Estimated number assigned to manufacturing changes over time due to changes in OES total number of ES workers and changes in occupational composition of ES workers

Key Results of Imputation • Rapid Increase in Outsourcing to Employment Services by Manufacturing during the 1990s ○ ES employment adds an estimated 2% to manufacturing employment in 1989, 8% in 2000, 9% by 2004 ○ Manufacturing employment without ES workers shrank 4% from 1989 to 2000 ○Adding ES workers employment in manufacturing actually grew by 1%

ES Workers Assigned to Manufacturing, by Occupation, Selected Years

Robustness Checks • Occupational assignment not changing over time ○ Test using CWS data indicates holds for 1995-2005 period ○ Single year imputations look similar • Probability of THS assignment = Probability of Other ES assignment ○ THS workers can be distinguished from other ES workers in OES data beginning in 1999 ○ Imputation with just THS workers, number is lower, but pattern and implications remain

Labor Productivity Definition in Manufacturing ○ Output/worker or Output/labor hour ○ Manufacturing uses gross output ▪ constant dollar value of shipments ▪ Not a value-added concept ▪ Inputs purchased from outside manufacturing not subtracted out

Labor Productivity • Given Definition ○ Measures could be significantly impacted by changes in contracting out to ES ○ Use of employment services by manufacturers accounted for 14% of labor productivity growth from 1989 to 2000

Manufacturing Labor Productivity Growth Adjusted for Employment Services

Multifactor Productivity (KLEMS) • Should account for outsourcing to ES ○ Tries to account for shifts of inputs, in this case from “workers” to “purchased services” • Dependent on the accuracy estimated use of employment services by manufacturing • Derived from BEA benchmark input-output tables

Multifactor Productivity (KLEMS) • BEA benchmark I-O table estimates of manufacturers use of ES ○ 1992 15%, 1997 5%, 2002 5% • Our estimates ○ 1992 29%, 1997 36%, 2002 34% • OES production workers share of ES employment ○ 6% 1989, 17% in 2000 • BEA estimates inconsistent in both magnitude and trend

Conclusion • Outsourcing by manufacturers to Employment Services substantial • Affects estimates of sectoral employment trends • Affects measure of labor productivity, and evidences suggest not adequately reflected in KLEMS • Affects on labor productivity vary cyclically • Has potential implications for studies of skill-bias technological change and wage trends in manufacturing

Outline of Presentation