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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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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)
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
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
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

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