Yvonne Wolfmayr with Martin Falk

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

WORKS Expert Workshop Leuven, March 13-14

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 outsourcingemployment lossesnegative distributional effects (relative

employment of low-skilled, relative wages)productivity gainsgain in competitiveness and market position

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

Previous literature

Data and measurement of international outsourcing

Data and descriptive statistics

Empirical model and hypotheses

Estimation results

Conclusions

Previous Literature

Huge literature on the impact of outsourcing on skilled and unskilled workersbased on Heckscher-Ohlin Modelfind significant negative effect on:

- relative employment of low-skilled: Europe

- relative wages of low-skilled: USA

In this study: total employmentbased on labour demand framework

- segmented markets; no intersectoral mobility of factors- short-run

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 Literature

Impact of imported (manufactured) inputs

Falk-Wolfmayr (2005): 7 EU coutries significant negative impact on employment

in low-skill intensive manufacturing industries

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

Input-Output Tables 1995 and 2000 (Eurostat) imported intermediates, domestic

intermediates5 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

.1

j

jcN

j ijic M

MMIIM

Outsourcing Measures

Outsourcing by the manufacturing sectorOutsourcing 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 Measures

Outsourcing by the services sectorNarrow measure: inputs from within the

same service sectorWide measure: all types of services inputsKnowledge intensive business services –

„KIBS“

Potential Problems, Drawbacks

Limited data availability: published only every 5 years;time lag

Outsourcing measured in current values

No regional breakdown of importsBreakdown 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

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

.lnlnlnln 53210 itiitititit TgOutsourcinßWPßYßßL

iiiii gOutsourcinWPYL 3210 lnlnln

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

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

02468

10121416

Austri

a

Denm

ark

Finlan

d

Germ

any

Italy

Nethe

rland

s

Sweden

EU 7

Low-wage countriesHigh-wage countries

Growth of Imported Material Inputs

Average annual percentage change 1995-2000

-2

0

2

4

6

8

10

12

14

16

Austria

Denm

ark

Finland

Ger

many

Italy

Nethe

rland

s

Swed

en EU 7

High-wage countries

Low-wage countries

Most Important (Material) Outsourcing Sectors in

ManufacturingImport of material inputs Low-wage countries (LIC):

leatheroffice machinery and computersTV, radio, communication equipmenttextiles, apparelbasic metals

High-wage countries (HIC)chemical productstransport equipment and motor vehiclesoffice machinerycommunication equipment

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

World HIC LIC World HIC LIC

Shares in % (2000) 1.13 1.05 0.09 2.66 2.45 0.21

Growth (p.a) % (95/00) 4.82 4.94 3.451 6.37 6.46 5.36

Manufacturing Sector Services Sector

Stylized Facts - Summary

International outsourcing of materials much more important than outsourcing of services8.9% 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 SectorInternational 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

Imported Material Inputs

coeff t coeff t coeff t ln real value added 0.19 2.79 0.18 2.99 0.20 2.94 ln real wages -0.30 -5.38 -0.34 -4.64 -0.35 -4.36 IMQ from low-wage count. -3.20 -1.73 -3.50 -1.91 IMQ from high-wage count. 0.71 1.18 0.83 1.3constant 0.00 -0.76 -0.01 -1.86 0.00 -0.89

Adj-R2# of obs

(i) (ii) (iii)

0.57 0.56 0.58105 105 105

Estimation Results, Labour Demand -

Manufacturing Sector

International Outsourcing of Services

Average annual changesno impact of imported service inputsno impact of domestic service inputsno impact of KIBS

Initial levels of outsourcingno impact of imported service inputsnegative and significant impact of domestic

service inputsno impact of KIBS

Manufacturing Sector: Contribution of Sources of Labour Demand Growth

(in %-points)

(i) (ii) (iii) (iv) (v)Actual employment -0.63 -0.63 -0.63 -0.63 -0.63Predicted employment -0.62 -0.62 -0.62 -0.62 -0.62

Value added c.p. 0.53 0.57 0.52 0.47 0.46Real wages -0.48 -0.55 -0.48 -0.48 -0.48Imp. materials LIC -0.37 -0.40 -0.38Imp. materials HIC 0.12Imp. services LIC -0.03 -0.02Imp. services HIC -0.04Constant -0.29 -0.35 -0.25 -0.59 -0.57Notes: These calculations are based on the (unweighted) average annual change in the explanatory variables multiplied by the regression coefficients.

Estimation Results, Labour Demand -

Service SectorInternational Outsourcing of service inputs (total)

Average annual changes low-wage countries: significant negative

impact on employmenthigh-wage countries: no impacttotal imports of service inputs: negative,

insignificant

Initial levels of international outsourcingnegative and significant impact of imports

from low-wage countries and total service imports

Robust regression total imports of services: significant,

negative impact

Estimation Results, Labour Demand -

Service SectorInternational 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 outsourcingpositive and significant impact of KIBSnegative and highly significant impact of

„other services“

OLS Results – Service Sector, Labour Demand

Imported Services Inputs Total

coeff t coeff t coeff t coeff t ln real value added 0.48 5.5 0.48 6.0 0.48 5.5 0.48 5.7 ln real wages -0.33 -4.0 -0.30 -3.8 -0.33 -4.1 -0.30 -3.7 Imp. services total -1.24 -1.2 Imp. services from LIC -20.4 -3.3 -24.3 -2.3 Imp. services from HIC -1.18 -1.0 0.66 0.5constant 0.004 1.4 0.005 1.6 0.004 1.3 0.0 1.5

Adj-R2# of obs

(iii) (iv)

0.58 0.61 0.58 0.61

(i) (ii)

100 100 100 100

Service Sector: Contribution of Sources of Labour Demand Growth

(in %-points)

(i) (ii) (iii)Actual employment 2.89 2.89 2.89Predicted employment 2.88 2.89 2.90

Value added c.p. 2.24 2.23 2.21Real wages 0.40 0.37 0.36Imp. services total -0.17Imp. services LIC -0.17 -0.21Imp. services HIC 0.09Constant 0.41 0.47 0.45Notes: These calculations are based on the (unweighted) average annual change in theexplanatory variables multiplied by the regression coefficients.

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

Conclusions

Results are robust to model specification and econometric methodology

Outsourcing measures based on IO-Tablesso 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

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