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 outsourcing employment losses negative distributional effects (relative employment of low-skilled, relative wages) productivity gains gain 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 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 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 ; 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 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 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 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 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 Labour demand model - L it : total employment - Y it : value added in constant prices - WP it : real wage - Outsourcing it : outsourcing indicator Estimation equation ∆: average annual change of the variables between Estimation methods: (i) OLS using first differences, (ii) robust regression (iii) weighted OLS with employment shares as weights

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. ( )

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

Growth of Imported Material Inputs Average annual percentage change

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 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 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 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 Imported Material Inputs

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)

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  total imports of services: significant, negative impact

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 Imported Services Inputs Total

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

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-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 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