By A EKAPOL C HONGVILAIVAN Institute of Southeast Asian Studies (ISEAS), Singapore Does Outsourcing Provision Lead to Wage Inequality?: New Evidence from Thailand's Establishment-Level Data

What is outsourcing provision? Outsourcing can be loosely defined as “the arrangements whereby the physical and/or human resources related to the firm production are procured and/or administered by outside providers”. Outsourcing in principle pertains to two types of firms: (i) outsourcing firms; and (ii) outsourcing providers. Outsourcing provision is: “the arrangements whereby a firm carries out production stages for other firms”.

Research Motivation Much research has been devoted to how an outsourcing firms contributes to wage inequality between skilled and unskilled workers, especially in industrialized countries. For instance, Feenstra and Hanson (1996, 1997); Chongvilaivan et al. (2009) ; Anderton and Brenton (1999); Hijzen et al. (2005); Geishecker (2002); Hsieh and Woo (2005); and Geishecker and Görg (2008), among others However, the impacts of outsourcing provision on labor markets remain unexplored critically in the literature.

Main findings Outsourcing provision augments productivity of both skilled and unskilled workers. Outsourcing provision contributes to wage inequality between skilled and unskilled workers. Specifically, a 1 percent increase in outsourcing provision results in a rise in wage differentials by 2.47 percent The impacts of wage inequality are more pronounced for services provision than materials provision.

Two driving forces of OP in Thailand Firms in industrialized countries (i.e. Japan, the US and the EU) have increasingly outsourced their production activities to developing countries (Feenstra and Hanson, 1996). Local and multinational firms in Thailand leverage on local outsourcing providers by contracting out their production locally to maintain their core activities and remain competitive in the global market (Panyasavatsu, 2007).

Data Sources and Measurements The establishment-level data are retrieved from the Manufacturing Industry Survey 2003, conducted by NSO. Value added is measured by sales of goods net of production inputs. Capital stock is the values of land, building and construction, and machinery and equipment, less depreciation of assets. Skilled labor is employees in the production lines with training at least 3 months or work experience at least 5 years, i.e. machine maintenance and controllers. Unskilled labor is employees in the production lines with training less than 3 months, i.e. workers in factories and caretakers.

Outsourcing Provision Measurements MOUT denotes the production of materials inputs, including receipts for contract and commission work and sales of goods purchased for resales, undertaken by outsourcing provider i. SOUT refers to services receipts for repair and installation work done for others by an outsourcing provider i. Y represents total sales of goods by an outsourcing provider i.

Summary of Statistics

The Model: Translog Production Function I allow for the 2-digit ISIC industry dummies to control for unobservable industry-specific characteristics. All estimates are heteroskedasticity-robust. More importantly, I account for the possibilities that the outsourcing provision variable is endogenous.

IV Regression: First-stage Results

Baseline Results

Summary of baseline findings Outsourcing provision has positive direct effects on labor productivity of both skill groups. Outsourcing has no significant capital-augmenting and capital-substitution effects. Skilled and unskilled workers are substitutes. The last result explains rising wage inequality if outsourcing provision is in favor of skilled workers (to be continued).

Extension: Materials Provision

Extension: Services Provision

Impacts of OP on Wage Inequality The Impacts of OP on Labor Productivity: The impacts of OP on Wage Inequality:

Summary of main findings A 1 percent increase in the intensity of total outsourcing provision results in a nearly 2.5 percent increase in the wage gap. A breakdown of outsourcing provision into two types reveals that the positive effects on wage inequality are more pronounced for services provision

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