THE IMPACT OF INTERNATIONAL OUTSOURCING ON EMPLOYMENT: EMPIRICAL EVIDENCE FROM EU COUNTRIES Martin Falk and Yvonne Wolfmayr Austrian Institute of Economic Research WIFO

Motivation Imported materials are one the fastest growing input factor used in production Imports from low income Central and East European and East Asian countries most dynamic component of trade Effects of outsourcing –employment losses –negative distributional effects –productivity gains –gain in competitiveness and market position Aim of the paper: –New insights into the employment effects of international outsourcing. –Extension of previous work: (i) cross-country study, (ii) Disaggregation:imported materials from high and low wage countries (iii) robustness checks

Outline Previous literature Empirical model and hypotheses Data and descriptive statistics Estimation results Conclusions

Previous literature Huge literature on the impact of outsourcing on skilled and unskilled workers; in this study: total employment 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 have 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

Empirical model and hypotheses Labour demand model –L it : total employment –Y it : value added in constant prices –WP it : real wage –IMQ it : imported materials from the same industry as a percentage of gross output Estimation equation: ∆: average annual change of the variables between Estimation methods: (i) OLS using first differences, (ii), robust regression, (iii) median regression (iv) weighted OLS with employment shares as weights

Research questions Impact of imported materials on employment Impact of imported materials from low-wage and high- wage countries on employment Heterogeneity across industries: (i)two broad industry groups : NACE and NACE 15-28; 36 (ii)Declining and expanding industries

Data Input-Output Table 1995 and 2000 (Eurostat) –imported intermediates –7 EU countries (Aut, Dk, Fl, G, I, NL, Sw) –NACE 2-digits; manufacturing –No regional breakdown of material imports Definition of outsourcing –narrow measure: purchases from within the same industry class –imported intermediates as percent of gross output UN Foreign Trade Database: High wage – Low wage countries OECD STAN Data

Descriptive statistics Share of imported intermediates in gross production: 8.8% (7.2% high wage countries; 1.6% low wage countries). Strong increase of the share of imports of intermediates from low- wage countries (+9% p.a.) Kruskal-Wallis test: –high outsourcing industries subject to significantly higher negative total employment growth than low outsourcing industries –Employment losses in these sectors are significantly higher if inputs are sourced from low-wage countries.

Growth of Outsourcing Average annual percentage change

Data: Most important outsourcing sectors Low-wage countries: –leather –office machinery and computers –TV, radio, communication equipment –textiles, apparel –basic metals High-wage countries –chemical products –transport equipment and motor vehicles –office machinery –communication equipment

Estimation results Negative and significant impact of imported materials from low- wage countries No impact of total imported materials Imported materials from high-wage countries are positive but not significant Sample split regressions: –negative and significant effect of total imported materials and imported materials from low-wage countries in less skill intensive manufacturing industries –no effect in machinery, electrical, optical and transport equipment Quantile regressions –Effect of outsourcing is more pronounced at the low end of the conditional employment distribution (declining industries)

OLS results, Labour demand Dep: var: average annual growth rate of total employment between t-values are based on heteroscedasticity consistent standard errors.

Empirical results These calculations are based upon the average annual change in the explanatory variables multiplied by the regression coefficients. actual employment Predicted employment real wages imports from low-wage countries constant Median regression estimates0.32 value added c. p. OLS estimates0.31 weighted OLS estimates0.70 Median regression estimates0.42 less skill intensive industries OLS estimates0.53 weighted OLS estimates0.44 all manufacturing industries, total sample Contribution of Sources of Labour Demand Growth (percentage points

Conclusions Imports from low-wage countries have a negative and significant effect on employment Imports from industrialised countries have no effect Observed change in outsourcing accounts for an employment reduction of 0.26 percentage points per year. Magnitude of the effect differs across industries. –large effect in less-skill intensive industries –no effect in machinery, electrical, optical and transport equipment. –no effect in expanding industries Future work: –Disaggregation of employment by skills => heterogenous labour demand –Outsourcing of services –Longer sample

Data: Imported materials (from the same industry) in low wage and high wage countries in 2000

Data: Imported materials (from the same industry) in low wage and high wage countries, average percentage change 1995/ Austria Denmark Finland Germany Italy Netherlands Sweden EU 7 Total inputs High-wage countries Low-wage countries

Data: Imported materials (from the same industry) in low wage and high wage countries, absolute change 1995/2000