Yvonne Wolfmayr with Martin Falk

1. 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

2. 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

3. 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

4. Outline • Previous literature • Data and measurement of international outsourcing • Data and descriptive statistics • Empirical model and hypotheses • Estimation results • Conclusions

5. 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

6. 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

7. Previous Literature Impact of imported (manufactured) inputs • Falk-Wolfmayr (2005): 7 EU coutries • significant negative impact on employment in low-skill intensive manufacturing industries

8. 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

9. 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

10. 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.)

11. 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“

12. 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

13. 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

14. 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

15. 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)

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

17. Growth of Imported Material InputsAverage annual percentage change 1995-2000

18. 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

19. 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

20. 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

21. 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

22. OLS Results – Manufacturing Sector, Labour Demand Imported Material Inputs

23. 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

24. Manufacturing Sector: Contribution of Sources of Labour Demand Growth (in %-points)

25. 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

26. 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“

27. OLS Results – Service Sector, Labour Demand Imported Services Inputs Total

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

29. 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

30. 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?

31. 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