Does Outsourcing to Central and Eastern Europe really threaten manual workers jobs in Germany? Ingo Geishecker copyright with the author (Free University Berlin and University of Nottingham) June Kommentar 1
Outline Stylised facts: Skill upgrading in manufacturing Empirical strategies Definition and measurement of outsourcing The econometric model Results Kommentar
Motivation: Wage and employment trends Unskilled worker s employment Germany: continued rise in unemployment of low-skilled workers skill upgrading of employment Unskilled workers earnings relative wages close to stable Kommentar 3
Unskilled employment 4
Unskilled unemployment % % no Training 1% 1% % Average Vocational Training University/Technical College 197 198 198 199 199 Source: IAB calculations
Shift-share analysis change in cost share of low-skilled labour in total wage bill decomposed into change in relative wages and change in relative employment: - 3%-pts = - %-pts - 1%-pts confirms Literature on stable relative wages and relative fall in low-skill employment kommentar 6
Shift-share analysis change in employment share of low-skilled labour decomposed into within-industry and cross-industry skill upgrading: - 3. %-pts = - 3.9 %-pts +.7 %-pts summarising: skill upgrading occurs within and not across industries under nearly constant relative wages Question: What drives skill upgrading? What drives skill upgrading: technological change, trade, outsourcing 7
Theory of outsourcing and labour demand General equilibrium models Feenstra Hanson (1996) Jones and Kierzkowski (1) Arndt (1999) Kohler (3) How outsourcing effects demand for low-skilled labour in general equilibrium is not clear. Empirical question. But first can we even find effects of outsourcing in partial equilibrium? 8
Empirical strategies Industry level studies solely rely on industry level data tractable model to explain aggregate effects in relative demand labour demand effects are composed of wage and employment effects potential aggregation bias potential endogeneity bias Literature: Feenstra/Hanson (1996, 1999) Falk/Koebel (1) Geishecker () Micro level studies use disaggregated individual level data combined with industry level indicators labour demand effects in principle can be decomposed into wage and employment effects analysis for different population groups no aggregation bias endogeneity bias less of a problem Literature: Egger et al. (3) Geishecker/Görg (4, ) 9
Measurement of international outsourcing Use trade data, allocate imports to domestic industries by utilising inputoutput data 4wide definition: all imported inputs of an industry i 4narrow definition: international Outsourcing is outcome of a make or buy decision, hence only imported inputs from the same industry i abroad are relevant kommentar 1
International outsourcing by region Differentiate import data by geographic region (as in Anderton and Brenton, 1999), allocate to industries holding use coefficient constant 4wide definition: 4narrow definition: kommentar 11
Narrow Outsourcing by geographic region 8 7 Outsourcing intensity in % 6 4 3 1 1991 199 1993 1994 199 1996 1997 1998 1999 Year Total Outsourcing Outsourcing in EU1 Outsourcing in CEC Source: OECD commodity trade data, Statistisches Bundesamt Input-Output Tables, authors calculations 1
Wide Outsourcing by geographic region Outsourcing intensity in % 1 1 1991 199 1993 1994 199 1996 1997 1998 1999 Year Total Outsourcing Outsourcing in EU1 Outsourcing in CEC Source: OECD commodity trade data, Statistisches Bundesamt Input-Output Tables, authors calculations 13
Empirical Model: Industry Level Potential endogeneity of relative Wage and Outsourcing GMM using one and two year lagged values GMM is consistent but not efficient therefore endogeneity tests first Empirical approach 4 imported intermediate inputs quasi fix production input 4adjustment costs, required investments, long term contracts..., hence imported intermediates not necessarily always in long term equilibrium 14
Empirical Model Empirical approach 4 imported intermediate inputs quasi fix production input 4adjustment costs, required investments, long term contracts..., hence imported intermediates not necessarily always in long term equilibrium 1
Results Empirical approach 4 imported intermediate inputs quasi fix production input 4adjustment costs, required investments, long term contracts..., hence imported intermediates not necessarily always in long term equilibrium 16
Results Empirical approach 4 imported intermediate inputs quasi fix production input 4adjustment costs, required investments, long term contracts..., hence imported intermediates not necessarily always in long term equilibrium 17
Simulations Empirical approach 4 imported intermediate inputs quasi fix production input 4adjustment costs, required investments, long term contracts..., hence imported intermediates not necessarily always in long term equilibrium 18
Simulations Empirical approach 4 imported intermediate inputs quasi fix production input 4adjustment costs, required investments, long term contracts..., hence imported intermediates not necessarily always in long term equilibrium 19
Summary 4substantial within industry skill upgrading 4nearly constant relative wages 4in the narrow outsourcing model the predicted overall decline in manual workers wage bill share is 4.7 %-pts 4of this, increasing outsourcing can explain.7 %-pts 4technological progress can explain almost 3 %-pts 4 with nearly constant relative wages, decline in relative demand has to be met by reductions in relative employment 4 Therefore: manual workers jobs are indeed threatened by outsourcing towards CEC Kommentar
Extras 1
Empirical Model: Micro Level log wage equation (hourly wages averaged over year) technical issues: individual unobserved heterogeneity controlling for industry characteristics contemporaneous correlation sample selection bias
3
4
6
Prices for intermediate imports 1.8 1.6 1.4 1. 1.8.6.4. Unit Value PPI Intermediate Imports 1991 199 1993 1994 199 1996 1997 1998 1999 1 Source: OECD, Statistical Office Germany Kommentar 7
International Outsourcing unit costs C S C S C N Z* Z skill intensity C N,S =f(w HS, w LS, r, A) Feenstra and Hanson (1996) kommentar 8
Narrow outsourcing by industry Outsourcing Intensität in % 4 3 1 4 3 1.8 1.6.4. 4 3 1 (1) Food (16) Tobacco (17) Textiles (18) Clothing (19) Leather 1. 1. 1 8 6 4 () Wood (1) Paper () Publishing (3) Coke,Petroleum (4) Chemicals 1. 8 1 1 1 6 1 1 4. () Rubber, Plastic (6) Glas, Ceramic (7) Basic metals (8) Fabricated metal (9) Machinery. 1.. 1 8 6 4 1 1 (3) Computer (31) Electrical equ. (3) Radio, TV (33) Instruments (34) Motor vehicles 1 1 1 1 1. 1. 4 3 1 1 1 8 6 4 1 8 6 4 4 3 1 (3)Transport equ. 8 6 4 (36) Furniture,n.e.c. Jahr TotalOutsourcing Outsourcing in CEC Outsourcing in EU1 9
Wide outsourcing by industry Outsourcing Intensität in % 1 1 1 1 1 1 4 3 1 (1) Food (16) Tobacco (17) Textiles (18) Clothing (19) Leather 3 1 1 1 1 1 1 () Wood (1) Paper () Publishing (3) Coke,Petroleum (4) Chemicals 8 6 4 () Rubber, Plastic (6) Glas, Ceramic (7) Basic metals (8) Fabricated metal (9) Machinery 8 3 1 1 6 8 4 6 1 1 4 (3) Computer (31) Electrical equ. (3) Radio, TV (33) Instruments (34) Motor vehicles 1 3 1 1 1 1 1 1 4 3 1 1 8 6 4 1 1 1 4 3 1 (3)Transport equ. 1 1 (36) Furniture,n.e.c. Jahr TotalOutsourcing Outsourcing in CEC Outsourcing in EU1 3
31