Does Outsourcing to Central and Eastern Europe really threaten manual workers’ jobs in Germany?

Ingo Geishecker

Juni

2005

Outline

Stylised facts: Skill upgrading in manufacturing

International Outsourcing

The literature

The econometric model

Estimation

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

Unskilled employment

1975 20001980 1985 1990 1995

25%

20%

15%

10%

5%

no Training

Average

Vocational Training

University/Technical College

Unskilled unemployment

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:

- 23%-pts = - 2%-pts - 21%-pts

confirms Literature on stable relative wages and relative fall in low-skill employment

Shift-share analysis

change in employment share of low-skilled labour decomposed into within-industry and cross-industry skill upgrading:

- 3.2 %-pts = - 3.9 %-pts + 0.7 %-pts

summarising: skill upgrading occurs within and not across industries under nearly constant relative wages

Question: What drives skill upgrading?

Theory of outsourcing and labour demand

General equilibrium models

• Feenstra Hanson (1996)

• Jones and Kierzkowski (2001)

• Arndt (1999)

• Kohler (2003)

• 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?

Empirics of fragmentation and wages

• industry level studies:

• Feenstra and Hanson (1996), Morrison-Paul and Siegel (2001) and others: composite demand equation for low-skilled labour, outsourcing is shift parameter

• problem: aggregation bias, endogeneity bias, measurement

• Falk and Koebel (2002): use relative prices and no shift parameter

• problem: outsourcing only captured by relative price changes

• micro level studies:

• Geishecker, Görg (2004) on outsourcing and wages

International Outsourcing

Use trade data, allocate imports to domestic industries by utilising input-

output data

wide definition: all imported inputs of an industry i

narrow definition: international Outsourcing is outcome of a “make or

buy” decision, hence only imported inputs from the same industry i abroad

are relevant

International Outsourcing by region

Differentiate import data by geographic region (as in Anderton and

Brenton, 1999) , allocate to industries holding use coefficient constant

wide definition:

narrow definition:

0

1

2

3

4

5

6

7

8

Ou

tso

urc

ing

inte

nsi

ty in

%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000Year

Total Outsourcing Outsourcing in CECOutsourcing in EU15

Narrow Outsourcing by geographic region

Source: OECD commodity trade data, Statistisches Bundesamt Input-Output

Tables, authors calculations

Wide Outsourcing by geographic region

Source: OECD commodity trade data, Statistisches Bundesamt Input-Output

Tables, authors calculations

0

5

10

15

20

Ou

tso

urc

ing

inte

nsi

ty in

%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000Year

Total Outsourcing Outsourcing in CECOutsourcing in EU15

Empirical Model

• 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 Model

Results

Results

Simulations

Simulations

Summary

substantial within industry skill upgrading

nearly constant relative wages

in the narrow outsourcing model the predicted overall decline in manual

workers wage bill share is 4.7 %-pts

of this, increasing outsourcing can explain 2.7 %-pts

technological progress can explain almost 3 %-pts

with nearly constant relative wages, decline in relative demand has to be met

by reductions in relative employment

Therefore: manual workers jobs are indeed threatened by outsourcing towards

CEC

0

0.2

0.4

0.6

0.8

11.2

1.4

1.6

1.8

2

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Unit Value

PPI

Intermediate Imports

Source: OECD, Statistical Office Germany

Prices for intermediate imports

International Outsourcing

Z*

CS

CN

C´S

Z´

CN,S=f(wHS, wLS , r, A)

skill intensity

unit costs

Feenstra and Hanson (1996)

Narrow outsourcing by industry

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0.51

1.52

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05

101520

05

10152025

012345

05

101520

0

.5

1

1.5

02468

0

5

10

15

0.2.4.6.81

0.51

1.52

2.5

0

5

10

15

0

.5

1

1.5

02468

010203040

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(15) Food (16) Tobacco (17) Textiles (18) Clothing (19) Leather

(20) Wood (21) Paper (22) Publishing (23) Coke,Petroleum (24) Chemicals

(25) Rubber, Plastic (26) Glas, Ceramic (27) Basic metals (28) Fabricated metal (29) Machinery

(30) Computer (31) Electrical equ. (32) Radio, TV (33) Instruments (34) Motor vehicles

(35)Transport equ. (36) Furniture,n.e.c.

TotalOutsourcing Outsourcing in EU15Outsourcing in CEC

Ou

tso

urc

ing

In

ten

sitä

t in

%

Jahr

Wide outsourcing by industry

0

5

10

15

05

101520

05

10152025

010203040

0

10

20

30

0

5

10

15

05

10152025

02468

020406080

100

05

101520

05

101520

02468

0

10

20

30

02468

10

0

5

10

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01020304050

0

5

10

15

0

10

20

30

0

5

10

15

05

101520

010203040

05

101520

(15) Food (16) Tobacco (17) Textiles (18) Clothing (19) Leather

(20) Wood (21) Paper (22) Publishing (23) Coke,Petroleum (24) Chemicals

(25) Rubber, Plastic (26) Glas, Ceramic (27) Basic metals (28) Fabricated metal (29) Machinery

(30) Computer (31) Electrical equ. (32) Radio, TV (33) Instruments (34) Motor vehicles

(35)Transport equ. (36) Furniture,n.e.c.

TotalOutsourcing Outsourcing in EU15Outsourcing in CEC

Ou

tso

urc

ing

In

ten

sitä

t in

%

Jahr