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

1. Does Outsourcing to Central and Eastern Europe really threaten manual workers’ jobs in Germany? Ingo Geishecker Juni 2005

2. Outline • Stylised facts: Skill upgrading in manufacturing • International Outsourcing • The literature • The econometric model • Estimation

3. 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

4. Unskilled employment

5. 25% 20% no Training 15% 10% Average Vocational Training 5% University/Technical College 2000 1975 1980 1985 1990 1995 Unskilled unemployment Source: IAB calculations

6. 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

7. Shift-share analysis change in employmentshare 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?

8. 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?

9. 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

10. 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

11. 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:

12. Narrow Outsourcing by geographic region Source: OECD commodity trade data, Statistisches Bundesamt Input-Output Tables, authors calculations

13. Wide Outsourcing by geographic region Source: OECD commodity trade data, Statistisches Bundesamt Input-Output Tables, authors calculations

14. 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

15. Empirical Model

16. Results

17. Results

18. Simulations

19. Simulations

20. 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

21. Prices for intermediate imports Source: OECD, Statistical Office Germany

22. International Outsourcing unit costs CS C´S CN skill intensity Z* Z´ CN,S=f(wHS, wLS , r, A) Feenstra and Hanson (1996)

23. Narrow outsourcing by industry

24. Wide outsourcing by industry