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Does Offshoring of Materials and Business Services Affect Employment? Evidence for a small open economy

Does Offshoring of Materials and Business Services Affect Employment? Evidence for a small open economy. Bernhard Michel (FPB and ULB) and François Rycx (ULB). Outline. Relevant empirical literature Belgian data on offshoring Estimation framework Results Conclusion.

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Does Offshoring of Materials and Business Services Affect Employment? Evidence for a small open economy

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  1. Does Offshoring of Materials and Business Services Affect Employment?Evidence for a small open economy Bernhard Michel (FPB and ULB) and François Rycx (ULB) http://www.plan.be

  2. Outline • Relevant empirical literature • Belgian data on offshoring • Estimation framework • Results • Conclusion

  3. Relevant empirical literature – Offshoring and the labour market • Pioneering papers: Feenstra & Hanson (1996, 1999) standard measurement of offshoring, US data, relative wages • Follow-up papers: Strauss-Kahn (2002), Falk & Koebel (2002), Hijzen et al. (2005) European countries, employment of low-skilled workers • Extensions and related papers: Egger & Egger (2003), Amiti & Wei (2005, 2006), Falk & Wolfmayr (2005) low-wage countries, services offshoring, total employment

  4. Offshoring and employment Impact on total employment: - jobs lost: those employed in the offshored activity - cheaper inputs  productivity gain in downstream production stages  further reduction in employment, or  expansion of production and employment - caveats: terms of trade, relative factor demands

  5. Relevant empirical literature – Offshoring and total employment • Seven papers: Amiti & Wei (2005, 2006), Cadarso et al. (2008), Falk & Wolfmayr (2005, 2008), OECD (2007a, 2007b) • Labour demand framework augmented by offshoring term • Individual country vs. Panel of countries • Industry-level data • Differences: calculation of the offshoring intensity, measure of employment (FTE or hours), controls, estimation methods,… • Different results…

  6. Relevant empirical literature – comparison of results

  7. Measuring offshoring Standard measure (Feenstra & Hanson, 1996): oti = ∑jIIIij / Yi Mostly computed proportionally using data from Input-Output tables and trade statistics Split into materials and business services offshoring omi and osi Split III by country of origin (Egger & Egger, 2003) Narrow offshoring vs Broad offshoring (Feenstra & Hanson, 1999)

  8. Measuring offshoring For Belgium: - supply and use tables, 1995-2003 - NA vintage 2007 - constant prices of 2000 - use tables of imports (imported intermediates) - offshoring to different regions (oecd, ceec, asia)

  9. Measuring offshoring – Data for Belgium

  10. Measuring offshoring – Data for Belgium

  11. Measuring offshoring – Data for Belgium

  12. Measuring offshoring – Data for Belgium

  13. Measuring offshoring – Data for Belgium

  14. Measuring offshoring – Data for Belgium

  15. Measuring offshoring – Data for Belgium

  16. Measuring offshoring – Data for Belgium

  17. Estimation framework • Conditional labour demand in log-linear form: Lit = α + β1 wit + β2 rit + γ Yit • Augment by offshoring variables in logs: omit and osit • Make it testable (time and industry dummies, disturbance term, lags of explanatory variables): Lit = αt + β1 wit + β2 wit-1 + γ1 Yit + γ2 Yit + (θ1 omit + θ2 osit + θ3 omit-1 + θ4 osit-1) + εi + uit • Regional splits (oecd, ceec, asia) can also be introduced • Estimate (fixed effects) for 58 manufacturing and 35 service industries

  18. Results – data used Dependent variable: employment in hours (employees) Controls: - wage rate: deflated compensation of employees per hour - value-added Offshoring (see above) Source: national accounts

  19. Results – manufacturing sector

  20. Results – service sector

  21. Results – summary • Controls: - w: negative significant elasticity - Y: positive significant elasticity • Offshoring variables: almost always not significant, in some cases om has a small positive impact on employment in manufacturing industries • Offshoring does not have a significant impact on total employment in Belgium, the number of jobs lost due to offshoring is small compared to total labour market turnover.

  22. Robustness tests • Measure offshoring as share in total intermediate inputs instead of output • Apply an industry-level correction for self-employed • Estimate unconditional labour demand replacing output in volume by its price • Specify a dynamic model with an autoregressive term and estimate it using GMM (dif and sys) The offshoring coefficients remained overwhelmingly non-significant.

  23. Conclusion • Improved measure for offshoring (data on imported intermediates, coherent constant price dataset) • First estimations for Belgium • Estimations for both manufacturing and market service sectors • Results: offshoring has no significant impact on total employment - in line with earlier findings - small job loss compared to overall labour market turnover • Further research: - impact of offshoring on productivity - impact on employment of low-skilled workers

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