EU 6th framework, EUKLEMS

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• EU 6th framework, EUKLEMS
• WP 8 Labour Markets and Skill Formation
• 1) Modelling the Demand for Heterogeneous Labour
• 2) Background paper The Impact of International
  Outsourcing on Employment Empirical Evidence
  from EU-Countries

Martin Falk and Yvonne Wolfmayr WIFO
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WP 8 Labour Markets and Skill Formation

• Stylized facts
• Input factors such as information and
  communication technologies, imported materials,
  purchased services, skilled labour as well as
  general capital have been increasingly used in
  production
• Relative demand for low skilled labour decreases
  faster over time than does supply
• Decline in the demand for older workers
• Stable relative wages in some EU countries
  rising skill premium in UK, US etc.
• Input prices of imported materials grew at a
  smaller rate than the wages

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WP 8 Labour Markets and Skill Formation

• Research questions
• Relationship between output and employment by
  skill level and age
• Labour-labour substitution and wage elasticities
  of different types of workers
• Capital-Skill complementarity
• Skill-biased technology change
• Impact of RD capital on heterogeneous labour
• Impact of information technology capital on
  heterogeneous labour
• Impact of outsourcing on labour demand and
  productivity
• Outsourcing of services
• Outsourcing of production
• The labour demand for older workers (age-biased
  technological change)

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WP 8 Labour Markets and Skill Formation

• Under cost minimization Cost function is a
  function of input prices, fixed factors and
  output
• Translog cost function

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WP 8 Labour Markets and Skill Formation

• Factor cost share equations
• Joint estimation of cost function and factor
  demand
• gt identification of the productivity and factor
  demand effects
• Indicators of technological change
• RD capital stock, RD intensity, RD spillovers
• Infomation technology capital stock
• High-Tech capital stock (electrical equipment,
  instruments...)
• In case of two types of labour, the estimation
  equation becomes

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WP 8 Labour Markets and Skill Formation

• Disaggregation of labour
• Educational qualification
• (i) Compulsory school (isced 0-2)
• (ii) Higher general secondary school (isced 3a),
  Apprentice training (isced 3b), Higher technical
  and vocational college (isced 4ab)
• (iii) academic degree, university degree and post
  graduates
• Age and gender
• Estimation Problems
• Estimation of elasticities of substitution become
  impracticable when the number of factors in the
  system is large
• Multicollinearity caused by very high correlation
  between wage for different skill levels
• Use of interpolated data
• Dynamic specification, adjustment costs

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WP 8 Labour Markets and Skill Formation

• Previous literature
• Technology and skills, Cross-country studies
• Hollanders, ter Weel (2002) manufacturing four
  EU countries, white collar high and low-skilled,
  blue-collar high and low skilled, foreign and
  domestic RD capital stock
• Machin and Van Reenen (1998), blue/white collar
• OMahoney, Robinson and Vecchi (2004)
  educational qualification, IT and general capital
  
• Morrison-Paul and Siegel (2001)
• numerous studies studies for individual
  countries, see Autor, Katz and Krueger (1998)

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WP 8 Labour Markets and Skill Formation

• Labour-Labour substitution and own-wage
  elasticities
• Hamermesh (1993) own-wage elasticities (in
  absolute terms) decrease with the skill level
• Mellander (2000), four educational qualification
  groups, Swedish manufacturing data, 20
  industries the own-wage elasticity decreases
  with the skill level
• Riley and Young (1999), five educational
  qualification groups, U.K. industry panel data
  mixed results for the ranking of own-wage
  elasticities by skills
• Capital-Skill complementarity Krusell, Ohanian,
  Rios-Rull and Violante (2004)
• capital-embodied technological change alone can
  account for most of the variations in the skill
  premium

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WP 8 Labour Markets and Skill Formation

• Previous literature
• use of quality-adjusted prices for a number of
  durable equipment categories such as office and
  computing equipment including peripheral
  equipment and accounting machinery (OCAM),
  communication equipment, general industrial
  equipment and transportation equipment.
• There has been a strong decline in the relative
  price of equipment (ratio of the price index for
  capital equipment and the price index for
  consumption of non-durables and services) of
  about 7 percent per year
• Strong increase in the stock of equipment.
• International Outsourcing and demand for skills
• Feenstra and Hanson (1999) for the US, Anderton
  and Brenton (1999), Hijzen, Görg and Hine (2004)
  for the UK, Geishecker (2002) for Germany
  Strauss-Khan (2003), Egger and Egger (2001) for
  Austria.
• NEXT STEPS Survey paper

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Background paper WP 8 The Impact of
International Outsourcing on Employment

• Motivation
• Imported materials are one the fastest growing
  input factor used in production
• Imports from low income Central and East European
  and East Asian countries most dynamic component
  of trade
• Effects of outsourcing
• employment losses
• negative distributional effects
• productivity gains
• gain in competitiveness and market position
• Aim of the paper
• New insights into the employment effects of
  international outsourcing.
• Extension of previous work (i) cross-country
  study, (ii) Disaggregationimported materials
  from high and low wage countries (iii) robustness
  checks

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Outline

• Previous literature
• Empirical model and hypotheses
• Data and descriptive statistics
• Estimation results
• Conclusions

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Previous literature

• Huge literature on the impact of outsourcing on
  skilled and unskilled workers in this study
  total employment
• 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 have 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

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Empirical model and hypotheses

• Labour demand model
• Lit total employment
• Yit value added in constant prices
• WPit real wage
• IMQit imported materials from the same industry
  as a percentage of gross output
• Estimation equation
• ? average annual change of the variables
  between 1995-2000
• Estimation methods (i) OLS using first
  differences, (ii), robust regression, (iii)
  median regression (iv) weighted OLS with
  employment shares as weights

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Research questions

• Impact of imported materials on employment
• Impact of imported materials from low-wage and
  high-wage countries on employment
• Heterogeneity across industries
• two broad industry groups NACE 29-35 and NACE
  15-28 36
• Declining and expanding industries

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Data

• Input-Output Table 1995 and 2000 (Eurostat)
• imported intermediates
• 7 EU countries (Aut, Dk, Fl, G, I, NL, Sw)
• NACE 2-digits manufacturing
• No regional breakdown of material imports
• Definition of outsourcing
• narrow measure purchases from within the same
  industry class
• imported intermediates as percent of gross output
• UN Foreign Trade Database High wage Low wage
  countries
• OECD STAN Data

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Descriptive statistics

• Share of imported intermediates in gross
  production 8.8
• (7.2 high wage countries 1.6 low wage
  countries).
• Strong increase of the share of imports of
  intermediates from low-wage countries (9 p.a.)
• Kruskal-Wallis test
• high outsourcing industries subject to
  significantly higher negative total employment
  growth than low outsourcing industries
• Employment losses in these sectors are
  significantly higher if inputs are sourced from
  low-wage countries.

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Growth of Outsourcing 1995-2000Average annual
percentage change
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Summary statistics
Mean
Q50
Q25
Q75
Std. Dev
Min
Max
all manufacturing industries ( of obs 144)
Average annual growth rate
between 1995 and 2000 ()
Value added in constant prices
3.3
2.3
0.0
5.0
8.4
-28.9
55.6
Total employment
-0.8
-0.4
-2.2
1.3
3.9
-22.2
11.3
Real wages
1.6
1.4
-0.7
3.5
7.0
-27.3
55.6
Absolute average annual change
between 1995 and 2000 (percentage points)
Imported materials (IM) gross prod.
0.25
0.11
-0.06
0.43
0.7
-1.46
4.73
IM from low-wage countries production
0.1
0.04
-0.15
0.23
0.64
-1.96
4.84
IM from high-wage countries production
0.11
0.05
0.01
0.15
0.18
-0.15
1.07
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Data

• Most important outsourcing sectors
• Low-wage countries
• leather
• office machinery and computers
• TV, radio, communication equipment
• textiles, apparel
• basic metals
• High-wage countries
• chemical products
• transport equipment and motor vehicles
• office machinery
• communication equipment

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Estimation results

• Negative and significant impact of imported
  materials from low-wage countries
• No impact of total imported materials
• Imported materials from high-wage countries are
  positive but not significant
• Sample split regressions
• negative and significant effect of total imported
  materials and imported materials from low-wage
  countries in less skill intensive manufacturing
  industries
• no effect in machinery, electrical, optical and
  transport equipment
• Quantile regressions
• Effect of outsourcing is more pronounced at the
  low end of the conditional employment
  distribution (declining industries)

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OLS results, Labour demand
Dep var average annual growth rate of total
employment between 1995-2000. t-values are based
on heteroscedasticity consistent standard errors.
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Empirical results
Contribution of Sources of Labour Demand Growth
(percentage points
Predicted employment
imports from
employment
added c. p.
real wages
low-wage
countries
constant
actual
value
all manufacturing industries, total sample
OLS estimates
0.53
-0.77
-0.77
-0.50
-0.49
-0.31
weighted OLS estimates
0.44
-0.07
-0.07
-0.21
-0.26
-0.04
Median regression estimates
0.42
-0.41
-0.38
-0.44
-0.28
-0.08
less skill intensive industries
OLS estimates
0.31
-1.30
-1.30
-0.40
-0.74
-0.47
weighted OLS estimates
0.70
-0.53
-0.53
-0.35
-0.30
-0.58
-0.60
-0.59
-0.35
-0.25
-0.31
Median regression estimates
0.32
These calculations are based upon the average
annual change in the explanatory variables
multiplied by the regression coefficients.
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Conclusions

• Imports from low-wage countries have a negative
  and significant effect on employment
• Imports from industrialised countries have no
  effect
• Observed change in outsourcing accounts for an
  employment reduction of 0.26 percentage points
  per year.
• Magnitude of the effect differs across
  industries.
• large effect in less-skill intensive industries
• no effect in machinery, electrical, optical and
  transport equipment.
• no effect in expanding industries
• Future work
• Disaggregation of employment by skills gt
  heterogenous labour demand
• Outsourcing of services
• Longer sample