Title: Outsourcing,%20Offshoring%20and%20Productivity:%20Measurement%20Issues
1Outsourcing, Offshoring and Productivity
Measurement Issues
- Susan Houseman
- Upjohn Institute for Employment Research
- Presentation prepared for World Congress on
National Accounts and Economic Performance
Measures for Nations - Session 3 May 16, 2009
2Outline
- Distinguishing import price measurement issues
related to product variety v. outsourcing
offshoring - Outsourcing and offshoring
- Definitions
- Causes
- Problems measuring input price changes with
changes in sourcing - Evidence on growth of outsourcing offshoring
- Why measurement issue important
3Distinguishing from Import Prices and Gains from
Variety Literature
- Recent literature focuses on problems in
measuring prices in trade models with product
differentiation monopolistic competition - Debate on whether growth in trade ? growth in
variety of goods - Feenstra (1994), Broda Weinstein (2006),
Feenstra, Reinsdorf, Slaughter (2008),
Arkolakis, et al. (2008) - If growth imports ? increase variety, consumer
surplus from variety not measured price index
growth overstated, domestic output growth
overstated, productivity overstated
4Distinguishing from Import Prices and Gains from
Variety Literature
- Models assume separability between domestic
imported goods substitution between domestic
and imported goods not explicitly considered - Any bias to price index theoretically depends on
low substitutability of new varieties - when existing varieties are close substitutes to
new or disappearing varieties, changes in variety
will not have a large effect on exact price
index. (Broda Weinstein 2008) - Offshore outsourcing primarily concerns the
substitution of relatively homongeneous foreign
inputs for domestic inputs
5Outsourcing Offshoring
- Use broad definition
- Change in sourcing of inputs in the production of
a good or service - Types of outsourcing offshoring
- Switch from something produced internally in
organization to domestic supplier (domestic
outsourcing) - Switch from producing internally to foreign
supplier (offshore outsourcing) or to foreign
affiliate (offshoring) - Switch from domestic to foreign supplier
(offshore outsourcing)
6Outsourcing Offshoring
- Examples
- Manufacturer outsources labor services to
staffing agencies - Manufacturer offshores first stage of production
of good, keeps final finishing of product in U.S.
- Bank offshores back office functions
- Retailer shifts from domestic to imported goods
or manufacturer switching from domestic to
imported inputs - Driving force of outsourcing offshoring
- Factor price arbitrage substitution of lower
priced input for internally or domestically
produced good or service - Reducing production costs for any given good or
service, not increase in product variety
7Offshore Outsourcing Offshoring
- Trade models of comparative advantage appropriate
for offshoring phenomenon - Product cycle theory of international trade
(Vernon 1966) - Complicated by fact that much of trade occurs
within financially related parties production
of single product or service may become divided
among countries - Growth of offshoring outsourcing offshoring
driven by confluence of factors - Reduction tariffs (Feenstra, Reinsdorf,
Slaughter 2008) - Reduction transportation communication costs
- Economic political reforms major parts of the
world China, Eastern Europe - Rapid economic development many countries
8Problems measuring input price changes with
changes in sourcing
- Price measurement system assumes stable sourcing
patterns - Important set of cases in which input price drop
associated with outsourcing offshoring not
measured even when goods services homogeneous
- Real value of outsourced or offshored input
understated price index growth overstated, - Real domestic output and/or sector value-added
growth overstated, - Aggregate and/or sectoral productivity overstated
9Problems measuring input price changes with
changes in sourcing (cont.)
- Certain tasks outsourced or offshored labor
input now becomes purchased services or materials
inputno price drop measured across input
categories (Houseman 2006, 2007) - Wage cut effected via wage reduction to employees
no first order effect on measured productivity - Wage cut effected by firing employees,
outsourcing or offshoring task to lower paid
workers ? drop in input price not measured,
productivity overstated - Shift from domestic, internal production to
domestic contractor or offshore - slicing the value chain (Krugman 1996),
intra-mediate trade (Antweiler Trefler),
disintegration (Yuskavage et al. 2008)
10Problems measuring input price changes with
changes in sourcing (cont.)
- Shift from domestic, internal production to
domestic contractor or offshore Affects
measurement for goods services - Services Mann (2004) emphasizes lack of prices
for services need to develop with growth
services offshoring - Goods example First stage of production of good
sent overseas final finishing kept in U.S. ?
new imported good not previously observed ? price
drop not measured - Shift from domestic supplier to foreign supplier
- No link between domestic price series import
price series ? input price drop not captured - Business Week furniture example (Mandel 2007)
- Shift from one foreign supplier to another
- Price drop captured only if importer the same
11Size of any bias to output productivity measures
- Dont know But body of evidence suggests
growing importance of outsourcing especially
offshore outsourcing/offshoring - Rapid increase in imports relative to GDP
- Growth of imports dominated by growth of imports
from developing countries especially China - Studies indicate rapid shifts in sourcing of
intermediate inputs
12Growing Importance of Imports from Developing
Countries
- Imports as percent GDP grew from 10.8 in 1989 to
17.0 in 2007 - Developing countriesgrowth non-oil imports
- 56 1989-2000
- 70 growth 2000-2007
- Growth imports from China especially dramatic
- 13 growth non-oil imports 1989-2000
- 39 growth 2000-2007
- Imports and Exports as Percent of GDP, 1989-2007
13Evidence of growth of outsourced and imported
intermediate inputs
- Domestic providers of outsourcing services
significant growth in share of GDP 1982-2006 7
to 12 - Domestic outsourcing esp. strong durable
manufacturing - Substantial substitution imported inputs for
domestic inputs in production of goods services
1997-2005 - Growth imported intermediates esp. strong
manufacturing accelerated 1997-2005 - Yuskavage, Strassner, Medeiros (2008) Kurz
Lengermann (2008)
- Manufacturing Real Output and Employment
1989-2007 - (Indexes, 1992100)
14Why Measurement Issues Important
- Potential bias to sector and aggregate output
productivity measures real value of outsourced
offshored goods services understated - Data measurement issues preclude answering key
questions about offshoring What impact does
substitution of lower-cost imports for
domestically produced goods services have on - Employment, esp. manufacturing employment?
- Wages and wage inequality?
- Consumer prices?
- Data not suited for answering these questions
- Structure of sourcing assumed stable
- Price drops associated with outsourcing
offshoring not adequately measured - Studies biased against finding impacts
15Other measurement issues related to growth of
globalization
- Reclassification of manufacturers to wholesalers
- Timeliness of BEA benchmark I-O tables and
validity of import comparability assumption - Measurement of services offshoring among
multinationals - Intangible assets
16Data point from the furniture industry
- Manufacturer produced desk in Holland, Michigan
- Cost of production 3,750
- Sale price 5,000
- Profit 1,250
- Shifted production to the Philippines
- Cost of production 500
- Sale price 4,500
- Profit 4,000
- Example illustrates
- Cost savings/input price declines can be large
- Manufacturer becomes wholesaler
- Changes in CPI from domestic to imported good may
not be good measure of input price change