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Outsourcing Three Years Later: New Frameworks and Facts

Outsourcing Three Years Later: New Frameworks and Facts. Matthew J. Slaughter Tuck School of Business at Dartmouth, NBER, and CFR CFR Roundtable Series “Technology, Innovation, and American Primacy” May 2, 2007. The Conventional Wisdom: Then. The Conventional Wisdom: Now.

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Outsourcing Three Years Later: New Frameworks and Facts

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  1. Outsourcing Three Years Later:New Frameworks and Facts Matthew J. Slaughter Tuck School of Business at Dartmouth, NBER, and CFR CFR Roundtable Series “Technology, Innovation, and American Primacy” May 2, 2007

  2. The Conventional Wisdom: Then

  3. The Conventional Wisdom: Now

  4. A Framework for Outsourcing • Consider a U.S.-based investment-banking firm. • Suppose that in response to a fall labor costs abroad, it decides to relocate some of its banking activities to India. • What happens to labor demand in the firm’s U.S. operations? • Substitution effects: If U.S. labor and Indian labor are price substitutes (or complements) in the firm’s cost function, then a fall in Indian labor costs leads to a decrease (or increase) in U.S. labor demand. • Scale effects: If falling labor costs in India lead to an expansion in firm scale, then demand for U.S. labor may rise (even if U.S. labor and Indian labor are price substitutes). • Scope effects: If falling labor costs in India lead to an expansion in firm scope (holding scale constant), then U.S. labor demand may fall or rise depending on the labor intensity of the new lines of activity.

  5. Are Multinationals Exporting Jobs? Then • We can count net jobs that U.S. multinationals create abroad in all their foreign affiliates and in their U.S. parents. What do we see? Year 1991 2000 91-00 MOFA Jobs 5,386,500 8,171,400 +2,784,900 Parent Jobs 17,958,900 23,885,200 +5,926,300

  6. Are Multinationals Exporting Jobs? Now • We can count net jobs that U.S. multinationals create abroad in all their foreign affiliates and in their U.S. parents. What do we see? Year 2000 2005 00-05 MOFA Jobs 8,171,400 9,057,700 +886,300 Parent Jobs 23,885,200 21,479,000 -2,404,200

  7. What About Capital Investment? Now • We can can also track capital investment by both U.S. parents and their affiliates abroad. What do we see? Year 2001 2005 01-05 MOFA Capex $110.8 billion $137.3 billion +19.3% Parent Capex $413.5 billion $340.8 billion -17.6%

  8. What About Insourcing Companies? • We can also track activity of U.S. affiliates of foreign-headquartered multinationals in the United States. What do we see? Year 1990 2000 2005 MOFA Jobs 3,841,700 5,656,500 5,103,200 MOFA Capex $61.8 billion $113.0 billion $120.9 billion

  9. What About Paychecks? • Growth in earnings has lagged productivity growth and has also aggravated income inequality. • Growth in mean real total money earnings, by educational group, 2000 through 2005. • GroupEmployment ShareEarnings Growth HSDO 9.9% -4.6% HSG 29.8% -0.2% SC 27.9% -2.5% CG 21.1% -3.1% Masters 7.9% -1.8% Ph.D. 1.5% +2.9% MBA,JD,MD 1.9% +10.6%

  10. Public Opinions about Globalization • A plurality to majority of Americans oppose freer trade, immigration, and FDI. • Large majorities acknowledge all the gains we discuss. • But many worry more about perceived labor-market costs in terms of job separations and wage pressures. • The single most-important cleavage beneath these preferences: labor-market skills. • Not industry of employment. • If an American with 11 years of education were to complete both high school and college, the probability they support freer trade would rise by 30 percentage points. • In recent years support for trade has waned further, with a noticeable drop among higher earners.

  11. Public Opinions about Globalization • “In general, do you think that free trade agreements between the United States and foreign countries have helped or hurt the United States?” (WSJ/NBC) • December, 1999: 39% Helped vs. 30% Hurt • March, 2007: 28% Helped vs. 46% Hurt • “Are you personally benefiting from today’s global economy?” (WSJ/NBC March, 2007) • High-school graduates and below saying yes: 20%. • College graduates and above responding yes: 35%.

  12. Conclusions • The past several years of data look quite different from that of earlier years in terms of activities of multinational firms and in terms of overall U.S. growth in real income. • These new patterns broadly accord with the work of Alan Blinder, Catherine Mann, and others that argues more activities are now tradable across borders. • Careful research to make such connections remains to be done. Either way, the political support for open borders has been eroding shockingly fast.

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