Outsourcing Three Years Later: New Frameworks and Facts

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Outsourcing Three Years LaterNew 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

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The Conventional Wisdom Then
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The Conventional Wisdom Now
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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 firms U.S.
  operations?
  
• Substitution effects If U.S. labor and Indian
  labor are price substitutes (or complements) in
  the firms 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.

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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
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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
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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.
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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
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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.
  
• Group Employment Share Earnings 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

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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.
  

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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 todays
  global economy? (WSJ/NBC March, 2007)
  
• High-school graduates and below saying yes
  20.
  
• College graduates and above responding yes 35.

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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.