Intermediate good sourcing,wages and inequality: From theory to evidence

This paper examines the consequences of offshoring and outsourcing on domestic wages and wage inequality. I highlight the role of labor market frictions in impacting firms’ outsourcing and offshoring decisions; specifically, how differential costs of matching with workers affect the location of production (onshore or offshore) and how differential costs of assessing worker quality affect the ownership of intermediate production (intra‐firm or inter‐firm). I demonstrate how firm sourcing decisions can depend crucially on the industry skill intensity, which reflects the importance of worker–firm match quality, and as a result, the effect of offshoring on domestic labor depends on occupation and industry characteristics, as well as the ownership regime of trade. Bringing the theory to the data I rely on plausibly exogenous variation in the cost of inter‐ and intra‐firm offshoring to identify the effects of a change in each type of offshoring on domestic wages. I find strong evidence that the effect of offshoring on domestic wages—both on the average and on the wage distribution—is governed by the type of offshoring (inter‐ vs. intra‐firm), the skill intensity of the industry, and the offshorability of the occupation.     

LABOR MARKET EQUILIBRIUM WITH REHIRING

Consistent with the empirical evidence, this article analyzes a labor market in which separations are not permanent and reactivated firms prefer to rehire former employees instead of seek new ones. Workers engage in job search due to the uncertain prospects of rehiring. If firms can commit to wages contingent on rehiring, they backload wages to provide incentives for workers to reduce their unobservable search effort. Under risk aversion and incomplete markets, if productivity at reactivation is sufficiently high, the tension between wage backloading and consumption smoothing leads to excessive search in equilibrium.     

Offshoring and Firm Performance: Evidence from the Italian Manufacturing Industry

The fundamental question of whether offshoring is value enhancing and, more specifically, whether Italian manufacturing firms that undertake offshoring benefit from higher productivity and profitability is explored. Using data from the tenth wave of the “Survey on Manufacturing Firms” conducted by Unicredit‐Capitalia, it was found that, compared with domestic firms, firms relocating activities to a foreign country have different characteristics, and “better” firms might self‐select into offshoring decision. To disentangle the effect of offshoring on firms' performances from the effect of firm characteristics, several variants of propensity score matching are used. A mild and insignificant positive effect of offshoring on profitability was found and also evidence of a statistically significant positive effect of offshoring on productivity.     

Rent-sharing and collective wage contracts–evidence from German establishment-level data

Using German establishment-level data, this article analyses whether wages respond to firm-specific profitability conditions. Particular emphasis is given to the question of whether the extent of rent-sharing varies with collective bargaining coverage. In this context, two conflicting hypotheses are tested. The first one asserts that unions exploit their bargaining power at the firm level and appropriate a larger share of rents than the bargaining parties in uncovered firms. The second one states that unions favour a compressed intra-industry wage structure and suppress the responsiveness of wages to firm-specific profitability conditions. The empirical analysis provides strong support for the second hypothesis. While Pooled Ordinary Least Squares (POLS) estimates yield positive estimates of the rent-sharing coefficient in covered establishments, dynamic panel data estimates accounting for unobserved heterogeneity and the endogeneity of rents point to a rent-sharing coefficient of zero.     

Offshoring,immigration, and the native wage distribution

Abstract This paper presents a simple model that examines the impact of offshoring and immigration on wages and tests these predictions using U.S. state‐industry‐year panel data. According to the model, the productivity effect causes offshoring to have a more positive impact on low‐skilled wages than immigration, but this gap decreases with the workers’ skill level. The empirical results confirm both of these predictions and thus present direct evidence of the productivity effect. Furthermore, the results provide important insight into how specific components of offshoring and immigration affect the wages of particular types of native workers.     

Wage differentials, discrimination and efficiency

I analyze a large labor market where homogeneous firms post wages to direct the search of workers who differ in productivity. I show that the model has a unique equilibrium. The wage differential depends positively on the workers’ productivity differential only when the latter is large. When the productivity differential is small, high-productivity workers get a lower wage than low-productivity workers. This reverse wage differential remains even when the productivity differential shrinks to zero. However, the equilibrium is socially efficient. High-productivity workers always get the employment priority and higher expected wages than low-productivity workers. Although discrimination in terms of expected wages does not exist, conventional measures are likely to incorrectly find discrimination in the model.     

Foreign-owned firms around the world: A comparative analysis of wages and employment at the micro-level

This paper provides the first microeconomic cross-country analysis of the effects of foreign ownership on wages, employment and worker turnover rates. Using firm-level and linked worker-firm data, we apply a standardised methodology for three developed (Germany, Portugal, UK) and two emerging economies (Brazil, Indonesia). We find that wage effects are larger in developing countries, and that for each country the largest effect on wages comes from workers who move from domestic to foreign firms. Employment growth after foreign takeover is concentrated in high-skill jobs. In contrast to widespread fears, there is no evidence that wage gains come at the expense of greater job insecurity; separation rates actually fall slightly after takeover. We conclude that the positive effect of foreign ownership on wages is not primarily driven by its impact on incumbent wages, but by its impact on the creation of high-wage jobs.     

Going offshore or better staying in? Spatial relocation strategies and their impact on firm innovativeness

We analyse the short- to mid-run effects of spatial relocation strategies on firm innovativeness and productivity growth. Using conditional difference-in-difference estimation with multiple treatments, we find for a sample of German firms in 1999–2013 that offshoring has a statistically significant negative impact on the firms’ innovation activity and productivity growth vis-à-vis nonrelocating comparison firms. In contrast, we find a positive link between domestic relocation activities and the firms’ propensity to introduce a product innovation. Firms should thus carefully account for potentially distorting performance effects when deciding about the spatial scale of relocation strategies in the short to mid-run.     

How does FDI affect domestic firms’ wages? theory and evidence from Vietnam

This paper explores the role of inward foreign direct investment (FDI) as a determinant of domestic firms’ wages, namely wage spillovers. We first construct a theoretical model to demonstrate that the presence of FDI firms affects domestic firms’ expected average wages via productivity spillovers and a cut-off capability. We then estimate FDI-induced wage spillovers by employing IV-GMM estimator with a five-year panel dataset of a growing service industry in Vietnam. Despite FDI firms on average pay 2.25 times that of domestic firms, they put a downward pressure on domestic firms’ wages. A one percent increase in FDI presence causes domestic firms to cut average wages by 2.03 percent. The estimations also find that firm-specific features are attributable to significant differences in their wages as well as FDI-linked wage spillovers.     

Offshoring and product innovation

We propose an endogenous growth model with offshoring to investigate its effects on product innovation and growth in the country of origin. Offshoring is associated with reduced feedback from offshored plants to domestic labs as well as coordination problems between the offshored and domestic divisions of firms. Production and transport cost parameters affect the static decision to relocate plants but not R&D. Hence, offshoring may be chosen by firms when it damages the growth rate of their countries of origin. In particular, if offshoring reduces the feedback from plants to labs, it is likely to bring dynamic losses when the countries of origin are large, especially in sectors in which R&D is cheap and product differentiation is strong. It is also likely to slow growth in sectors in which contractual incompleteness gives a strong bargaining power to offshored divisions in intra-firm transactions. We thank Thierry Verdier, an anonymous referee and participants to the Final Conference of the EU funded Research Training Network “Trade, Industrialisation and Development”, held at Paris Jourdan Sciences Economiques on 26–27 October 2006, for helpful comments. The second author gratefully acknowledges financial support from MIUR.     

Quota removal and firm-level offshoring: Theory and evidence

Recent literature indicates that offshoring can effectively increase firm productivity and improve product quality. Therefore, global value chains have increased in importance. In this paper, we investigate the impact of export growth on firm-level offshoring. Removal of the quota on textile and clothing products in importing countries boosts China's exports of quota-restricted products. This removal offers a quasi-natural experiment. Using a difference-in-differences approach, we find that export growth induced by the quota removal increases the extensive and intensive margins of firm-level offshoring. The impact is more pronounced on domestic firms and firms that are engaged in ordinary trade. Our findings suggest additional gains from trade liberalization: trade liberalization not only boosts exports, but also enhances firm productivity and product quality through encouraging firm-level offshoring.     

Offshore Outsourcing and Productivity: Evidence from Japanese Firm‐level Data Disaggregated by Tasks

This paper examines the relationship of offshoring with productivity, based on the original survey data of Japanese firms. Productivity gains were found in the firms offshoring both manufacturing and service tasks, but not in the firms offshoring only either manufacturing or service tasks. This paper also finds that firms offshoring to various destinations tend to be more productive than non‐offshoring firms. These results suggest that the level of firms' engagement in offshoring is more important for productivity than whether or not firms engage in offshoring.     

Intra‐firm trade,exporting, importing,and firm performance

Abstract This paper examines firm heterogeneity in terms of size, wages, capital intensity, and productivity between domestic and foreign‐owned firms that engage in intra‐firm trade, firms that export and import, firms that import only, and firms that export only. As previously documented, heterogeneity between different groups of trading firms is substantial. Taking into account intra‐firm trade in addition to exporting and importing yields new insights into the productivity advantage previously established for exporting firms. The results presented here show that this premium accrues only to exporters that also import and to exporters that also engage in intra‐firm trade, but not to firms that export only. Using simultaneous quantile regressions, the paper illustrates that heterogeneity within different groups of trading firm is equally large. Some of this within‐group heterogeneity can be attributed to differences in trading partners.     

Microdata evidence on rent-sharing

We examine the effect of firm profits on wages for individual workers while focusing on the empirical complications associated with estimating the extent of rent-sharing. Controlling for worker and firm fixed-effects and using several instruments to deal with the endogeneity of profits, we report results indicating that Ordinary Least Square (OLS)-estimates strongly underestimate the effects of profits on wages. Moreover, the effect of profits on wages are estimated separately for firms with increasing and decreasing profits within a given time period. We find a positive and stable effect only in firms with increasing profits. This is in line with the idea that falling profits do not lead to wage cuts while increasing profits imply higher wages.     

Foreign firm entry in an open economy: the case of Portugal

The purpose of this paper is to analyse the entry process of foreign direct investment (FDI) in Portuguese industrial sectors. Portugal presents an interesting case where firms enter to take advantage of export opportunities. The results suggest that foreign firms possess the ability to overcome existing entry barriers that affect domestic firms. Apparently, foreign firms have different expectations about profitability than domestic firms, possibly due to foreign firms’ export-orientation to the rest of the European Union (EU). They appear to desire industries where other foreign firms have clustered. Above all, it appears that these foreign firms enter industries to exploit Portugal's chief location advantage in Western Europe: low wages. Portugal's FDI experience is relevant to other countries that have opened their economies to greater trade and investment and attracted export-oriented firms.     

Trade,tasks and training: The effect of offshoring on individual skill upgrading

We offer a theoretical explanation and empirical evidence for a positive link between increased offshoring and individual skill upgrading. Skill upgrading takes the form of on‐the‐job training, complementing the existing literature, which mainly focuses on the retraining of displaced workers. To establish a link between offshoring and on‐the‐job training, we introduce an individual skill upgrading margin into the Grossman and Rossi‐Hansberg ( 2008 ) model of offshoring. By scaling up worker's wages, offshoring creates previously unexploited skill upgrading possibilities, which lead to more training. Using data from German manufacturing, we establish a causal link between industry‐level offshoring growth and increased individual skill upgrading.     

International Trade,Offshoring and Heterogeneous Firms

Recent trade models determine the equilibrium distribution of firm‐level efficiency endogenously and show that freer trade shifts the distribution towards higher average productivity because of entry and exit of firms. These models ignore the possibility that freer trade also alters the firm‐size distribution via international firm migration (offshoring); firms must, by assumption, produce in their “birth nation.” We show that when firms are allowed to switch locations, new productivity effects arise. Freer trade induces the most efficient small‐nation firms to move to the large nation. The large country gets an “extra helping” of the most efficient firms while the small nation's firm‐size distribution is truncated on both ends. This reinforces the large‐nation productivity gain while reducing or even reversing the small‐nation productivity gain. The small nation is nevertheless better off allowing firm migration.     

The potential impact of China–US BIT on China’s manufacturing sectors

This article finds that the overall effect of the foreign direct investment (FDI) and thereby the China–US bilateral investment treaties (BIT) on Chinese manufacturing sector is positive, which raises the productivity and profitability of the firms, using various econometric models and other evidence. The manufacturing sector as a whole has already opened up to the world economy and needs to continue this process. The industries in the manufacturing sector do not need to be protected, except for in limited fields related to national security, scarce natural resources and well-defined strategic sectors. Gradual lifting of the protection may be needed in the short-run for a small number of vulnerable sectors. A moderate relaxing of the current restrictions will increase FDI in manufacturing from all countries by 4–8% under different assumptions. This effect will be small when only considering FDI from the USA. Domestic firms need to update their technology, reduce costs and learn management skills from their foreign competitors, while using the national treatment terms in BIT to enter the fields that are not open to domestic firms under current regulations. Domestic firms also need to set up firm-level global strategies and reallocate firms’ resources according to the changing investment environment, taking advantage of profit opportunities outside the domestic markets.     

The role of indicator selection in nowcasting euro-area GDP in pseudo-real time

This paper studies the correlates of subjective assessments of how easy it would be for a worker to find another job as good as the present one and how easy it would be for an employer to replace a worker. First, I study the correlates of these two subjective assessments. Second, I study whether respondents who report better chances of reemployment receive higher wages and whether respondents who think they are easy to replace receive lower wages. The results are consistent with the standard job-matching model, which predicts that wages increase with better outside opportunity of the worker and fall with better outside opportunity of the employer.     

FDI对我国内资企业员工工资的影响——基于不同地区和不同员工类型的实证分析

目前,无论是以销售收入还是以就业量衡量,FDI在我国制造业行业中的份额都是不断提高的。那么,FDI的存在对我国内资企业的员工工资有什么影响？文中利用世界银行关于我国2002年18个城市的制造业内资企业的数据,将企业员工分为生产员工和非生产员工两类,然后实证分析FDI对这两类员工工资的影响。结果发现,企业员工类型不同,企业所在城市生产率水平不同,FDI对内资企业的工资影响是不同的。