Ebook Outsourcing, Labor Productivity, and Wage Inequality in the US: A Primal Approach
For the last two decades, we have observed a remarkable increase in outsourcing in the world. Two strands of literature investigating this ongoing phenomenon have emerged. The first strand takes the view that the increase in outsourcing emanates from the decline in transaction costs in connection with the intensified use of information technology (see, for instance, Abraham and Taylor, 1996). The main research question in this literature concerns the impact of outsourcing activities on productivity. In the second strand, the trade-related aspects of outsourcing have attracted increasing attention (see, for instance, Feenstra and Hanson, 1996, 1999). The main subject here is the impact of outsourcing on wage inequality for skilled and unskilled workers. The former strand centers on a firm’s decision to contract out business activities and does not distinguish between international and domestic outsourcing (we have coined the term “general outsourcing” to describe this) or between skilled and unskilled labor productivity, whereas the latter strand deals with the role of mainly international outsourcing as a mechanism for moving unskilled-intensive production to unskilled-abundant countries, thereby affecting wage differentials within industries.
Is there any link between these two strands? In this paper, we argue that, given the nature of competitive economies, the skilled and unskilled labor productivity impacts of general and international outsourcing and their wage differentials may be related. Our idea is that either general outsourcing or international outsourcing may be biased toward skilled labor productivity, and thus the biased impacts on skilled labor productivity may result in wage differentials between skilled and unskilled workers in labor markets. We attempt to empirically investigate such linkages based on six-digit NAICS US manufacturing industries. We also examine what type of outsourcing is more significant in explaining the linkages.
We adopt a primal approach. That is, we directly estimate the constant elasticity of substitution (CES) value-added function for the US manufacturing case. Hence, our framework may be subject to the potential endogeneity problem, resulting in inconsistent estimators, due to the fact that outsourcing decisions may be endogenously determined by other industry-specific factors. We tackle this problem by employing two-step non-linear estimators with instrument variables. Such a primal approach is different from that employed in existing studies in this area, in which a dual approach, estimating cost-share function, has commonly been used. However, according to Mundlak (1996), the estimates based on a primal approach, unlike indirect estimators of the cost function, can optimally utilize all the available information and therefore are statistically efficient.
The main benefit of this approach lies in the fact that it provides us with a unified framework in which we can link outsourcing and labor productivity and then link labor productivity and wage differentials. For the first link, the primal approach, estimating production functions, enables us to construct a marginal productivity of skilled and unskilled labor. Furthermore, we can investigate the segregated impacts of general and international outsourcing on skilled and unskilled labor productivity, respectively. For the second link, by utilizing the marginal productivities of skilled and unskilled workers in the two different outsourcing environments, we can examine the impact of the outsourcing activities on wage differentials, given the nature of competitive economies.
Our main findings can be elaborated as follows. First, general and international outsourcing entail positive non-neutral technological shifts of skilled and unskilled workers. More importantly, they are all skilled-biased in the sense that non-neutral productivity gains from specialization in core-competent activities are more pronounced for skilled workers. Second, on average, general and international outsourcing bring about a productivity improvement for both unskilled and skilled workers in both the short run and the long run. However, we further find that, in the case of international outsourcing, the positive productivity gains prevail only in high-tech industries. Finally, the wage gaps in the US between skilled and unskilled workers during the period 2002-2005 are affected to a greater degree by general outsourcing than by international outsourcing, both in the short run and in the long run.
Download
PDF Ebook Outsourcing, Labor Productivity, and Wage Inequality in the US: A Primal Approach
Posted in :
