Problems measuring input price changes with
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Transcript Problems measuring input price changes with
Outsourcing, 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
Outline
Distinguishing import price measurement issues related
to product variety v. outsourcing & offshoring
Outsourcing and offshoring
o Definitions
o Causes
Problems measuring input price changes with changes
in sourcing
Evidence on growth of outsourcing & offshoring
Why measurement issue important
Distinguishing 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
o 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
Distinguishing 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:
o “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)
o Offshore outsourcing primarily concerns the substitution
of relatively homongeneous foreign inputs for domestic
inputs
Outsourcing & Offshoring
Use broad definition:
o Change in sourcing of inputs in the production of a good
or service
Types of outsourcing & offshoring:
o Switch from something produced internally in
organization to domestic supplier (domestic outsourcing)
o Switch from producing internally to foreign supplier
(offshore outsourcing) or to foreign affiliate (offshoring)
o Switch from domestic to foreign supplier (offshore
outsourcing)
Outsourcing & Offshoring
Examples:
o Manufacturer outsources labor services to staffing
agencies
o Manufacturer offshores first stage of production of good,
keeps final finishing of product in U.S.
o Bank offshores back office functions
o Retailer shifts from domestic to imported goods or
manufacturer switching from domestic to imported inputs
Driving force of outsourcing & offshoring:
o Factor price arbitrage: substitution of lower priced input
for internally or domestically produced good or service
o Reducing production costs for any given good or service,
not increase in product variety
Offshore Outsourcing & Offshoring
Trade models of comparative advantage appropriate for
offshoring phenomenon
o Product cycle theory of international trade (Vernon 1966)
o 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:
o Reduction tariffs (Feenstra, Reinsdorf, & Slaughter 2008)
o Reduction transportation & communication costs
o Economic & political reforms major parts of the world –
China, Eastern Europe
o Rapid economic development many countries
Problems 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
o Real value of outsourced or offshored input understated –
price index growth overstated,
o Real domestic output and/or sector value-added growth
overstated,
o Aggregate and/or sectoral productivity overstated
Problems measuring input price changes with changes in
sourcing (cont.)
Certain tasks outsourced or offshored – labor input now
becomes purchased services or materials input—no
price drop measured across input categories (Houseman
2006, 2007)
o
o
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
o “slicing the value chain” (Krugman 1996), “intra-mediate
trade” (Antweiler & Trefler), “disintegration” (Yuskavage
et al. 2008)
Problems measuring input price changes with changes in
sourcing (cont.)
Shift from domestic, internal production to domestic
contractor or offshore – Affects measurement for goods
& services:
o Services: Mann (2004) emphasizes lack of prices for
services – need to develop with growth services
offshoring
o 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
o No link between domestic price series & import price
series → input price drop not captured
o Business Week furniture example (Mandel 2007)
Shift from one foreign supplier to another
o Price drop captured only if importer the same
Size of any bias to output & productivity measures
Don’t know – But body of evidence suggests growing
importance of outsourcing & especially offshore
outsourcing/offshoring
o Rapid increase in imports relative to GDP
o Growth of imports dominated by growth of imports
from developing countries – especially China
o Studies indicate rapid shifts in sourcing of intermediate
inputs
Growing Importance of Imports from Developing Countries
Imports as percent GDP
grew from 10.8% in 1989
to 17.0% in 2007
Developing countries—
growth non-oil imports:
o
o
56% 1989-2000
70% growth 2000-2007
Imports and Exports as
Percent of GDP, 1989-2007
30
Imports + Exports
25
20
Growth imports from
China especially
dramatic:
15
13% growth non-oil
imports 1989-2000
39% growth 2000-2007
5
o
o
Imports
Exports
10
0
1989
1992
1995
1998
2001
2004
2007
Evidence 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
Manufacturing Real Output and
Employment 1989-2007
(Indexes, 1992=100)
170
Value-added
150
130
Sectoral Output
110
90
Growth imported
intermediates esp. strong
manufacturing – accelerated
1997-2005
Employment
70
50
1989
Yuskavage, Strassner, Medeiros (2008);
Kurz & Lengermann (2008)
1992
1995
1998
2001
2004
2007
Why 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:
o Employment, esp. manufacturing employment?
o Wages and wage inequality?
o Consumer prices?
Data not suited for answering these questions
o Structure of sourcing assumed stable
o Price drops associated with outsourcing & offshoring not
adequately measured
o Studies biased against finding impacts
Other 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
Data point from the furniture industry
Manufacturer produced desk in Holland, Michigan:
o
Cost of production
$3,750
o
Sale price
$5,000
o
Profit
$1,250
Shifted production to the Philippines
o
Cost of production
$ 500
o
Sale price
$4,500
o
Profit
$4,000
Example illustrates
o
Cost savings/input price declines can be large
o
Manufacturer becomes wholesaler
o
Changes in CPI from domestic to imported good may not be good
measure of input price change