EU 6th framework, EUKLEMS
WP 8: Labour Markets and Skill Formation
1) Modelling the Demand for Heterogeneous
Labour
2) Background paper: The Impact of
International Outsourcing on Employment:
Empirical Evidence from EU-Countries
Martin Falk and Yvonne Wolfmayr
WIFO
WP 8: Labour Markets and Skill Formation
Stylized facts:
• Input factors such as information and communication
technologies, imported materials, purchased services, skilled
labour as well as general capital have been increasingly used in
production
• Relative demand for low skilled labour decreases faster over
time than does supply
• Decline in the demand for older workers
• Stable relative wages in some EU countries; rising skill
premium in UK, US etc.
• Input prices of imported materials grew at a smaller rate than the
wages
WP 8: Labour Markets and Skill Formation
Research questions:
• Relationship between output and employment by skill level and
age
• Labour-labour substitution and wage elasticities of different types
of workers
• Capital-Skill complementarity
• Skill-biased technology change
– Impact of R&D capital on heterogeneous labour
– Impact of information technology capital on heterogeneous
labour
• Impact of outsourcing on labour demand and productivity
– Outsourcing of services
– Outsourcing of production
• The labour demand for older workers („age-biased technological
change“)
WP 8: Labour Markets and Skill Formation
• Under cost minimization: Cost function is a function of input
prices, fixed factors and output
C  c(Y ,W11 ,....Wnm , K , T )
• Translog cost function:
ln C   0   i ln Pi   k ln K   yY   T T 
i 1
N
N
N
N
1
 ij ln Pi Pj   ßik ln Pi ln K   ßiy ln Pi ln Y 

2
i 1 j 1
i 1
i 1
N
ß
i 1
it
ln Pi ln T
WP 8: Labour Markets and Skill Formation
• Factor cost share equations
 ln C *  ln C *
 ln C
S 
; S2 
; SN 
 ln P1
 ln P3
 ln PN
*
1
• Joint estimation of cost function and factor demand
– => identification of the productivity and factor demand effects
• Indicators of technological change
– R&D capital stock, R&D intensity, R&D spillovers
– Infomation technology capital stock
– High-Tech capital stock (electrical equipment, instruments...)
• In case of two types of labour, the estimation equation becomes:
W1
S1  1 ln
  2 ln K   3 ln Y   4 ln T
W2
WP 8: Labour Markets and Skill Formation
Disaggregation of labour
• Educational qualification
(i) Compulsory school (isced 0-2)
(ii) Higher general secondary school (isced 3a), Apprentice training (isced 3b),
Higher technical and vocational college (isced 4ab)
(iii) academic degree, university degree and post graduates
• Age and gender
Estimation Problems:
• Estimation of elasticities of substitution become impracticable
when the number of factors in the system is large
• Multicollinearity caused by very high correlation between wage for
different skill levels
• Use of interpolated data
• Dynamic specification, adjustment costs
WP 8: Labour Markets and Skill Formation
Previous literature
• Technology and skills, Cross-country studies
– Hollanders, ter Weel (2002): manufacturing four EU countries,
white collar high and low-skilled, blue-collar high and low
skilled, foreign and domestic R&D capital stock
– Machin and Van Reenen (1998), blue/white collar
– O‚Mahoney, Robinson and Vecchi (2004): educational
qualification, IT and general capital
– Morrison-Paul and Siegel (2001)
– numerous studies studies for individual countries, see Autor,
Katz and Krueger (1998)
WP 8: Labour Markets and Skill Formation
• Labour-Labour substitution and own-wage elasticities
– Hamermesh (1993): own-wage elasticities (in absolute terms) decrease
with the skill level
– Mellander (2000), four educational qualification groups, Swedish
manufacturing data, 20 industries: the own-wage elasticity decreases with
the skill level
– Riley and Young (1999), five educational qualification groups, U.K.
industry panel data mixed results for the ranking of own-wage elasticities
by skills
• Capital-Skill complementarity: Krusell, Ohanian, Rios-Rull and
Violante (2004)
– capital-embodied technological change alone can account for most of the
variations in the skill premium
WP 8: Labour Markets and Skill Formation
Previous literature
– use of quality-adjusted prices for a number of durable equipment
categories such as office and computing equipment including peripheral
equipment and accounting machinery (OCAM), communication
equipment, general industrial equipment and transportation equipment.
– There has been a strong decline in the relative price of equipment (ratio
of the price index for capital equipment and the price index for
consumption of non-durables and services) of about 7 percent per year
– Strong increase in the stock of equipment.
• International Outsourcing and demand for skills
– Feenstra and Hanson (1999) for the US, Anderton and Brenton (1999),
Hijzen, Görg and Hine (2004) for the UK, Geishecker (2002) for
Germany; Strauss-Khan (2003), Egger and Egger (2001) for Austria….
• NEXT STEPS: Survey paper
Background paper WP 8: The Impact of
International Outsourcing on Employment
Motivation:
• Imported materials are one the fastest growing input factor used
in production
• Imports from low income Central and East European and East
Asian countries most dynamic component of trade
• Effects of outsourcing
– employment losses
– negative distributional effects
– productivity gains
– gain in competitiveness and market position
• Aim of the paper:
– New insights into the employment effects of international
outsourcing.
– Extension of previous work: (i) cross-country study, (ii)
Disaggregation:imported materials from high and low wage
countries (iii) robustness checks
Outline
•
Previous literature
•
Empirical model and hypotheses
•
Data and descriptive statistics
•
Estimation results
•
Conclusions
Previous literature
•
Huge literature on the impact of outsourcing on skilled and unskilled workers; in
this study: total employment
•
Negative correlation between employment growth and imports/import prices
(Sachs and Shatz, 1994; Greenaway et al., 1999; Revenga, 1992).
•
Sachs and Shatz (1994): Industry employment levels fall due to imports from
developing rather than developed countries.
•
Neven and Wyplosz (1996): Imports from developing and developed countries
have similar effects
•
Landesmann, Stehrer and Leitner (2001):
– import penetration from emerging countries have a significant negative effect
on employment growth in the period 1982-1988; effect disappears in the
1990s.
– Effect is stronger in the high-skill intensive industries than in the low-skill
intensive industries
Empirical model and hypotheses
•
Labour demand model
ln Lit  ß0  ß1 ln Yit  ß2 ln WPit  ß3 ln IMQit  t  i   it .
– Lit: total employment
– Yit: value added in constant prices
– WPit: real wage
– IMQit: imported materials from the same industry as a percentage of
gross output
•
Estimation equation:
 ln Li   0  1 ln Yi   2  ln WPi   3IMQi  i
∆: average annual change of the variables between 1995-2000
•
Estimation methods: (i) OLS using first differences, (ii), robust
regression, (iii) median regression (iv) weighted OLS with employment
shares as weights
Research questions
•
Impact of imported materials on employment
•
Impact of imported materials from low-wage and highwage countries on employment
•
Heterogeneity across industries:
(i) two broad industry groups : NACE 29-35 and NACE
15-28; 36
(ii) Declining and expanding industries
Data
•
•
Input-Output Table 1995 and 2000 (Eurostat)
– imported intermediates
– 7 EU countries (Aut, Dk, Fl, G, I, NL, Sw)
– NACE 2-digits; manufacturing
– No regional breakdown of material imports
Definition of outsourcing
– narrow measure: purchases from within the same industry
class
– imported intermediates as percent of gross output
•
UN Foreign Trade Database: High wage – Low wage countries
•
OECD STAN Data
Descriptive statistics
•
Share of imported intermediates in gross production: 8.8%
(7.2% high wage countries; 1.6% low wage countries).
•
Strong increase of the share of imports of intermediates from lowwage countries (+9% p.a.)
•
Kruskal-Wallis test:
– high outsourcing industries subject to significantly higher
negative total employment growth than low outsourcing
industries
– Employment losses in these sectors are significantly higher if
inputs are sourced from low-wage countries.
Data:
high wage countries in 2000
7
EU
nd
Sw s
ed
en
rla
et
he
Ita
ly
Low-wage countries
High-wage countries
Au
st
ria
D
en
m
ar
k
Fi
nl
an
d
G
er
m
an
y
16
14
12
10
8
6
4
2
0
Imported materials (from the same industry) in low wage and
N
•
Growth of Outsourcing 1995-2000
Average annual percentage change
16
High-wage countries
14
Low-wage countries
12
10
8
6
4
2
0
7
EU
ed
en
he
rla
et
Sw
nd
s
ly
Ita
N
G
er
m
an
y
nd
Fin
la
ar
k
en
m
D
A
us
t
ria
-2
Summary statistics
Mean Q50 Q25 Q75 Std. Dev Min Max
all manufacturing industries (# of obs: 144)
Average annual growth rate
between 1995 and 2000 (%):
Value added in constant prices
3.3 2.3 0.0
Total employment
-0.8 -0.4 -2.2
Real wages
1.6 1.4 -0.7
Absolute average annual change
between 1995 and 2000 (percentage points):
Imported materials (IM) % gross prod.
0.25 0.11 -0.06
IM from low-wage countries % production
0.1 0.04 -0.15
IM from high-wage countries % production
0.11 0.05 0.01
5.0
1.3
3.5
8.4 -28.9 55.6
3.9 -22.2 11.3
7.0 -27.3 55.6
0.43
0.23
0.15
0.7 -1.46 4.73
0.64 -1.96 4.84
0.18 -0.15 1.07
Data:
Most important outsourcing sectors
• Low-wage countries:
–
–
–
–
–
leather
office machinery and computers
TV, radio, communication equipment
textiles, apparel
basic metals
• High-wage countries
–
–
–
–
chemical products
transport equipment and motor vehicles
office machinery
communication equipment
Estimation results
•
•
•
•
Negative and significant impact of imported materials from lowwage countries
No impact of total imported materials
Imported materials from high-wage countries are positive but not
significant
Sample split regressions:
–
–
•
negative and significant effect of total imported materials and imported
materials from low-wage countries in less skill intensive manufacturing
industries
no effect in machinery, electrical, optical and transport equipment
Quantile regressions
–
Effect of outsourcing is more pronounced at the low end of the conditional
employment distribution (declining industries)
OLS results, Labour demand
(i)
ln value added const. p.
ln real wages
 imported materials (IM)
% production (Q)
IMQ low-wage countries
IMQ high-wage countries
constant
2
Adj. R
# of obs
(ii)
(iii)
(iv)
coeff t
coeff
t
coeff
t
0.15 4.4 0.16 5.0 0.16 4.5
-0.31 -6.2 -0.32 -7.9 -0.34 -6.2
-0.07 -0.1
coeff t
0.17 4.9
-0.35 -5.9
-4.50 -3.3
-4.79 -3.5
0.68 1.2
0 -1.1
0.54
144
-0.01 -2.8
0.53
144
0.45 0.9
0 -1.1 -0.01 -2.9
0.54
0.50
144
144
Dep: var: average annual growth rate of total employment between 1995-2000.
t-values are based on heteroscedasticity consistent standard errors.
Empirical results
OLS estimates
weighted OLS estimates
Median regression estimates
OLS estimates
weighted OLS estimates
Median regression estimates
constant
imports from
low-wage
countries
real wages
value
added c. p.
Predicted
employment
actual
employment
Contribution of Sources of Labour Demand Growth (percentage points
all manufacturing industries, total sample
0.53 -0.50
-0.77 -0.77
-0.49 -0.31
0.44 -0.21
-0.07 -0.07
-0.26 -0.04
0.42 -0.44
-0.41 -0.38
-0.28 -0.08
less skill intensive industries
0.31 -0.40
-1.30 -1.30
-0.74 -0.47
0.70 -0.35
-0.53 -0.53
-0.30 -0.58
-0.60 -0.59
0.32 -0.35
-0.25 -0.31
These calculations are based upon the average annual change in the explanatory variables multiplied by the regression coefficients.
Conclusions
•
•
•
•
Imports from low-wage countries have a negative and
significant effect on employment
Imports from industrialised countries have no effect
Observed change in outsourcing accounts for an
employment reduction of 0.26 percentage points per year.
Magnitude of the effect differs across industries.
– large effect in less-skill intensive industries
– no effect in machinery, electrical, optical and transport
equipment.
– no effect in expanding industries
•
Future work:
– Disaggregation of employment by skills => heterogenous labour
demand
– Outsourcing of services
– Longer sample