Effects of out and insourcing

A recent paper in the NBER working paper series by Runjuan Liu and Daniel Trefler deals with the effects on the US labour market of outsourcing to China and India. The paper is Much Ado About Nothing: American Jobs and the Rise of Service Outsourcing to China and India, NBER Working Paper No. 14061, June 2008.

The paper sets out to examine the impact on labour markets within the US of offshore outsourcing in services, and only in services, to low-wage trading partners of the US; places like China and India. The effects of such outsourcing has been a big issue in the US. Liu and Trefler also look at "inshoring", that is the sale of services produced in the US to buyers in China and India not affiliated with the US seller. The paper users March-to-March matched Current Population Survey data for 1996-2006 to examine the impacts on three issues to do with the US labour market:

1. occupation and industry switching,
2. weeks spent unemployed as a share of weeks in the labor force, and
3. earnings.

In summary, their estimates show small positive effects of inshoring and smaller negative effects of offshore outsourcing. The net effect therefore being positive, but small. To give some context to their results Liu and Trefler write

To illustrate how small the effects are, suppose that over the next nine years all of inshoring and offshore outsourcing grew at rates experienced during 1996-2005 in business, professional and technical services i.e., in segments where China and India have been particularly strong. Then workers in occupations that are exposed to inshoring and offshore outsourcing (1) would switch 4-digit occupations 2 percent less often, (2) would spend 0.1 percent less time unemployed, and (3) would earn 1.5 percent more. These are not annual changes – they are changes over nine years – and are thus best described as small positive effects.

Thus the results show, importantly, that outsourcing has not been placing significant downward pressure on American wages.