EU 6th framework, EUKLEMS WP 8: Labour Markets and Skill Formation 1) Modelling the Demand for Heterogeneous Labour 2) Background paper: The Impact of.

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

• Translog cost function:

),,,....,( 11 TKWWYcC nm

TPß

YPßKPßPP

TYKPC

i

N

iit

i

N

iiyi

N

iikji

N

i

N

jij

Tyki

ii

lnln

lnlnlnlnln2

1

lnlnln

1

111 1

10

WP 8: Labour Markets and Skill Formation • Factor cost share equations

• 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:

NN P

CS

P

CS

P

CS

ln

ln;

ln

ln;

ln

ln *

3

*2

1

*1

TYKW

WS lnlnlnln 432

2

111

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

– 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:

∆: 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

.lnlnlnln 3210 itititititit IMQßWPßYßßL

iiiii IMQWPYL 3210 lnlnln

Research questions

• Impact of imported materials on employment

• Impact of imported materials from low-wage and high-

wage 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 low-

wage 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:

02468

10121416

Austri

a

Denm

ark

Finlan

d

Germ

any

Italy

Nethe

rland

s

Sweden

EU 7

Low-wage countriesHigh-wage countries

• Imported materials (from the same industry) in low wage and

high wage countries in 2000

Growth of Outsourcing 1995-2000Average annual percentage change

-2

0

2

4

6

8

10

12

14

16

Austria

Denm

ark

Finland

Ger

many Ita

ly

Nethe

rland

s

Swed

en EU 7

High-wage countries

Low-wage countries

Summary statistics

Mean Q50 Q25 Q75 Std. Dev Min Max

Average annual growth rate

between 1995 and 2000 (%): Value added in constant prices 3.3 2.3 0.0 5.0 8.4 -28.9 55.6

Total employment -0.8 -0.4 -2.2 1.3 3.9 -22.2 11.3 Real wages 1.6 1.4 -0.7 3.5 7.0 -27.3 55.6Absolute average annual change between 1995 and 2000 (percentage points):

Imported materials (IM) % gross prod. 0.25 0.11 -0.06 0.43 0.7 -1.46 4.73 IM from low-wage countries % production 0.1 0.04 -0.15 0.23 0.64 -1.96 4.84 IM from high-wage countries % production 0.11 0.05 0.01 0.15 0.18 -0.15 1.07

all manufacturing industries (# of obs: 144)

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 low-wage 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) (ii) (iii) (iv)coeff t t coeff t t

ln value added const. p. 0.15 4.4 5.0 0.16 4.5 4.9ln real wages -0.31 -6.2 -7.9 -0.34 -6.2 -5.9 imported materials (IM) -0.07 -0.1% production (Q)IMQ low-wage countries -3.3 -3.5IMQ high-wage countries 0.45 0.9 1.2constant -0.01 -2.8 -1.1 -0.01 -2.9 -1.1

Adj. R2

# of obs0.54

0

coeff coeff

0.53 0.54 0.50144 144 144 144

00.68

-4.50 -4.79

-0.32 -0.350.16 0.17

Dep: var: average annual growth rate of total employment between 1995-2000. t-values are based on heteroscedasticity consistent standard errors.

Empirical results

These calculations are based upon the average annual change in the explanatory variables multiplied by the regression coefficients.

act

ual

empl

oym

ent

Pre

dict

ed

empl

oym

ent

real

wag

es

impo

rts

from

lo

w-w

age

coun

trie

s

cons

tant

-0.77 -0.77 -0.50 -0.49 -0.31-0.07 -0.07 -0.21 -0.26 -0.04-0.41 -0.38 -0.44 -0.28 -0.08

-1.30 -1.30 -0.40 -0.74 -0.47-0.53 -0.53 -0.35 -0.30 -0.58-0.60 -0.59 -0.35 -0.25 -0.31Median regression estimates 0.32

valu

e ad

ded

c. p

.

OLS estimates 0.31weighted OLS estimates 0.70

Median regression estimates 0.42less skill intensive industries

OLS estimates 0.53weighted OLS estimates 0.44

all manufacturing industries, total sample

Contribution of Sources of Labour Demand Growth (percentage points

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