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International Outsourcing and the Demand for Skills Kurt Kratena WP8 EUKLEMS Consortium Meeting Brussels, 15 - 17 March, 2007.

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Presentation on theme: "International Outsourcing and the Demand for Skills Kurt Kratena WP8 EUKLEMS Consortium Meeting Brussels, 15 - 17 March, 2007."— Presentation transcript:

1 International Outsourcing and the Demand for Skills Kurt Kratena WP8 EUKLEMS Consortium Meeting Brussels, 15 - 17 March, 2007

2 Motivation Stylized facts: Increase in the wage gap between skilled and unskilled workers (U.S and UK) or employment shifts (increasing unemployment of unskilled) with stable wage structures (continental EU countries) Increased use of inputs, e.g.: skilled labour imported materials Decreased use of inputs: Unskilled workers (in particular older workers)

3 Outsourcing & demand for skills Methodological questions (Feenstra, Hanson, 2001): (i) single (relative) labour demand functions: Berman, Bound and Griliches, 1994; Feenstra, Hanson (1999), Amiti, Wei (2004). (ii) system of labour demand equations derived from a flexible cost function: Morrison-Paul, Siegel, 2001; Eckholm, Hakkala 2006; Hijzen, Görg and Hine (2005) advantage of (ii): theoretical consistency (elasticities), econometric results based on efficient estimation technique

4 Outsourcing & demand for skills Methodological questions (i) outsourcing as a quasi fixed factor like factor biased technical change: most studies (ii) outsourcing as a variable factor = imported intermediates: Falk, Koebel 2002; Tombazos, 1999. Measures of outsourcing: (iii) imports of intermediates from the same industry = narrow measure (iv) total imported intermediates (in EUKLEMS without energy!) = broad measure advantage of (ii) over (i) : directly quantifying the role of prices for outsourcing (= substitution).

5 Outsourcing & demand for skills Methodological approach Cost and factor demand functions with different skills of labour and outsourcing as imported intermediates (without energy): (i) own and cross price elasticities (ii) impact of outsourcing on costs (~ productivity) EU countries: Austria, Finland, Germany, Italy Sweden (geography criterion) Pooling across countries (not industries)

6 Outsourcing & demand for skills Data issues Basic data of EUKLEMS: capital stock gross output inputs of intermediates (values & volumes) inputs of labour (skilled/unskilled, compensation & hours) Additional data from other sources (Eurostat or national): inputs of imported intermediates (values & volumes): (i) full use matrices for imports (ii) import price indices Interpolation of import matrices ?

7 Outsourcing & demand for skills Data issues Additional data from other sources by countries Italy: Statistics Italy, WIFO Austria: Statistics Austria, WIFO Germany: ? Finland: EUKLEMS consortium partner (?) Sweden: Eckholm, Hakkala 2006 (EUKLEMS consortium partner ?), WIFO

8 Outsourcing: Methodology General Translog cost function with i variable factors: i = L (unskilled), H (skilled), M M (imported intermediates), M D (domestic intermediates) and capital stock (x K ), gross output (Y) and deterministic trend (t), Berndt, Hesse (1986):

9 Outsourcing: Methodology General Translog cost function: homogeneity and constant returns to scale imposed Deriving factor demand (Shephards Lemma):

10 Outsourcing: Methodology General Translog cost function: homogeneity and constant returns to scale imposed Deriving shadow price of capital (Berndt, Hesse 1986): System estimation (SUR) of: cost function, factor demand and shadow cost equation. Own price elasticity: Cross price elasticity:

11 Outsourcing: Methodology Impact on costs: Definition of cost equation with input coefficients w i =x i /Y : dynamic cost equation: with Decomposition into: (i) substitution effects (ii) price effects

12 First empirical results (Austria) Import matrices for Austria: 1995, 2000, 2001 Interpolation of import matrices for 1988 – 2004 (similar to Eckholm, Hakkala 2006): import destination, not constant as in Eckholm, Hakkala (2006) Import prices based on unit value indices at 3 digit NACE with outlier detection (relative variance of 3 digits within 2 digits industry)

13 First empirical results (Austria) Stylized facts for Austria 1988 – 2004 1. Input coefficient of imported intermediates

14 First empirical results (Austria) Stylized facts for Austria 1988 – 2004 2. Input coefficient of unskilled labour

15 First empirical results (Austria) Own price elasticities of factor demand

16 First empirical results (Austria) Cross price elasticities of labour

17 First empirical results (Austria) Unskilled labour and imported intermediates are substitutes in 7 out of 12 manufacturing industries (especially: transport equipment, machinery, textiles) Skilled labour and imported intermediates are substitutes in almost all manufacturing industries (especially transport equipment, wood, pulp and paper/printing) which skill aggregation is appropriate ? (aggegating medium skill category to high or low ?) Both categories of labour are complements in 5 out of 12 industries Domestic intermediates are rather a substitute for high skilled labour than for low skilled labour (domestic outsourcing)


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