Outsourcing is good for American job growth! Two data-intensive evidence

As more manufacturing and service jobs are outsourced to developing countries, complaints arise domestically that it is responsible for the “jobless growth” in the U.S.

Two research papers recently produced however provide evidence that outsourcing is actually good for American job growth. 

The first study, authored by Mihir Desai, Fritz Foley, and James Hines Jr., investigates migration of manufacturing production to developing countries. They show  that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation.

You may ask: “but the growth is not proportional – growth in the U.S. is smaller!”.  But this already is a serious blow to those who believe that the impact should have been negative!  Furthermore, 10% growth in compensation for foreign workers is much smaller than 4% growth in compensation for U.S. workers (who’s pay level starts at least 10 times that of their foreign counterparts.

The second study, authored by Mary Amiti and Shang-Jin Wei, looks into service outsourcing, which is feared by white-collar workers.

They show that,  in each of the past 10 years, the value of US insourcing (i.e. the value of business services expoerted by a country like the U.S., e.g., high-priced business consultants and lawyers in richer countries offering their services to the rest of the world) has been greater than that of US outsourcing! This is true even though the US has been running a trade deficit and an overall current account deficit.

Examining 100 sectors of the U.S. economy, they also show that there  is no evidence that the most outsourcing-intensive sectors have had systematically slower (or negative) job growth in the last decade. In fact, the millwork and plywood sector, the metal coating, engraving, and allied services sector, and the insurance industry have had some of the fastest increases in service outsourcing but at the same time also some of the fastest
rates of job creation.

Study 1: Foreign Direct Investment and Domestic Economic Activity   (pdf file)
Abstract:   How does rising foreign investment influence domestic economic activity? Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic operations, but this pattern alone is inconclusive, as foreign and domestic business activities are jointly determined. This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic distributions of foreign investment, to predict changes in foreign investment by a large panel of American firms. Estimates produced using this instrument for changes in foreign activity indicate that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending. The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse.

Study 2: Fear of Service Outsourcing: Is It Justified?   (pdf file)
Abstract:      The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what are the hypes and what are the facts. The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries "insourcing" is greater than outsourcing. Using the United Kingdom as a case study, we find that job growth at a sectoral level is not negatively related to service outsourcing.
(Also check out Raghuram Rajan and Shang-Jin Wei's op-ed "The non-threat that is outsourcing (pdf file))