Outsourcing/offshoring: Trade Costs and Outsourcing across Firms
The effects of outsourcing described in figure 1 can be thought of as occurring along the value chain of a firm.One naturalway to examine these changes is by examining the impact of falling trade costs on manufacturing establishments with different characteristics. It is likely that as firms move production activities offshore, they will outsource the least skilled activities (as depicted in figure 1), or close the plants focusing on these activities.
Bernard, Jensen, and Schott (2006) examine the implications of falling trade costs on U.S. manufacturers, and specifically examine the channels by which trade affects the distribution of economic activity. They find when trade costs in an industry fall, plants aremore likely to close.They also find that low productivity, nonexporting plants are more likely to die. This is one channel by which outsourcing can affect the distribution of economic activity. Falling trade costs tend to reduce the amount of economic activity at the low end of the productivity distribution. Because low-productivity plants also tend to be production-worker intensive, this change is likely to reduce the relative demand for unskilled workers.
Bernard, Jensen, and Schott (2006) also find that relatively high-productivity nonexporters in industries with falling trade costs are more likely to start exporting. The magnitude of the effect of falling trade costs on becoming an exporter is substantial. Because higher-productivity plants are more skilledworker intensive, as these plants expand they will increase the relative demand for skilled workers. They also find that existing exporters increase their shipments abroad as trade costs fall. Because exporters have relatively high-productivity plants, the expansion of the high end of the productivity distribution will tend to raise aggregate productivity (even if no plants changes its productivity). Because exporters are skill- and capital-intensive, thiswill also tend to increase relative demand for these factor inputs. Finally, these authors find that plants in industries with falling trade costs have faster productivity growth, possibly due to increased outsourcing.
It should be noted that the productivity increase associated with outsourcingmeans that the realwage of workers (even the less-skilled workers) need not fall due to outsourcing. That result is shown in the model of Feenstra and Hanson (1996), from which figure 1 is drawn. The same result occurs more strongly in the recentmodel of Grossman and Rossi- Hansberg (2006), where the real wage of less-skilled worker are guaranteed to rise due to the productivityenhancing effect of outsourcing.