Outsourcing Three Years Later:
New Frameworks and Facts
Matthew J. Slaughter
Tuck School of Business at Dartmouth,
NBER, and CFR
CFR Roundtable Series
“Technology, Innovation, and American Primacy”
May 2, 2007
The Conventional Wisdom: Then
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The Conventional Wisdom: Now
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A Framework for Outsourcing
• Consider a U.S.-based investment-banking firm.
– Suppose that in response to a fall labor costs abroad, it decides to
relocate some of its banking activities to India.
– What happens to labor demand in the firm’s U.S. operations?
• Substitution effects:
If U.S. labor and Indian labor are price
substitutes (or complements) in the firm’s cost function, then a fall in
Indian labor costs leads to a decrease (or increase) in U.S. labor
demand.
• Scale effects: If falling labor costs in India lead to an expansion in firm
scale, then demand for U.S. labor may rise (even if U.S. labor and
Indian labor are price substitutes).
• Scope effects: If falling labor costs in India lead to an expansion in
firm scope (holding scale constant), then U.S. labor demand may fall
or rise depending on the labor intensity of the new lines of activity.
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Are Multinationals Exporting Jobs? Then
• We can count net jobs that U.S. multinationals
create abroad in all their foreign affiliates and
in their U.S. parents. What do we see?
Year
MOFA Jobs
Parent Jobs
1991
5,386,500
17,958,900
2000
8,171,400
23,885,200
91-00
+2,784,900
+5,926,300
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Are Multinationals Exporting Jobs? Now
• We can count net jobs that U.S. multinationals
create abroad in all their foreign affiliates and
in their U.S. parents. What do we see?
Year
MOFA Jobs
Parent Jobs
2000
8,171,400
23,885,200
2005
9,057,700
21,479,000
00-05
+886,300
-2,404,200
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What About Capital Investment? Now
• We can can also track capital investment by
both U.S. parents and their affiliates abroad.
What do we see?
Year
MOFA Capex
Parent Capex
2001
$110.8 billion
$413.5 billion
2005
$137.3 billion
$340.8 billion
01-05
+19.3%
-17.6%
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What About Insourcing Companies?
• We can also track activity of U.S. affiliates of
foreign-headquartered multinationals in the
United States. What do we see?
Year
MOFA Jobs
MOFA Capex
1990
3,841,700
$61.8 billion
2000
5,656,500
$113.0 billion
2005
5,103,200
$120.9 billion
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What About Paychecks?
• Growth in earnings has lagged productivity growth
and has also aggravated income inequality.
• Growth in mean real total money earnings, by
educational group, 2000 through 2005.
• Group
Employment Share
HSDO
9.9%
HSG
29.8%
SC
27.9%
CG
21.1%
Masters
7.9%
Ph.D.
1.5%
MBA,JD,MD
1.9%
Earnings Growth
-4.6%
-0.2%
-2.5%
-3.1%
-1.8%
+2.9%
+10.6%
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Public Opinions about Globalization
• A plurality to majority of Americans oppose freer
trade, immigration, and FDI.
• Large majorities acknowledge all the gains we discuss.
• But many worry more about perceived labor-market costs in terms
of job separations and wage pressures.
• The single most-important cleavage beneath these
preferences: labor-market skills.
• Not industry of employment.
• If an American with 11 years of education were to complete both
high school and college, the probability they support freer trade
would rise by 30 percentage points.
• In recent years support for trade has waned further,
with a noticeable drop among higher earners.
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Public Opinions about Globalization
• “In general, do you think that free trade agreements
between the United States and foreign countries
have helped or hurt the United States?” (WSJ/NBC)
• December, 1999:
• March, 2007:
39% Helped vs. 30% Hurt
28% Helped vs. 46% Hurt
• “Are you personally benefiting from today’s global
economy?” (WSJ/NBC March, 2007)
• High-school graduates and below saying yes: 20%.
• College graduates and above responding yes: 35%.
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Conclusions
• The past several years of data look quite different
from that of earlier years in terms of activities of
multinational firms and in terms of overall U.S.
growth in real income.
• These new patterns broadly accord with the work of
Alan Blinder, Catherine Mann, and others that argues
more activities are now tradable across borders.
• Careful research to make such connections remains to
be done. Either way, the political support for open
borders has been eroding shockingly fast.
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