Trade in High-Tech Services
J. Bradford Jenseny
McDonough School of Business, Georgetown University
Peterson Institute for International Economics
October 2007
Abstract
This paper examines the size, scope, and potential implications of trade in high-tech services
in the U.S. The results suggest that many service activities are tradable, tradable service activities tend to employ more educated workers and pay higher wages, and high-tech services account
for a large share of service activities that are tradable. Service exporters are more prevalent in
high-tech industries with larger establishments and higher wages. Within industries, service exporters tend to be larger, pay higher wages, and are more productive. Tradable service activities
seem consistent with U.S. comparative advantage and, as a result, less likely to be vulnerable
to o¤shoring. Consistent with this, recent employment growth in tradable service industries is
not signi…cantly di¤erent than employment growth in non-tradable service industries.
Keywords: Trade in services, o¤shoring, outsourcing, employment
JEL classi…cation: F14, F16, L84, L86
The author wishes to thank the Sloan Foundation, the MacArthur Foundation, and the National
Science Foundation (SES-0552029) for research support and Evan Gill for research assistance. Some of
the research in this paper was conducted while the author was a Special Sworn Status researcher of the
U.S. Census Bureau at the Center for Economic Studies. Research results and conclusions expressed are
those of the author and do not necessarily indicate concurrence by the Bureau of the Census. The paper
has not undergone the review the Census Bureau gives its o¢ cial publications. It has been screened to
insure that no con…dential data are revealed.
y
411 Old North, Washington, DC, 20057, tel : (202) 687-3767, email : [email protected]
Trade in High-Tech Services
1.
2
Introduction
International trade in services is growing rapidly. Over the period 1992 to 2005,
service exports have increased from $177 billion to $375 billion to account for 31 percent
of all U.S. exports and service imports have increased from $120 billion to $317 billion to
account for 17 percent of all U.S. imports. Coincident with increasing services trade, the
composition of displaced workers in the U.S. is changing. While manufacturing workers
have historically accounted for more than half of displaced workers, over the period 20012003, non-manufacturing workers accounted for 70 percent of displaced workers. The
share of job loss accounted for by workers displaced from Information, Financial Services,
and Professional and Business Services nearly tripled, from 15 percent during the 1979-82
recession to 43 percent over the 2001-03 period.1
There is growing concern that these trends are related and that even highly skilled
service jobs in advanced economies are vulnerable to import competition from low-wage
countries.2 The public discussion of the impact of services o¤shoring has been hampered
by the relative lack of information on the service sector in general and trade in services
in particular. If these trends are related, the changing mix of industries exposed to
international trade may have deep implications for the structure of U.S. industry and
labor markets in the future. Currently, there is little clear understanding of the size and
extent of services o¤shoring or what impact it is having on the U.S. economy. More
fundamentally, there is little empirical research examining international trade in services.
The objective of this paper is to examine the potential size, scope, and impact of trade
in services, particularly trade in "high-tech" services,3 on the U.S. economy.
An important factor in the lack of empirical research on trade in services, and its implications for the domestic economy, is the relative lack of detail in o¢ cial statistical data
on services trade. For example, in the manufacturing sector o¢ cial statistical information
on trade in goods is available for over 10,000 product categories by country. By comparison, una¢ liated trade in services is reported for fewer than 30 categories with limited
geographical detail. While the literature on services o¤shoring is expanding rapidly, relatively little is known about how many and what type of jobs may be at risk of relocation
1
See Jensen and Kletzer (2006).
See Blinder (2006).
3
The speci…c de…nition of "high-tech" used in this paper depends to a degree on the particular dataset
being used for the empirical analysis. It typically includes industries contained in NAICS sector 50 (Information; Financial services; Real Estate; Professional, Scienti…c, and Technical services; Management;
and Administrative Support) or occupations in Standard Occupational Categories Business and Financial
Operations; Computer and Mathematical, Architecture and Engineering, and Life Physical and Social
Sciences. In some cases, subsets of these categories are reported.
2
Trade in High-Tech Services
3
or which types of …rms might face competitive pressure through services trade.
To gain an understanding of how trade in services is likely to a¤ect the U.S. economy, this paper will draw on several sources. First, we review an emerging literature that
examines how individual …rms respond to changes in the trading environment in the manufacturing sector. This literature provides a rich set of conclusions of how increased trade
a¤ects manufacturing …rms. While some suggest that services are inherently di¤erent
from goods, there seems to be little reason to expect a priori that service producers will
behave any di¤erently than manufacturers. This paper will make several empirical comparisons between service producers and manufacturers throughout the paper to explore
this issue. Second, this paper will draw on and expand recent research that develops a new
methodology for identifying the potential size and scope of trade in services. The methodology uses the geographical concentration of service activities to identify what activities
are traded within the U.S. and then infers that activities that are traded within the U.S.
are likely candidates for trade with other countries. This paper exploits this methodology
to provide additional detail regarding high-tech service activities. The paper presents
analysis of newly developed establishment level data on the service sector to examine establishment characteristics of service exporters. The paper also examines net employment
growth in tradable and non-tradable high-tech service industries for preliminary evidence
of o¤shoring a¤ecting employment growth.
We …nd that many service industries exhibit geographic concentration similar to that
observed in manufacturing. Using geographic concentration as a proxy for "trade-ability"
there is a signi…cant share of U.S. employment in the service sector that appears to be in
tradable activities, in fact there is more employment in professional and business services
in industries classi…ed as tradable than in the manufacturing sector in tradable industries.
These …ndings suggest that there is the potential for signi…cant trade in services. Service
activities that are tradable are in general consistent with U.S. comparative advantage,
i.e. tradable service activities tend to use more educated and more skilled workers. This
is true both across industries and within industries. Business service producers have
characteristics, in terms of scale, wages, and even the use of other inputs, that are similar
to manufacturing. Service establishments that are engaged in exporting tend to be larger,
pay higher wages, and are more productive than non-exporters. In short, professional and
business services look a lot like manufacturing.
These results suggest that much of what we have learned regarding how trade a¤ects
manufacturing is likely to apply in professional and high-tech services. We can expect that
trade in services will likely have a signi…cant impact on the evolution of service industries
Trade in High-Tech Services
4
in developed economies. The impact will most likely be concentrated in relatively low
wage, low skill services …rst. Like in manufacturing, the pattern of trade will evolve
consistent with comparative advantage across countries. The increase in services trade
is also likely to increase productivity in the service sector, as it did in manufacturing.
Before moving to the analysis of trade in services, we …rst review recent research on how
trade a¤ects the manufacturing sector.
2.
Globalization and Manufacturing
There is a long history of theoretical work and empirical analysis of trade in goods at
the industry level that informs our view of how trade a¤ects the manufacturing sector.
The literature emphasizes that countries will trade goods where they have a comparative advantage –either through relative productivity di¤erences or through di¤erences in
relative factor endowments. Countries will tend to export goods that they are relatively
e¢ cient at producing, either because they have a technological advantage or because they
are relatively abundant in the factor important to a good’s production. Thus, capitalintensive countries like the U.S. tend to export capital-intensive products and import
labor-intensive products from countries where labor is abundant and wages are relatively
low.
2.1. Within Industry Heterogeneity
There is a growing body of empirical research using plant- and …rm-level microdata
for the manufacturing sector that demonstrates that the traditional assumption of a "representative" …rm in an industry is not appropriate for many research questions. Plants,
even within narrowly de…ned industries, exhibit considerable heterogeneity both in their
cross-sectional characteristics and in their behavior over time. The heterogeneity of plants
and …rms and the variation in their responses to globalization have clear implications for
the impacts of trade in services.
Bernard and Jensen (1995) provide some of the …rst plant-level results on U.S. exporters and …nd that exporters are relatively rare. Even in industries in which the U.S.
has a comparative advantage the majority of plants do not export, while even in import
competing sectors like textiles and apparel some …rms export. In addition to being relatively rare, exporters are strikingly di¤erent from plants in the same industry. Exporters
are signi…cantly larger than non-exporters in the same industry. Exporters are also more
capital intensive, more skilled worker intensive, and pay higher wages than plants of simi-
Trade in High-Tech Services
5
lar size, in the same industry, in the same state. Exporters are also more productive than
non-exporters in the same industry and region.
Bernard and Jensen (1999, 2006) also show that exporters are more likely to survive and have higher employment growth than non-exporters of similar size, in the same
industry, in the same region. Because exporters have di¤erent characteristics than nonexporters and because they have di¤erential growth and survival rates, the potential exists
for the behavior of exporters is associated with a reallocation of economic activity that
a¤ects aggregate measures like industry and aggregate productivity and the demand for
and returns to di¤erent factors of production (e.g. skilled workers).
Economists are now incorporating these empirical regularities into models of international trade and investment.4 While di¤ering in their details, these models have several
shared implications:
1. as trade costs fall, low productivity non-exporters are more likely to fail
2. as trade costs fall, high productivity non-exporters are more likely to start exporting
3. as trade costs fall, existing exporters should increase their exports
These models have direct implications for how increased trade will a¤ect …rms and
workers. If trade costs are reduced di¤erentially across industries (either because of policy or technology), industries with larger reductions in trade costs are likely to see more
churning within the industry. Because low productivity plants tend to use low-skill and
low-wage workers more intensively, the increased likelihood of plant failure has implications for the demand for low-skill workers. To the extent that particular industries or
low-productivity producers are concentrated in particular geographic areas, this will also
a¤ect distributional outcomes. In this section we review results that examine the impact
of international trade on U.S. manufacturers explicitly.
2.2. Competition from Low-Wage Countries
Bernard, Jensen, and Schott (2006a) examine the role of import-competition from lowwage countries on the reallocation of U.S. manufacturing within and across industries from
1977 to 1997. They focus on where imports originate (rather than their overall level), motivated by the factor proportions framework and the signi…cant increases in import shares
from low-wage countries like China. Their use of plant-level data provides a richer examination of U.S. producer responses to international trade, including plant exit and product
switching, than is possible with more aggregate data. Speci…cally, their analysis identi…es
whether reallocation within industries is consistent with U.S. comparative advantage.
4
For example, see Bernard et al (2003), Melitz (2003), and Bernard, Redding, and Schott (2006).
Trade in High-Tech Services
6
They show that low-wage country import shares and overall penetration vary substantially across both industries and time. Both components tend to be higher and to increase
more rapidly among labor-intensive industries such as Apparel and Leather. Other industries such as Textiles see only modest rises in both series. Finally, more capitaland skill-intensive sectors such as Transportation and Industrial Machinery experience
rapid growth of import penetration but little or no increase in the share of imports from
low-wage countries. They exploit this variation in low-wage import penetration across industries and over time to investigate the impact of import competition from very low-wage
countries.
They …nd that plant survival and employment growth are negatively associated with
industry exposure to low-wage country imports. Within industries, they show that manufacturing activity is disproportionately reallocated towards capital-intensive plants. Because there is an observed empirical regularity that capital-intensive plants also tend to
be more skill (non-production worker) intensive, the reallocation to more capital-intensive
plants will likely have implications for the relative demand for skilled and unskilled workers.5
2.3. Falling Trade Costs
In separate but related work, Bernard, Jensen, and Schott (2006b) examine the impact
of falling trade costs (both tari¤s and transportation costs) on U.S. manufacturers. They
…nd when trade costs in an industry fall, plants are more likely to close. This is one channel
by which international trade can a¤ect the distribution of economic activity, aggregate
productivity growth, and the demand or labor. Falling trade costs tend to reduce the
amount of economic activity at the low end of the productivity distribution. This tends
to raise aggregate productivity (even without any technological change at the plant level)
by truncating the low end of the productivity distribution. Because low productivity
plants also tend to be production worker intensive, this change is likely to a¤ect the
relative demand for unskilled workers.
They …nd that relatively high productivity non-exporters in industries with falling
trade costs are more likely to start exporting. Again, this will have distributional and
aggregate productivity implications. Because relatively higher productivity plants are
expanding, aggregate productivity will tend to rise. Also, because higher productivity
plants tend to be more skilled worker intensive, as these plants expand they will tend to
5
Bernard and Jensen (1997) examine the impact of reallocation to exporters on the relative demand
for and wages paid to skilled workers in the U.S. manufacturing sector.
Trade in High-Tech Services
7
increase the relative demand for skilled workers.
They also …nd that existing exporters increase their shipments abroad as trade costs
fall. Exporters are relatively high productivity plants and 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, this will also
tend to increase relative demand for these factor inputs.
Bernard, Jensen and Schott also provide evidence of productivity growth within plants
in response to decreases in industry-level trade costs. All of the previous channels would
have increased aggregate productivity without any plant-level productivity growth, merely
by increasing the share of economic activity at more productive producers. Bernard,
Jensen, and Schott also …nd that decreases in trade costs, and the increased competitive
pressure associated with it, increases productivity at the plant level.
Not surprisingly, given the number of channels by which falling trade costs shift the
distribution of economic activity towards more productive plants, they …nd that industries
experiencing relatively large declines in trade costs exhibit relatively strong productivity
growth.
We know a considerable amount about the reaction of …rms to increasing trade in the
manufacturing sector. How much of the insight from the manufacturing sector translates
to the service sector? Or to put it di¤erently, how di¤erent is the service sector from the
manufacturing sector?
3.
Are services inherently di¤erent than manufacturing?
As described above, we have considerable knowledge regarding the impact of trade on
the manufacturing sector and its implications for …rms and workers. The question posed
by increased trade in services is "Are services inherently di¤erent?" Part of the di¢ culty
in answering this question is there is a paucity of empirical work on the service sector
in general and trade in services in particular. The lack of empirical work derives in part
from the fact that the data infrastructure in services is less developed than that for goods.
In this section we examine how the service sector compares to the manufacturing sector
along one key dimension –the geographic concentration of productive activity within the
U.S.
There is a long tradition among economists of using the geographic concentration
of economic activity to identify a region’s "export base" or "manufacturing base." The
thinking was that if a region specialized in a manufacturing activity – think airplanes
in Seattle – it was likely to export the product in which it specializes. Seattle has a
Trade in High-Tech Services
8
disproportionate share of U.S. aircraft manufacturing employment. This is not because
people in Seattle consume more airplanes than other parts of the country; they export
the planes in exchange for other goods and services.
This same type of logic applies to services. Economists have long thought of many
services as "non-tradable" because services seem to require face-to-face interaction. The
quintessential services are personal services like haircuts or divorce lawyers. These service
activities tend to be distributed in proportion to the population in a region (and thus
we don’t see big concentrations of these types of service activities in one place). But
increasingly, there are services that don’t seem to require face-to-face interaction and
thus might be tradable. We can use this feature to distinguish between service activities
that are tradable and those that require face-to-face interaction (and thus are far less
likely to be traded).
Let’s go back to Seattle. Figure 1 shows the location quotient for several industries
in Seattle.6 Indeed, Seattle has a disproportionate share of U.S. aircraft manufacturing
employment (about 9 times Seattle’s share of the population). We are accustomed to
thinking of Seattle exporting aircraft. But, Seattle also has a disproportionate share of
U.S. employment in software publishing (about 18 times Seattle’s share of the population).
Again, this is not because folks in Seattle consume more software than other parts of the
country, they export it in exchange for other goods and services. Software is a service
that is traded with other regions.
We can generalize this approach to make up for the lack of detailed data on trade
in services and identify which workers are vulnerable to services o¤shoring by looking
at services that are geographically concentrated and traded domestically. These services
can be classi…ed as potentially tradable internationally, and estimates can be made of the
number of workers in tradable activities in each sector.
Jensen and Kletzer (2006) use the geographic concentration of service employment
across metropolitan areas within the U.S. to identify service activities that are tradable.7
They …nd that a signi…cant number of service industries (and occupations) exhibit levels of
geographic concentration consistent with the activity being traded within the U.S. Figure 2
6
The location quotient is the share of an industry’s employment in a region relative to the share of
total employment in a region. These calculations are made using the 2000 Decennial Public Use Micro
Sample.
7
If a service is non-tradable and demand for the service is concentrated (the industries that use the nontraded service are geographically concentrated), the service industry will be geographically concentrated
and the analysis would incorrectly infer that the service is tradable. Jensen and Kletzer adjust their
measure of geographic concentration to correct for this possibility and construct region speci…c measures
of demand for each industry using the input-output use tables produced by the Bureau of Economic
Analysis.
Trade in High-Tech Services
9
shows a graph of Gini coe¢ cients (the measure used to identify geographic concentration)
by industry.8 While industries in the manufacturing sector tend to have higher levels of
geographic concentration than the service sector, many service industries exhibit levels of
geographic concentration consistent with them being traded within the U.S. In addition,
the industries that do exhibit high levels of geographic concentration conform to our priors
about what service activities might be tradable. For example, software publishing, sound
recording, motion picture production, securities and commodities trading all exhibit high
levels of geographic concentration. In addition, service industries identi…ed as non-tradable
also conform to our notions of industries that are likely to be non-tradable. For example,
retail banking and video tape rental exhibit low levels of geographic concentration.
4.
Trade in Services
A number of service activities have geographic concentration levels consistent with
being traded within the U.S.; thus it appears there are a number of service activities for
which international trade is feasible. In the next section, we take a closer look at the
number and type of workers in these tradable service activities and examine the impact
on employment to date. We then take a closer look at service producers that export.
4.1. Service Workers and O¤shoring
4.1.1.
How many workers are potentially a¤ ected by services o¤ shoring?
Using the methodology described above, Jensen and Kletzer (2006) identify the share
of employment within the U.S. that is potentially tradable. They …nd a signi…cant share of
total employment is in service industries classi…ed as tradable. For example, more workers
are in tradable industries in the services sector than in manufacturing. See Figure 3. The
share of total employment in tradable professional services alone is 13.7 percent, while
the share of employment in tradable manufacturing industries is 12.4 percent. Some big
services sectors – education, health care, personal services, and public administration
– do in fact have low shares of employment in tradable industries. However, because
the services sector is much larger than the manufacturing sector, the number of workers
potentially exposed to international trade in services is actually larger than the number of
exposed workers in manufacturing. Included in the list of industries identi…ed as tradable
in the professional and business services sector are several high tech industries such as
8
This …gure is taken from Jensen and Kletzer (2006).
Trade in High-Tech Services
10
software publishing, computer systems design and related services, and architectural and
engineering services.
Some worker inputs into service production might be tradable even though the service
industry itself is not (think computer programming or other back o¢ ce operations for
the banking industry). In the aggregate, the share of these sorts of workers –in tradable
occupations but in non-tradable industries –is not large, at about 10 percent. However,
for business and professional occupations, the share of workers in tradable occupations
but non-tradable industries is much larger. The typical high-tech professional occupation has about 25 percent of its employment in tradable occupations but non-tradable
industries. Figure 4 lists the level and shares of employment in high-tech occupations
by tradable/non-tradable industry and occupation.9 For example, 28 percent of employment in business and …nancial operations occupations and 24 percent of employment in
computer and mathematical occupations are in tradable occupations but non-tradable
industries. To the extent that …rms can disentangle intermediate service inputs from the
rest of their business, workers in these tradable occupations are vulnerable to trade, even
though their industry is not tradable. Thus the industry results above on the share of
workers potentially vulnerable to trade are understated. For the high-tech occupations
listed in Figure 4, workers in tradable occupations and non-tradable industries would
add 3 million workers (or a little over 2% of total employment) in tradable professional
and business service activities to the industry shares reported in Figure 3. The typical
white-collar occupation involves an activity that could be traded.
4.1.2.
What do tradable service workers look like?
Workers in tradable industries (and occupations) have higher education levels and signi…cantly higher wages than workers in manufacturing an workers in non-tradable service
activities. Jensen and Kletzer (2006) report that the share of workers with a college degree in the manufacturing sector in tradable industries is 20 percent. In contrast, in the
information sector 37 percent of workers in non-tradable industries have a college degree
and 41 percent of workers in tradable industries have a college degree. Mean earnings are
also higher –workers in tradable industries in the information sector have mean earnings
about $10,000 (or about 25%) higher than workers in the manufacturing sector. The
higher incomes are not solely a result of higher skill level –even controlling for di¤erences
in worker characteristics, workers in tradable service activities have incomes about 10
percent higher than those earned by similar workers in non-tradable activities in the same
9
The calculations use the 2000 Decennial Public Use Micro Sample.
Trade in High-Tech Services
11
sector. Figure 5 shows that within professional service industries and within “high-tech”
service occupations workers in tradable industries and occupations have higher earnings.10
Workers in the NAICS 50s sector that are in tradable industries and tradable occupations
have earnings that are almost 20 percent higher than workers in non-tradable industries
and occupations in the same sector. For high-tech service occupations, workers in tradable industries and occupations have over 12 percent higher earnings than workers in
non-tradable industries and occupations in similar high-tech occupations.
That many tradable service activities exhibit higher rates of education and have higher
earnings suggest these activities are consistent with U.S. comparative advantage. That
these activities are consistent with U.S. comparative advantage would seem to argue for
these jobs not being particularly vulnerable to import competition (o¤shoring) from lowwage, labor abundant countries. Workers in high-tech industries and occupations tend to
have high levels of education and skill, suggesting that these types of activities are well
suited to U.S. comparative advantage.
4.1.3.
Will all these high-paid service jobs move overseas?
The concern about many service jobs moving overseas is driven in part by large perceived wage di¤erentials between the U.S. and emerging economies like India. If software
programmers in India earn a fraction of what software programmers earn in the U.S.,
won’t all the computer programming jobs move to India? Here, again, a comparison to
manufacturing is useful. In manufacturing, large wage di¤erentials exist between the U.S.
and emerging economies like China suggesting that all the manufacturing jobs should
move to China. This is not happening. China’s exports to the U.S. are concentrated in
low-wage, labor-intensive industries like apparel and furniture. Imports from China are
causing signi…cant dislocation to U.S. producers and workers in these industries and the
costs of these dislocations should not be minimized. However, it remains the case that
the U.S. maintains a signi…cant manufacturing presence in (and continues to export) skilland capital-intensive goods like medical and scienti…c equipment and aircraft.
We can expect that some share of tradable service activities will move to other countries with skilled workforces that currently have lower wages than those paid in the U.S.
However, the supply of educated workers –even in large countries like India –is not limitless. Work by the McKinsey Global Institute suggests that the number of engineers and
computer programmers in the developing world that are "multinational company ready"
is a fraction (under 20 percent) of the total number of these workers and that other fac10
These calculations use the 2000 Decennial Public Use Micro Sample.
Trade in High-Tech Services
12
tors, like accessibility and domestic competition for this talent, will further reduce the
pool available for o¤shoring. China and India will likely have large and growing domestic
demand for the services of the engineers and other high-tech workers they educate. Like
manufacturing, it is unlikely that in the short-term and even in the long-term, that a
signi…cant share of these high-wage, skill-intensive service activities will move to emerging markets. The skill-intensive, high-wage jobs in services are likely to stay in the U.S.
and even grow as other countries open to our service exports. Indeed, the U.S. is a net
exporter of services (unlike manufactured goods) and increased trade in services is likely
to bene…t U.S. service …rms and workers.
4.1.4.
What is the employment impact (so far)?
Consistent with the interpretation above, there is little evidence in the employment
data that services o¤shoring is having a signi…cant impact on U.S. employment. Jensen
and Kletzer (2006) report that tradable industries within the service sector do not seem
to have di¤erent employment growth than non-tradable service industries. The data for
employment growth di¤erences are not de…nitive, yet it appears that tradable and nontradable service activities (both industries and occupations) have similar net employment
growth rates. Figure 8 updates the results in Jensen and Kletzer and reports mean
industry growth rates for tradable and non-tradable industries in high-tech industries (the
NAICS 50s).11 The average industry employment growth rates are quite similar between
tradable and non-tradable industries, about 12.7 percent for tradable industries and about
14.5 percent for non-tradable industries. These results are consistent with o¤shoring not
yet having had a signi…cant impact on employment growth in these high-tech services in
the U.S.12
4.2. Service Exporters
Much of the recent work in manufacturing has exploited plant-level microdata –not
worker level data like that used by Jensen and Kletzer –to examine how plant heterogeneity and variation in the response of plants to trade in‡uences the reallocation of economic
activity across plants and industries.
11
The NAICS 50s are: Information; Financial services; Real Estate; Professional, Scienti…c, and Technical services; Management; and Administrative Support services. The employment growth rates are
calculated for the period 1998-2004 using County Business Pattern data.
12
The 1998-2004 period includes the dot com and telecommunications industry bust making it more
di¢ cult to draw de…nitive conclusions regarding employment growth. Jensen and Kletzer also report
analysis of job displacement rates for tradable activities.
Trade in High-Tech Services
13
In this section, I report recent research that exploits newly developed establishment
level data for the service sector (that is similar to the plant level data on the manufacturing sector) to explore how similar or dissimilar the services and manufacturing sectors
are. First, Jensen (2006) examines service establishments that export and con…rms the
geographic concentration approach described above. Industries with higher levels of geographic concentration have higher shares of establishments that export and higher ratios
of exports to shipments (in manufacturing and in services). These results con…rm that
the geographic concentration of industries is a useful proxy for the tradability of a service
(as developed in Jensen and Kletzer).
In addition, recent results on service industry exporters are very consistent with the
plant-level analyses on manufacturing. Jensen (2006) reports that across industries, service industries that have larger establishments, pay higher wages, are more intensive users
of other inputs, and have higher labor productivity have higher export to shipments ratios and higher shares of establishments that export. Figures 6 and 7 report the number
of exporters and non-exporters for high-tech service industries and select establishment
characteristics. The variation in the share of plants that export across the industries
is consistent with the broader results reported in Jensen (2006). Note the variation in
shares of exports across industries. Software Publishing and Scienti…c Research and Development Services have signi…cantly higher shares of establishments that export than the
other industries, with 26 percent and 18 percent of establishments exporting respectively
compared to 7 percent or less for the other industries. For comparison purposes, about
27 percent of manufacturing plants export.
The relatively low share of service exporters in tradable service industries is somewhat
surprising. Many service activities can be delivered at very low or near zero marginal cost.
For example, published software, motion pictures, and sound recordings can be delivered
at very low cost on light media or at almost no cost electronically via the internet, in
contrast to many manufactured goods that are expensive to transport. That a lower share
of establishments in tradable industries export than in manufacturing suggests that there
are other impediments to exporting. Jensen (2006) also reports that service exporters
export a smaller share of their output than manufacturers. Both the lower share of plants
that export in service industries and the lower export/sales ratios at service exporters
suggest that "border e¤ects" (e.g., language or cultural di¤erences, policy and regulatory
barriers, information costs) might be more important for services than for manufacturing.
Within industries, exporters tend to be larger, pay higher wages, use other inputs more
intensively, and are more productive than non-exporters in the same industry. Figures
Trade in High-Tech Services
14
6 and 7 reports mean establishment characteristics for exporters and non-exporters for
select high-tech 4-digit NAICS industries.13 In all of the high-tech industries reported,
exporters are signi…cantly larger in terms of employment and sales than non-exporters in
the same 4-digit NAICS industry. In most of the industries, exporters pay higher wages
and are more productive than non-exporters.
Like the worker characteristics results, the service establishment results suggest U.S.
service exports tend to be concentrated in high wage, high productivity industries. Within
these industries, the establishments that export tend to be larger, pay higher wages, and
be more productive than non-exporters. These results suggest that tradable services are
consistent with U.S. comparative advantage and, as a result, likely to be less vulnerable
to foreign competition.
5.
Globalization and business services going forward
We have a pretty good understanding of how international trade has a¤ected the
manufacturing sector. Service industries exhibit a number of characteristics similar to
industries in the manufacturing sector. A number of service industries have levels of geographic concentration that are similar to manufacturing, indicating that these service
activities are traded within the U.S. and thus there seems to be the technological possibility of providing them over a distance. Industries that are characterized by geographic
concentration do have higher shares of establishments that export and higher exports
to shipments ratios (as do industries in manufacturing). A signi…cant share of domestic
employment is in service industries that are tradable – more than manufacturing. This
suggests that trade in services, like trade in goods, has the potential to have an important impact on the U.S. economy in terms of changes in relative factor demands and
productivity.
Tradable service activities employ workers with higher education and more skill than
non-tradable activities and manufacturing. This seems to suggest that tradable services
are consistent with U.S. comparative advantage in high skill production. Because tradable services are consistent with U.S. comparative advantage, we should expect that as
technology and policy allow for more trade in these activities the U.S. should gain world
market share in these activities, not lose it.14 Trade in services will undoubtedly cause
a reallocation of economic activity towards U.S. comparative advantage (like trade has
13
These calculations use establishment level data from the 2002 Census of Service Industries.
Though over the longer-term, if the U.S. ceases to make investments in education and training, it is
possible that it would cease to have comparative advantage in high-skill activities.
14
Trade in High-Tech Services
15
done in manufacturing), but this should result in a shift towards high-skill high-tech activities within the U.S. Relatively low-skill, labor-intensive service activities are likely to
be o¤shored to lower wage locations (again, as it did in manufacturing). This is likely
to result in signi…cant dislocation for workers in these activities and likely to a¤ect the
relative demand for and relative wages of workers in these activities.15
While o¤shoring has the potential to cause dislocation in the labor market (as it did in
manufacturing), it also has the potential to contribute signi…cantly to productivity growth
within the service sector in the U.S. (as trade contributed to productivity growth in the
manufacturing sector). In addition to raising productivity in the U.S., trade in services
has probably even more potential to improve productivity in the services sector in developing countries where service sector productivity is not as high as in developed countries.
Because high-tech services tend to be intermediate inputs to other business processes,
increased productivity in tradable service industries should bene…t other downstream sectors too.
A signi…cant share of service activities appear to be traded within the U.S. and thus
appear at least potentially tradable internationally. Workers in these activities are better
educated and have higher earnings than workers in similar, non-tradable activities. Service industries characterized by large establishments and high wages are more likely to
export. Within industries, exporters tend to be larger, pay higher wages, and be more
productive than non-exporters. Tradable service industries look a lot like manufacturing.
The evidence to date is that there has been little net employment impact of o¤shoring
on U.S. service industries and occupations. It is reasonable to expect that the process of
globalization in services will proceed much as it has in manufacturing – relatively lowwage, labor-intensive activities will be the most likely to move o¤shore. This increased
competitive pressure will cause dislocation to workers and …rms, but the globalization
of services production is likely to have productivity enhancing (and standard of living
increasing) e¤ects similar to the impact of globalization in the manufacturing sector.
References
Bernard, Andrew B., Jonathan Eaton, J. Bradford Jensen, and Samuel S. Kortum. 2003.
"Plants and Productivity in International Trade." American Economic Review, Vol.
93, No. 4, 1268-1290.
15
Bernard and Jensen (1997) examine how shifts in economic activity towards exporters contributed
to wage inequality in the 1970s and 1980s in the U.S.
Trade in High-Tech Services
16
Bernard, Andrew B. and J. Bradford Jensen. 1995. "Exporters, Jobs and Wages in U.S.
Manufacturing, 1976-87." Brookings Papers on Economic Activity: Microeconomics.
Bernard, Andrew B. and J. Bradford Jensen. 1997. "Exporters, Skill Upgrading, and the
Wage Gap." Journal of International Economics, vol. 42, pp. 3-31.
Bernard, Andrew B. and J. Bradford Jensen. 1999. "Exceptional Exporter Performance:
Cause, E¤ect, or Both?" Journal of International Economics Vol. 47, No.1, 1-26.
Bernard, Andrew B. and J. Bradford Jensen. 2006. "Firm Structure, Multinationals and
Manufacturing Plant Deaths." Review of Economics and Statistics, forthcoming.
Bernard, Andrew B., J. Bradford Jensen, and Peter K. Schott. 2006a. “Survival of the
Best Fit: Competition from Low Wage Countries and the (Uneven) Growth of U.S.
Manufacturing Plants,” Journal of International Economics, vol. 68, no. 1, pp. 219237.
Bernard, Andrew B., J. Bradford Jensen, and Peter K. Schott. 2006b. “Trade Costs,
Firms, and Productivity,”Journal of Monetary Economics, forthcoming.
Bernard, Andrew B., Stephen Redding, and Peter K. Schott. 2006. "Comparative Advantage and Heterogeneous Firms." Review of Economic Studies, forthcoming.
Blinder, Alan S. 2006. "O¤shoring: The Next Industrial Revolution?" Foreign A¤airs,
March/April, Vol 85, Number 2.
Jensen, J. Bradford and Lori Kletzer. 2006. "Tradable Services: Understanding the Scope
and Impact of Services O¤shoring," O¤shoring White-Collar Work – Issues and Implications, Brookings Trade Forum 2005, ed. Lael Brainard and Susan M. Collins, pp.
75-134.
Jensen, J. Bradford. 2006. "Service Exporters: Comparative Advantage Across and
Within Service Industries," manuscript.
McKinsey Global Institute. 2005. The Emerging Global Labor Market.
Melitz, Marc J. 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity." Econometrica, Vol. 71, November, 1695-1725.
Trade in High-Tech Services
17
Figure 1: Industrial Concentration in Seattle
20
18
16
Location Quotient
14
12
10
8
6
4
2
0
Software
publishing
Aircraft and
parts
Aerospace
product and
parts
Ship and boat
building
Fishing,
hunting,
trapping
Toys,
amusements,
and sporting
goods
Other
information
services
Electronic
shopping and
mail-order
houses
Trade in High-Tech Services
18
Figure 2: Geographic Concentration of Industries
0.9
0.8
0.7
Gini Coefficient
0.6
0.5
0.4
0.3
0.2
0.1
0
0
100
200
300
400
500
600
700
800
NAICS Industry
Ag
Mining
Utilities
Construction
Manufacturing
Wholesale
Retail
Transportation
Services
900
Trade in High-Tech Services
19
Figure 3: Share of Total Employment in Tradable Industries
Ag.
1%
Min, Util, Con
1%
Mfg.
12%
Ret./Whl.
7%
Prof. Srv.
14%
Non-Tradable
60%
Pers. Srv.
2%
Ed./Health
0%
Oth. Srv.
1%
Pub. Adm.
2%
Figure 4: Share of Occupational Employment in Tradable and Non-Tradable Industries
Major Occupation Group
Business and financial operations (13)
Non-Tradable Employment
Share
Tradable
Employment
Share
Computer and mathematical operations (15)
Tradable
Employment
Share
Architectural and Engineering (17)
Non-Tradable Employment
Share
Tradable
Employment
Share
Life, physical, and social science (19)
Non-Tradable Employment
Share
Tradable
Employment
Share
Non-Tradable Industry
Tradable Industry
757,406
14
1,487,523
28
945,273
18
2,176,721
41
757,018
24
2,369,198
76
220,040
8
345,980
13
717,880
28
1,318,203
51
85,095
7
426,274
36
105,527
9
551,382
47
Trade in High-Tech Services
20
Figure 5: Earnings Di¤erentials for Tradable and Non-Tradable High-Tech Industries and
Occupations, Controlling for Worker Characteristics
20%
18%
16%
Percent Difference
14%
12%
10%
8%
6%
4%
2%
0%
Workers in Prof/Bus Service Industries
Non-Tradable Industry and Tradable Occupation
Workers in High-Tech Service Occupations
Tradable Industry and Non-Tradable Occupation
Tradable Industry and Tradable Occupation
Trade in High-Tech Services
21
Figure 6: Mean Establishment Characteristics, Exporters and Non-Exporters, Select Service Industries
Industry
Software Publishers
NAICS
N
Variable
Establishment Mean
5112 Non-Exporters 4,597 Employment
40
Sales ($000)
9,748
Other Inputs/Worker ($000)
133
Average Wage ($000)
71
Labor Productivity ($000)
204
Exporters
Architectural, Engineering, and Related Services
Specialized Design Services
1,646 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
60
24,328
118
67
184
5413 Non-Exporters 28,282 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
26
3,153
77
49
126
Exporters
1,488 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
61
11,746
110
63
173
5414 Non-Exporters
6,782 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
8
1,166
126
44
170
338 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
16
2,414
126
55
182
Exporters
Trade in High-Tech Services
22
Figure 7: Mean Establishment Characteristics, Exporters and Non-Exporters, Select Service Industries
Industry
Computer Systems Design and Related Services
NAICS
N
Variable
Establishment Mean
5415 Non-Exporters 22,253 Employment
28
Sales ($000)
4,571
Other Inputs/Worker ($000)
98
Average Wage ($000)
63
Labor Productivity ($000)
161
Exporters
Management, Scientific, and Technical Consulting Services
Scientific Research and Development Services
1,700 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
45
8,423
101
74
175
5416 Non-Exporters 20,283 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
18
2,578
106
63
169
Exporters
1,299 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
26
5,073
134
83
218
5417 Non-Exporters
5,721 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
64
5,326
70
62
132
Exporters
1,243 Employment
Sales ($000)
Other Inputs/Worker ($000)
Average Wage ($000)
Labor Productivity ($000)
95
14,077
99
64
164
Figure 8: Mean Employment Growth for High-Tech Industries,1998-2004
NAICS 50s Non-Tradable
Tradable
N
13
Mean Std. Dev.
0.145
0.123
27
0.127
0.181