“Offshoring, Biased Technical Change and

the Increasing Capital Share:

an Analysis of Global Manufacturing
Production”

Marcel Timmer
Groningen Growth and Development Centre,
University of Groningen, The Netherlands

Second SEM conference, Paris, 22-24 July 2015.

The World input-output database (WIOD) project was funded by the European
Commission, Research Directorate General as part of the 7th Framework Programme,
Theme 8: Socio-Economic Sciences and Humanities. Grant Agreement no: 225 281
 Motivation
Two stylised macro-economic facts:
 Increasing income share for capital and high-skilled workers.
 Polarisation of labour markets

Consensus view that technical change is biased. Mostly based on

cross (country/industry) regressions of labour cost shares based on data
on domestic production (Author et al. REStat 2008; Michaels et al REStat
2014; Goos et al AER 2014)

Bias in technical change might be observational equivalent to

offshoring as long as you only consider domestic factors of
production (Feenstra and Hanson, Handbook of International
Economics 2003) .
 Solving the problem of observational equivalence of
offshoring and biased technical change

Offshoring Offshoring
Original Traditional
situation analysis This paper

High skill HS Design HS Design HS Design Example of car

(35%) (50%) (35%) production
(cost shares) with
LS Parts LS Parts LS Parts
Low skill (35%) (50%) (35%) offshoring and no
change in factor
LS Assembly LS Assembly LS Assembly prices
Low skill (30%) (not observed) (30%)

Factor cost shares

Domestic HS 35% 50% 35%
Domestic LS 65% 50% 35%
Foreign LS 30%
biased tech ch
BIASED no bias
NO BIAS
technical
change
 This paper

Takes vertical integrated production function of a product as unit of

observation, which nets out intermediate inputs (Global value chain
approach, Timmer et al. JEP, 2014). Production is based on
combination of both domestic and foreign factors:
Final output = H [K(dom), L(dom), K(for), L(for)]

Estimates biases in technical change within system of factor cost

share equations derived from translog cost function (following Baltagi
and Rich, 2005 and Hijzen et al. 2005)

Findings:
 Strong bias in TC against low-skilled labor and in favour of high-
skilled labour and capital.
 Which is robust to alternative models and across different data
samples
 Factor content of a global value chain:
(introduced by Timmer et al. JEP, 2014)

VA by
Capital and Intermediate
Country 1
labour goods
L1
VA by
K1
Domestic
intermediate VA by
goods L2
Capital and
Country 2
labour
Intermediate VA by
goods K2

Domestic VA by
intermediate
L3
goods
Capital and
Country 3
labour
Final goods
for domestic VA by
and foreign K3
demand
 Method to derive factor content of GVC:
Input-output analysis
(Leontief, 1936; Miller and Blair, 2009)

F= R(I-Z)-1Y
Y a vector with 1 for product (i,j) and zeros otherwise
With F a matrix with elements F(k,h)(i,j) = quantity of production factor
k located in country h, used in production of final product (i,j)

Z the matrix of intermediate input use of all products per unit of output
for each product;
I is identity matrix and (I-Z)-1is the Leontief inverse (= 1+Z+Z2+Z3+….);
R a matrix with direct factor requirements per unit of gross output at
country-industry level

(NB All matrices of the appropriate dimensions with elements in values)

 Related literature using the Input-Output
methodology

 Variations of this approach are also used in literature on

 vertical specialisation in trade: Johnson and Noguera (2012, JIE)
who extended Hummels, Iishi and Yi (2001, JIE) multi-regional.
 Value added content of exports: Koopman, Wei and Zhang (2014,
AER) and Bems, Johnson and Yi (2011, AER)
 Factor content of trade: Reimer (2006, JIE) and Trefler and Zhu
(2010, JIE)
 Length of production chains: Dietzenbacher and Romero (2007,
IRSR) and Antràs et al. (2012, AER)
 DATA: World Input-Output Database

Cost shares in production of 280 ‘products’:

 14 manufacturing product groups
 in 20 advanced countries where last stage of production took place

13 years period: 1995-2007

4 factor inputs: 3 types of labour (by educational attainment) and capital.

 World Input-Output Tables representing flows of goods and services

across industries and countries, for 1995-2011 (www.wiod.org), based on:
 Times-series of input-output tables benchmarked to national accounts
 Bilateral trade classified by end-use
 A stylized world input-output table

  Intermediate use Final use Total

(S columns per country) (C columns per country)

  1 … N 1 … N  
S Industries, country 1
…
S Industries, country N
Value added        
Output        
 Global prices of production factors
(change relative to medium-skilled labour).

10.0
5.0 HS
0.0
-5.0
MS
-10.0
-15.0
K
-20.0
-25.0
LS
-30.0
-35.0
1996

1998

2006
1995

1997

1999
2000
2001
2002
2003
2004
2005

2007
.
 Kernel distributions of changes in factor income shares
between 1995 and 2007 in 280 GVCs.

0.09 0.14 Low Skill

0.08
Medium 0.12

0.07 Skill 0.1

0.06

0.05 0.08

0.04 0.06

0.03
0.04
0.02

0.02
0.01

0 0
-20 -15 -10 -5 0 5 10 15 20 -30 -25 -20 -15 -10 -5 0 5 10
Changes in Medium-Skilled Labour Share (% points) Changes in Low-skilled Labour Share (% points)

0.08 0.2

0.18
0.07
Capital 0.16 High Skill
0.06
0.14

0.05
0.12

0.04 0.1

0.08
0.03

0.06
0.02
0.04

0.01
0.02

0 0
-30 -20 -10 0 10 20 30 -4 -2 0 2 4 6 8 10 12 14 16
Changes in Capital Share (% points) Changes in High-Skilled Labour Share (% points)
 Econometric methodology

Standard translog cost framework (following Baltagi and Rich, 2005

and Hijzen et al. 2005). For each GVC :

1
ln𝐶 ( 𝒑𝑡 ,𝑦𝑡 ,𝑡 )=𝛼+∑ 𝛽𝑖 ln 𝑝𝑖𝑡 + ∑ ∑ 𝛾𝑖𝑗 ln 𝑝𝑖𝑡 ln 𝑝 𝑗𝑡
𝑖∈𝐹 2 𝑗∈𝐹 𝑖∈𝐹
 
 How many factors to consider?

 Cost-minimization is modelled as decision making by industry-country where last

stage of production takes place. Decision is about how much quantities to use of
each factor (irrespective of location), given exogenous global factor prices of
labour and capital.

 Section 2 contains a task-based model along the lines of Grossman and Rossi-
Hansberg (2008, AER) that motivates the exogeneity of factor prices. Non-formal
intuition: offshoring of tasks is costless, but limited by the current state of
communication technology, as well as openness of potential host countries.
These are exogenous to the firm.
 An improvement in offshoring opportunities will lead to a decline in global
average wage of low skilled workers as a larger share of the tasks will be
offshored and carried out at a lower wage.
 Factor-specific technical change has no impact on the global factor price
as it is assumed to symmetrically affect all workers of the same type irrespective
of their location.
 E’trics (continued)


Under
  standard assumptions cost share equations can be derived. We
have four factors and drop the equation for capital.

𝑆 𝐿𝑡=𝛽𝐿+𝛾 𝐿𝐿 ln ( 𝑝𝐿𝑡 /𝑝𝐾𝑡 )+ ¿𝛾 𝐿𝑀 ln(𝑝¿¿𝑀𝑡/𝑝𝐾𝑡)+¿𝛾 𝐿𝐻 ln(𝑝¿¿𝐻𝑡/𝑝𝐾𝑡)+𝛾 𝐿𝑌 ln 𝑦𝑡 +𝛾 𝐿𝑡 t¿¿¿¿

 

Constant returns to scale implies , and for any i. Without loss of

generality we also impose symmetry such that . Finally, by definition .

FBTC is modelled as linear trend. Alternative used is a set of time-

dummies (Baltagi and Griffin JPE 1988)
 Check on assumptions
underlying econmetric model

  observations consistent with cost minimization behaviour?

Are

 Test whether H-diag(s)+ss’ is negative semi-definite where H

refers to the symmetric matrix containing all of factors, and s is a
column vector of cost shares of each factor (Diewert and Wales,
1987).
 In base line regression we found for only 184 out of 3258
observations positive eigenvalues.
 Simpler test: evaluate only at average of cost shares. This is
satisfied in all regressions of the paper.
 Results: base line
Table 3 Regression results, 1995-2007.

Pooled ISUR Fixed Effect ISUR Fixed Effect with year dummies

Variable Coef std. E coef std. E coef std. E

βL 0.1972 0.0115 *** 0.1566 0.0103 *** 0.1602 0.0103 ***
βM -0.0006 0.0132 -0.0623 0.0121 *** -0.0765 0.0122 ***
βH 0.0036 0.0110 -0.2065 0.0099 *** -0.2049 0.0100 ***
γLL 0.1310 0.0033 *** 0.0316 0.0024 *** 0.0275 0.0024 ***
γLM -0.1125 0.0028 *** 0.0109 0.0024 *** 0.0116 0.0024 ***
γLH -0.0002 0.0022 -0.0047 0.0018 ** -0.0016 0.0019
γMM 0.2514 0.0053 *** 0.0743 0.0047 *** 0.0771 0.0049 ***
γMH -0.0693 0.0046 *** -0.0096 0.0038 ** -0.0121 0.0039 **
γHH 0.0809 0.0051 *** 0.0655 0.0038 *** 0.0650 0.0038 ***
γLY -0.0007 0.0007 -0.0005 0.0006 -0.0012 0.0005 *
γMY -0.0024 0.0006 *** -0.0022 0.0006 *** -0.0017 0.0006 **
γHY 0.0045 0.0004 *** 0.0020 0.0005 *** 0.0022 0.0005 ***
γLT -0.0026 0.0003 *** -0.0052 0.0001 *** -
γMT -0.0043 0.0003 *** -0.0016 0.0001 *** -
γHT 0.0037 0.0002 *** 0.0032 0.0001 *** -

Country Dummies NO YES YES

Product Dummies NO YES YES
Year Dummies NO NO YES
Number of observations 3258 3258 3258
R2 - LS 0.4237 0.9437 0.9467
R2 - MS 0.4320 0.9193 0.9215
R2 - HS 0.1650 0.8733 0.8748
 Elasticities in base-line model

Table 4 Factor demand elasticities

Implied Price Elasticity Implied Elasticity of Substitution

wL wM wH r L M H K

L -0.644 0.361 0.140 0.143 - 1.218 0.834 0.390

M 0.205 -0.453 0.135 0.112 1.218 - 0.807 0.306
H 0.141 0.239 -0.442 0.062 0.834 0.807 - 0.168
K 0.066 0.091 0.028 -0.184 0.390 0.306 0.168 -

Price elasticities of demand of factor i w.r.t price of j is given by

𝛾 𝑖𝑗
𝜀 𝑖𝑗 =( +1 ) 𝑆 𝑗 (for 𝑖 ≠ 𝑗 )
𝑆𝑖 𝑆 𝑗
𝛾 𝑖𝑖
𝜀 𝑖𝑖 = +𝑠 𝑖 − 1
𝑠𝑖
 Factor-biased technical change,
base-line

Figure 2 Cumulative factor bias in technological change, 1995-2007

 Results by product group

Table 5 Regression results for product groups, 1995-2007.

Light Heavy Machinery All

manufacturing manufacturing and electronics manufacturing
Variable
γLT -0.0056 -0.0047 -0.0054 -0.0052
0.0002*** 0.0002*** 0.0002*** 0.0001***
γMT -0.0018 -0.0008 -0.0015 -0.0016
0.0002*** 0.0002*** 0.0002*** 0.0001***
γHT 0.0038 0.0026 0.0031 0.0032
0.0002*** 0.0001*** 0.0001*** 0.0001***

Obs. 1079 1090 1089 3258

2
R - LS 0.9495 0.9572 0.9472 0.9437
2
R - MS 0.9373 0.9216 0.9223 0.9193
2
R - HS 0.9006 0.8945 0.9004 0.8733
Implied FBTC over 12 years (% points)
L -6.73 -5.66 -6.43 -6.28
M -2.21 -0.98 -1.76 -1.89
H 4.54 3.08 3.69 3.87
K 4.39 3.56 4.50 4.29
 Results: quasi-fixed capital

Table 6 Alternative regression results with capital as quasi-fixed, 1995-2007.

Light Heavy Machinery All

Manufacturing Manufacturing and Electronics Manufacturing
Variable
γLT -0.0073 -0.0065 -0.0066 -0.0068
0.0003*** 0.0002*** 0.0003*** 0.0001***
γMT 0.0000 0.0012 0.0003 0.0001
0.0002 0.0002*** 0.0003 0.0001

Obs. 1079 1090 1089 3258

2
R - LS 0.9586 0.9699 0.9638 0.9603
2
R - MS 0.9645 0.9542 0.9422 0.9480
Implied FBTC over 12 years (% pts)
L -8.79 -7.82 -7.90 -8.21
M -0.04 1.45 0.31 0.11
H 8.83 6.38 7.60 8.11
 Alternatives

Table 7 Alternative regression model results, 1995-2007.

Base Include MFP Expanding

Model ICT adjusted products
Variable
γLT -0.0052 -0.0045 -0.0056 -0.0045
0.0001*** 0.0001*** 0.0001*** 0.0001***
γMT -0.0016 -0.0001 -0.0017 -0.0018
0.0001*** 0.0002 0.0001*** 0.0001***
γHT 0.0032 0.0037 0.0033 0.0024
0.0001*** 0.0001*** 0.0001*** 0.0001***
γL,ICT -0.0035
0.0008***
γM,ICT -0.0145
0.0010***
γH,ICT -0.0024
0.0007***

Obs. 3258 2003 3258 6184

R2 - LS 0.9437 0.9512 0.9421 0.9145
R2 - MS 0.9193 0.9172 0.9169 0.9224
R2 - HS 0.8733 0.9019 0.8711 0.9018
 Concluding remarks

To identify factor bias in technical change one needs to model all inputs
in production. To do so, we model production as Global value chains
(GVCs) that have factor inputs across all countries.

We find decisively bias in technical change in 280 GVCs of

manufacturing goods:
 Bias against low-skilled labour and
 Bias in favour of high-skilled labour and capital.
 Bias against medium-skilled labour is strongly related to ICT-use

Future work: search for determinants of factor bias

 More on GVC approach

Timmer, Marcel P., Bart Los, Robert Stehrer and Gaaitzen J. de Vries (2013).
“Fragmentation, Incomes and Jobs. An Analysis of European
Competitiveness.” Economic Policy 28(76):613–661.

Los, B., M.P. Timmer and G.J. de Vries (2015), “How global are Global Value
Chains? A New Approach to Measure International Fragmentation”, Journal
of Regional Science,

Timmer, M.P., A.A. Erumban, B. Los, R. Stehrer and G.J. de Vries

(2014),"Slicing Up Global Value Chains", Journal of Economic
Perspectives.

Timmer, Marcel P., Erik Dietzenbacher, Bart Los, Robert Stehrer and
Gaaitzen J. de Vries (2015),“An Illustrated User Guide to the World Input-
Output Database: the Case of Global Automotive Production”. Review of
International Economics