Productivity Myths - Real Studies and Data

Over the past week we've been exploring whether the outsourcing or offshoring of subassemblies, later finished, in the United States, has a hidden impact on the rather exemplary manufacturing productivity numbers of the past few years.  The premise is that since productivity is output per labor hour, reducing input labor at U.S. plants by offshoring intermediate components would lead to a calculated increase in productivity.  The original post was mentioned on TheStreet.com, which led to a flurry of emails from some prominent economists, some of which were reprinted here.  The consensus seemed to be that offshoring had some effect, but no one could quantify to what extent.

Earlier today I received an email from Dr. Menzie Chinn, professor of economics at the University of Wisconsin's LaFollette School of Public Affairs.  His comments indicated that "in principle" the BEA attempts to related "value added" to the quantity of inputs, therefore theoretically manufacturing productivity should be accurate.  Theoretically.  Then he pointed me to two recent papers that do attempt to quantify the effect of offshoring intermediate components.

The first is from Organisation for Economic Cooperation and Development (OECD), entitled Productivity Impacts of Offshoring and Outsourcing: A Review.  The result of this study:

The most apparent conclusion drawn from the review is that there appears to be no clear patterns as to how offshore outsourcing affects productivity, and that much depends on both sector and firm-specific characteristics. There are some indications, however, that positive productivity effects from foreign material sourcing depends on the degree to which firms are already globally engaged, but also that such engagements generally could be close to their optimum level in developed economies. There is little existing research on offshoring of services, but it appears that its productivity enhancing effects generally are small in manufacturing plants while being of a somewhat greater magnitude for firms in the services sector.

The second study, from the International Monetary Fund entitled Offshoring, Productivity, and Employment Evidence from the United States, quantifies the effect a bit more.

We found that offshoring has an effect on productivity: service offshoring accounts for 11 to 13 percent of labor productivity growth over this period; and material offshoring for 3 to 6 percent of labor productivity. The positive effect of service offshoring on productivity is robust to the inclusion of industry fixed effects, high-technology capital share and import shares.

So there you have it, at least from one study: there is an effect, but it is relatively small.  Perhaps 3 to 6 percent of the total productivity improvement.  Perhaps as high as 13 percent depending on the service component.

The second study has some other interesting data, and is worth a full read.  For example, it details how a significant number of manufacturers that outsourced offshore actually saw their costs increase.  This is presumably traditional costs, and doesn't account for oft-uncalculated costs such as supply chain risk and in-transit inventories.