Productivity and Offshoring... Again

Once again leave it to bloggers like us to get the real scoop on a story or issue, sometimes months before you see it in print.  The latest issue of Manufacturing News has an article titled Manufacturing Productivity Growth Isn't What the Government Measures: Numbers Are Inflated By Cost Reductions From Offshore Outsourcing.  Richard McCormack's newsletter is a very good source for manufacturing policy information, although we've recently taken issue with the persistent negative tone.

We began asking similar questions about manufacturing productivity back in April of 2006.  Our concern also centered around the impact of the offshore outsourcing of intermediate components, where the final assembly was completed in the United States.  In our view this would distort the calculation of domestic manufacturing productivity as finished product would be completed with fewer domestic labor hours.

In December of 2006 we began to really investigate the issue, as organizations like the Business and Media Institute were citing productivity data to explain why manufacturing employment has gone down while total manufacturing output in the U.S. has increased.  That original post was discussed on CNBC and TheStreet.com, which led to comments from several prominent economists.  But the opinions still differed, and no one had quantitative data showing the impact of the offshoring of intermediate components on manufacturing productivity.

That changed late in late December when Dr. Menzie Chinn pointed us to two studies that specifically touch on this issue.  In summary:

We found that offshoring has an effect on productivity: offshoring accounts for 11 to 13 percent of labor productivity growth over this period.

So a small fraction of the 3.71% annual growth in manufacturing productivity from 1990 to 2000.  Although the dire-sounding headline in Manufacturing News would prompt you to think otherwise, their article comes to an almost identical conclusion based on a study from the Upjohn Institute for Employment Research.

[Susan] Houseman calculated that outsourcing of manufacturing services jobs accounted for about half of a percent point of the growth in manufacturing productivity between 1990 and 2000, dropping the growth rate from 3.71 percent to 3.17 percent.

Guess what... that's 13%!  The analysis of the impact of offshored intermediates is difficult, as the study author states:

"The growth of outsourcing and offshoring in industrialized countries makes it exceedingly difficult for government statistical agencies to measure changes in the flows of inputs into the production process and hence to accurately measure productivity growth," Houseman states. "In addition, the growth of outsourcing and offshoring raises conceptual issues about what productivity statistics do and should measure, with implications for how they should be interpreted and who will benefit from measured productivity gains."

"Foreign labor is counted as a separate input, weighted by its cost share, and hence, in as much as lower hourly foreign labor costs are not commensurately matched by lower productivity, cost savings from offshoring will be counted as productivity gains," writes Houseman. "To the extent that offshoring is an important source of measured productivity growth in the economy, productivity statistics will, in part, be capturing cost savings or gains to trade but not improvements in the output of American labor and should be interpreted with caution. "

Quite honestly I'm not going to be too concerned about a 6-13% impact on a nice positive number, especially when we need to convince other manufacturers with lemming leaders with their heads in the sand that they can compete globally from the U.S. instead of sending entire factories overseas.  That's what we should really be worried about.

Remember... you heard it here first!