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Bias in the ‘Proportionality Assumption’ Used in the Measurement of Offshoring

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  • Deborah Winkler
  • William Milberg

Abstract

Most studies of offshoring rely on a 'proportionality assumption' where every sector is assumed to import each material and service input in the same proportion as its economy-wide use. We assess the bias resulting from this assumption. Since Germany collects imported inputs directly, we are able to compare the direct and proxy measures, where the proxy is constructed with the proportionality assumption. The proxy fails to accurately capture the variation in services offshoring intensity because - as a result of the proportionality assumption - it is strongly influenced by the variation in demand for domestic inputs. Estimation of the effect of offshoring on labour demand for 35 manufacturing sectors in Germany over 1995-2006 shows that the direct and proxy-based measures of services offshoring give very different results. The implication goes beyond the case of Germany: researchers must be cautious about drawing policy conclusions from estimates using the proxy of offshoring.

Suggested Citation

  • Deborah Winkler & William Milberg, 2012. "Bias in the ‘Proportionality Assumption’ Used in the Measurement of Offshoring," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 13(4), pages 39-60, October.
    • Handle: RePEc:wej:wldecn:536
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    Cited by:

    1. Amador, João & Cabral, Sónia, 2014. "Global value chains: surveying drivers and measures," Working Paper Series 1739, European Central Bank.
    2. Aleksandra Parteka & Joanna Wolszczak-Derlacz, 2019. "Global Value Chains and Wages: Multi-Country Evidence from Linked Worker-Industry Data," Open Economies Review, Springer, vol. 30(3), pages 505-539, July.
    3. João Amador & Sónia Cabral, 2014. "Global Value Chains: Surveying Drivers, Measures and Impacts," Working Papers w201403, Banco de Portugal, Economics and Research Department.
    4. Arianto A. Patunru & Prema-chandra Athukorala, 2023. "Measuring trade in value added: how valid is the proportionality assumption?," Economic Systems Research, Taylor & Francis Journals, vol. 35(2), pages 292-300, April.
    5. Iliopoulos, Panagiotis (Takis), 2022. "A quantitative analysis of governance structures in the world economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 599(C).
    6. Konstantin Koerner, 2023. "The wage effects of offshoring to the East and West: evidence from the German labor market," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 159(2), pages 399-435, May.

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